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Any app built on top of these model providers could become a competitor to these providers. Since the model providers are currently in the lowest-margin part of

Any app built on top of these model providers could become a competitor to these providers. Since the model providers are currently in the lowest-margin part of the business, it is likely they will try to expand in to the app layer and start pulling the rug from under these businesses built on top of them. Amazon had a similar tactic, where it would use other sellers on its marketplace to validate market demand for products, and then produce its own cheap copies of the successes.

liuliu 1y ago
Or AWS, and AWS managed services v.s. other managed services on top of AWS.
jsnell 1y ago
The model providers are not in the low margin part of the business. The unit economies of paid-per-token APIs are clearly favorable, and scale amazingly well as long as you can procure enough compute. I think it's the subscription-based models that are tricky to make work in the long term, since they suffer from adverse selection. Only the heaviest users will pay for a subscription, and those are the users that you either lose money on or make unhappy with strict usage limits. It's kind of the inverse of the gym membership model. Honestly, I think the subscriptions are mainly used as a demand moderation method for advanced features.
- raincole 1y ago
  > The model providers are not in the low margin part of the business. Many people believe that model providers are running at negative margin. (I don't know how true it is.)
  - apothegm 1y ago
    They probably have been running at negative margin, or at the very least started that way. But between hardware and software developments, their cost structures are undoubtedly improving over time —- otherwise we wouldn’t be seeing pricing drop with each new generation of models. In fact, I would bet that their margins are improving in spite of the price drops.
  - jsnell 1y ago
    Yes, many people believe that, but it doesn't seem to be an evidence-based belief. I've written about this in some detail[0][1] before. But since just linking to one's own writing is a bit gauche and doesn't make for a good discussion, I'll summarize :) 1. There is no point in providing paid APIs at negative margins, since there's no platform power in having a larger paid API share (paid access can't be used for training data, no lock-in effects, no network effects, no customer loyalty, no pricing power on the supply side since Nvidia doesn't give preferential treatment to large customers). Even selling access at break-even makes no sense, since that is just compute you're not using for training, or not selling to other companies desperate for compute. 2. There are 3rd-party providers selling only the compute, not models, who have even less reason to sell at a loss. Their prices are comparable to 1st-party providers. 3. Deepseek published their inference cost structure for R1. According to that data their paid API traffic is very lucrative (their GPU rental costs for inference are under 20% of their standard pricing, i.e. >80% operating margins; and the rental costs would cover power, cooling, depreciation of the capital investment). Insofar as frontier labs are unprofitable, I think it's primarily due to them giving out vast amounts of free access. [0] https://www.snellman.net/blog/archive/2025-06-02-llms-are-cheap/ https://www.snellman.net/blog/archive/2025-06-02-llms-are-ch... [1] https://news.ycombinator.com/item?id=44165521 https://news.ycombinator.com/item?id=44165521
    - what 1y ago
      There are more factors to cost than just the raw compute to provide inference. They can’t just fire everyone and continue to operate while paying just the compute cost. They also can’t stop training new models. The actual cost is much more than the compute for inference.
      - brookst 1y ago
        I heart you. Classic fixed / variable cost fallacy: if you look at the steel and plastic in a $200k Ferrari, it’s worth about $10k. They have 95% gross margins! Outrageous! (Nevermind the engine R&D cost, the pre-production molds that fail, the testing and marketing and product placement and…)
      - 1y ago
- mvdtnz 1y ago
  What evidence do you have that there's decent margin on the APIs?
- tonyhart7 1y ago
  subscription model is just there to serve B2C side of business which in turn them into B2B side antrophic said themselves that enterprise is where the money at, but you cant just serve enterprise on the get go right this is where the B2C indirect influence comes
- brookst 1y ago
  Citation needed. Model providers spend a ton of money. It is unclear if they will ever have high margins. Today they are somewhere between zero and negative big numbers.
hshdhdhj4444 1y ago
Even to the extent that’s true, that doesn’t seem to be the issue here. OpenAI is acquiring Windsurf which is its most direct competitor.
- selcuka 1y ago
  True. Otherwise Anthropic would cut access to other code assistants too as they all compete with Claude Code.
  - SoftTalker 1y ago
    They might still. Why not? Illustrates a risk of building a product with these AI coding tools. If your developers don't know how to build applications without using AI, then you're at the mercy of the AI companies. You might come to work one day and find that accidentally or deliberately or as the result of a merger or acquisition that the tools you use are suddenly gone.
    - pbh101 1y ago
      This is true of any SaaS vendor
    - selcuka 1y ago
      > If your developers don't know how to build applications without using AI, then you're at the mercy of the AI companies. The same can be said if your developers don't know how to build applications: - without using syntax highlighting ... - without using autocomplete ... - without using refactoring tools ... - without using a debugger ... Why do we not care about those? Because these are commodity features. LLMs are also a commodity now. Any company with a few GPUs and bandwidth can deploy the free DeepSeek or QwQ models and start competing with Anthropic/OpenAI. It may or may not be as good as Claude 4, but it won't be a catastrophe either.
      - yusefnapora 1y ago
        Those examples are all either zero cost or "buy once, use forever." How is that an argument against outsourcing your core competency to third party in perpetuity?
brookst 1y ago
I 100% agree with you except your framing makes it sound like the model providers are doing something wrong. If I spend a ton of money money making the most amazing ceramic dinner plates ever and sell them to distributors for $10 each, and one distributor strikes gold in a market selling them at $100/plate, despite adding no value beyond distribution… hell yeah I’m cutting them off and selling direct. I don’t really understand how it’s possible to see that in moral terms, let alone with the low-value partner somehow a victim.
- pbh101 1y ago
  I don’t think it is at all clear that Windsurf adds zero value. Why do you think this is a helpful analogy?
  - osigurdson 1y ago
    The analogy is a bit like this. Imagine that there are 100 ceramic dinner plates for $6 each. Now someone comes in and buys them from you for $5 each - undercutting your margin. Then a 3rd company comes in and literally eats your lunch on your own ceramic dinner plates. The moral of the story is any story involving ceramic dinner plates is a good one, regardless of the utility of any analogy.

liuliu 1y ago

Or AWS, and AWS managed services v.s. other managed services on top of AWS.

jsnell 1y ago

The model providers are not in the low margin part of the business. The unit economies of paid-per-token APIs are clearly favorable, and scale amazingly well as long as you can procure enough compute. I think it's the subscription-based models that are tricky to make work in the long term, since they suffer from adverse selection. Only the heaviest users will pay for a subscription, and those are the users that you either lose money on or make unhappy with strict usage limits. It's kind of the inverse of the gym membership model. Honestly, I think the subscriptions are mainly used as a demand moderation method for advanced features.

raincole 1y ago
> The model providers are not in the low margin part of the business. Many people believe that model providers are running at negative margin. (I don't know how true it is.)
- apothegm 1y ago
  They probably have been running at negative margin, or at the very least started that way. But between hardware and software developments, their cost structures are undoubtedly improving over time —- otherwise we wouldn’t be seeing pricing drop with each new generation of models. In fact, I would bet that their margins are improving in spite of the price drops.
- jsnell 1y ago
  Yes, many people believe that, but it doesn't seem to be an evidence-based belief. I've written about this in some detail[0][1] before. But since just linking to one's own writing is a bit gauche and doesn't make for a good discussion, I'll summarize :) 1. There is no point in providing paid APIs at negative margins, since there's no platform power in having a larger paid API share (paid access can't be used for training data, no lock-in effects, no network effects, no customer loyalty, no pricing power on the supply side since Nvidia doesn't give preferential treatment to large customers). Even selling access at break-even makes no sense, since that is just compute you're not using for training, or not selling to other companies desperate for compute. 2. There are 3rd-party providers selling only the compute, not models, who have even less reason to sell at a loss. Their prices are comparable to 1st-party providers. 3. Deepseek published their inference cost structure for R1. According to that data their paid API traffic is very lucrative (their GPU rental costs for inference are under 20% of their standard pricing, i.e. >80% operating margins; and the rental costs would cover power, cooling, depreciation of the capital investment). Insofar as frontier labs are unprofitable, I think it's primarily due to them giving out vast amounts of free access. [0] https://www.snellman.net/blog/archive/2025-06-02-llms-are-cheap/ https://www.snellman.net/blog/archive/2025-06-02-llms-are-ch... [1] https://news.ycombinator.com/item?id=44165521 https://news.ycombinator.com/item?id=44165521
  - what 1y ago
    There are more factors to cost than just the raw compute to provide inference. They can’t just fire everyone and continue to operate while paying just the compute cost. They also can’t stop training new models. The actual cost is much more than the compute for inference.
    - brookst 1y ago
      I heart you. Classic fixed / variable cost fallacy: if you look at the steel and plastic in a $200k Ferrari, it’s worth about $10k. They have 95% gross margins! Outrageous! (Nevermind the engine R&D cost, the pre-production molds that fail, the testing and marketing and product placement and…)
    - 1y ago
mvdtnz 1y ago
What evidence do you have that there's decent margin on the APIs?
tonyhart7 1y ago
subscription model is just there to serve B2C side of business which in turn them into B2B side antrophic said themselves that enterprise is where the money at, but you cant just serve enterprise on the get go right this is where the B2C indirect influence comes
brookst 1y ago
Citation needed. Model providers spend a ton of money. It is unclear if they will ever have high margins. Today they are somewhere between zero and negative big numbers.

hshdhdhj4444 1y ago

Even to the extent that’s true, that doesn’t seem to be the issue here. OpenAI is acquiring Windsurf which is its most direct competitor.

selcuka 1y ago
True. Otherwise Anthropic would cut access to other code assistants too as they all compete with Claude Code.
- SoftTalker 1y ago
  They might still. Why not? Illustrates a risk of building a product with these AI coding tools. If your developers don't know how to build applications without using AI, then you're at the mercy of the AI companies. You might come to work one day and find that accidentally or deliberately or as the result of a merger or acquisition that the tools you use are suddenly gone.
  - pbh101 1y ago
    This is true of any SaaS vendor
  - selcuka 1y ago
    > If your developers don't know how to build applications without using AI, then you're at the mercy of the AI companies. The same can be said if your developers don't know how to build applications: - without using syntax highlighting ... - without using autocomplete ... - without using refactoring tools ... - without using a debugger ... Why do we not care about those? Because these are commodity features. LLMs are also a commodity now. Any company with a few GPUs and bandwidth can deploy the free DeepSeek or QwQ models and start competing with Anthropic/OpenAI. It may or may not be as good as Claude 4, but it won't be a catastrophe either.
    - yusefnapora 1y ago
      Those examples are all either zero cost or "buy once, use forever." How is that an argument against outsourcing your core competency to third party in perpetuity?

brookst 1y ago

I 100% agree with you except your framing makes it sound like the model providers are doing something wrong. If I spend a ton of money money making the most amazing ceramic dinner plates ever and sell them to distributors for $10 each, and one distributor strikes gold in a market selling them at $100/plate, despite adding no value beyond distribution… hell yeah I’m cutting them off and selling direct. I don’t really understand how it’s possible to see that in moral terms, let alone with the low-value partner somehow a victim.

pbh101 1y ago
I don’t think it is at all clear that Windsurf adds zero value. Why do you think this is a helpful analogy?
- osigurdson 1y ago
  The analogy is a bit like this. Imagine that there are 100 ceramic dinner plates for $6 each. Now someone comes in and buys them from you for $5 each - undercutting your margin. Then a 3rd company comes in and literally eats your lunch on your own ceramic dinner plates. The moral of the story is any story involving ceramic dinner plates is a good one, regardless of the utility of any analogy.