7 ms·
AI: The ROI Runway Could Be Long Outside the Tech Sector
- HardCodedBias 4mo agoThe premise is flawed. "The first chart below shows that so far there are no signs of profit margins rising outside the tech sector. This is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb." This is absolutely not necessary. The bull case is that AI will bring great efficiencies. The surplus profits from those efficiencies could easily be competed away by firms who have adopted AI. Those firms who do not adopt AI will have their margis crushed.
- beepbooptheory 4mo agoWhat does this look like for any given company? Which margins will you be crushed by for not adopting?
- degamad 4mo agoHypothetical: Pepsi starts using AI in some magical way that allows them to increase their margins. This allows them to reduce prices while increasing profits. Price-sensitive customers switch from Coca Cola products to Pepsi products. Coca Cola loses some market share, reducing economies of scale, and reducing margins, thus reducing profits. As the cycle repeats, Pepsi moves to dominate the market, and Coca Cola is slowly squeezed down.
- ares623 4mo agoAh yes, magical hypotheticals
- fc417fc802 4mo agoDo you have a constructive objection to the described market dynamic?
- pdimitar 4mo agoYes: historically this is not what I have observed businesses doing. They'd fight tooth and nail to reduce expenses for the fatter profits; cost savings are seldom if ever passed to consumers.
- eru 4mo agoObviously they don't voluntarily pass on cost savings to customers. That's why competition is there for. Btw, check how much RAM costs today per byte than eg 20 years ago. Even including today's AI driven price increases. Or check how much it costs to keep your house light up nice and bright compared to 50 years ago.
- Ekaros 4mo agoHow much does a car cost now? Surely with automation, robots and general efficiency gains every where in the production chain they should be lot cheaper than they used to be. The companies seem to rarely keep the cheaper models around too for something. Surely they could sell them for right price.
- eru 4mo ago> Surely with automation, robots and general efficiency gains every where in the production chain they should be lot cheaper than they used to be. And they are! Especially when adjusted for quality and efficiency and how seldom you have to maintain them these days. (Old time-y sitcoms had the males of the show always tinker with their cars for a reason: the stereotype existed because cars _needed_ constant tinkering.) > Surely they could sell them for right price. Partially that's because the models from the bad old times are outlawed these days. You couldn't legally sell a Model T these days. Partially because even if you could, you couldn't produce the Model T at the scale that would make it cheap: no one would want such a crappy car at any price. In the US, they also have annoying tariffs and other import restrictions. So you can't get the cheap and cheerful cars from China (or India or Brazil). But getting away from cars: for a few decades it was almost a proverb that China would sell you junk for cheap. (And before that Japan had the same reputation. And sometime in the 19th century Germany had that reputation in Britain.) So if you look around a bit: you can still often buy the low quality stuff from the bad old days, just from a different part of the market.
- pdimitar 4mo agoRealistic and historically accurate: Pepsi starts collecting the extra profits with zero price reductions.
- fc417fc802 4mo agoIn a duopoly, probably yes. However in a more competitive environment where several incumbents have achieved a given optimization a race to the bottom is likely to occur because it only takes one of them preferring to increase their relative market share to kick the process off.
- SoftTalker 4mo agoThe cola market is effectively a duopoly.
- eru 4mo agoBarriers to entry ain't exactly high.
- SoftTalker 4mo agosacrificing even more profits that may be had by undercutting coca-cola's price? The CEO would be fired.
- pdimitar 4mo agoReally depends on the concrete numbers and the projections. You could be right, I could be right, I am only saying what I've witnessed historically in general. Greed trumps a lot of other fairly rational courses of action.
- DangitBobby 4mo agoMarkets generally don't follow Econ 101. There are effects beyond first order when it comes to pricing.
- vitally3643 4mo agoLabor, obviously. That's where all the money in a business goes: paying pesky human employees. If your employees can suddenly magically do more work with the same pay, that's free money (for you). You can pay fewer employees, or pay them less by threatening to replace them with the magic robot. The magical thinking version of this is that your productivity gains magically translate into more customers and more sales for the same input cost and labor. The free money is really free because you're a magical special snowflake company and every consumer will want your brand of magic machine outputs and not the other guy's. Where does all this money come from? Do those extra customers even exist? Who cares!
- woeirua 4mo agoSo then your argument would be that we could see a bifurcation in the SP493 where those who adopt AI see increasing margins and those who do not have their margins crushed. What's funny is that in that scenario, the aggregate market might look zero sum.
- deleted 4mo ago[deleted]
- therobots927 4mo agoWell those efficiency gains have to show up somewhere. It would imply that consumers / customers of these companies are receiving cheaper or higher value services / goods. Thats at odds with current inflation trends to say the least.
- DrewADesign 4mo agoEven aside from inflation, the prospect of efficiency-borne gains meaningfully benefiting the consumer rather than fattening corporate profit margins, frankly, seems like magical thinking. I’ve seen no evidence that our current corporate culture is capable of it (for any longer than it takes to dominate some market.)
- throwaway27448 4mo agoI imagine this would come from outside the US.
- eru 4mo agoWhat does corporate culture have to do with any of it? The surplus goes to the consumer not because of any benevolent corporate culture, but because of competition. And (most) efficiency gains have benefited customers in the past. Just check eg how much you are paying for excellent lighting of your house today vs 200 years ago.
- DrewADesign 4mo agoYeah that’s why health care and credit are so cheap! How about literally anything run by private equity?
- eru 4mo ago> Yeah that’s why health care and credit are so cheap! Yep, though only where competition is allowed! > How about literally anything run by private equity? Like many airlines? Flying has never been cheaper. Planet Fitness is also owned by private equity, and their 10$/month membership plan has been steady for two decades despite inflation. You can find lots more examples.
- jagged-chisel 4mo ago> The surplus profits from those efficiencies could easily be … … usurped by the tech companies?
- eru 4mo agoWith enough competition, the surplus will go to consumers (and workers).
- hyperpape 4mo agoMaybe there's an argument that a lack of rising profit margins in non-tech companies is a bad sign for AI, but this article doesn't make it. Why can't we have a red-queen's race where non-tech companies are implementing AI, but it's not increasing the total profits of those sectors, just meeting rising customer demands/fighting over the share of existing profits? (Never mind that if you look at that chart, profit margins aren't static to begin with, so you can't isolate AI impact from normal fluctuation). Now, on the first order point, I agree that non-tech companies seem to be taking longer to see results from AI, even if the argument was bad. I work on SaaS for the logistics space, and I feel like prior to the end of 2025, almost all the discussion about AI for logistics was vaporware, starting this year, companies are actually trying to deploy agents, and we'll start finding out what the ROI is later this year or next.
- mikgp 4mo ago> Why can't we have a red-queen's race where non-tech companies are implementing AI, but it's not increasing the total profits of those sectors, just meeting rising customer demands/fighting over the share of existing profits? But then if this happens - all of the stock market has risen in the promise of AI. If AI eats profits instead of grows them, then the economy shrinks right? So maybe that’s worse? That there is no productivity increase?
- eru 4mo ago> If AI eats profits instead of grows them, then the economy shrinks right? No, why? The economy is bigger than company profits. Eg there's workers' wages and customer surplus and investments etc.
- rooftopzen 4mo agoArticle is authored by a private credit firm who assigned absurd valuations to AI infra (see below as an even super recent example) - what is their intention by writing this (is it due to the AI fear narratives around software investments they also hold that drive ppl to withdraw their holdings in Apollo?) From last month: https://peinsights.substack.com/p/apollo-and-blackstone-close-35bn https://peinsights.substack.com/p/apollo-and-blackstone-clos...
- sublinear 4mo agoI don't understand why anyone insists that this needs more time. None of what we've seen in the past few years is new tech. It's more money and hardware thrown at the problem than ever before for diminishing returns. The market has clearly spoken. Knowing what you're doing is much more valuable than just the doing. That still requires humans. This AI winter has already begun.
- cheschire 4mo agoEhh, it’s a late AI summer at best. You still need the economic leaves to finish falling off the trees before you can get to the true start of winter.
- Legend2440 4mo ago>None of what we've seen in the past few years is new tech. Well that's just wrong. Reasoning models are new and very powerful. LLMs can complete open-ended tasks that require many complex steps. We're just beginning. The bubble will pop and investors will lose a lot of money, but we're not going back into a winter. It actually works this time.
- eru 4mo agoI don't think there's any bubble to pop. However, yes, market asset prices can go up as well as down. (If they could only go up, there would be free money to be made.)
- rnagulapalle 4mo agoThe slower adoption in non-tech sectors isn't just cultural lag - the integration surface is genuinely harder. Legacy ERP systems, compliance review cycles for what data the model can touch, and change management overhead all front-load costs before any efficiency shows up in margins. I've seen this in payment/API systems: the actual model integration takes weeks, but getting legal and security sign-off on the data pipeline takes months. Non-tech companies face the same pattern but with less internal tooling to manage it. The margin signal might also be appearing at the wrong level. Gains in these sectors often show up first as headcount flatness or throughput improvements before they hit EBITDA. Measuring at the P&L level on a 2-year horizon is probably too early and too coarse - the operational metrics are moving, the accounting just hasn't caught up yet.
- Animats 4mo ago> If token costs converge toward zero for most AI use cases... In the real world, token costs seem to be going up, as early stage pricing at a loss gives way to pricing that generates revenue. Compute costs might go down a little over the next five years, but there's nothing coming along in hardware that leads to huge reductions in price. NVidia says don't expect better price/performance before 2030. The models keep getting bigger, and people put loops around them which iterate, burning tokens. Where is this cost reduction coming from?
- fc417fc802 4mo agoI don't expect any of the third party openrouter providers sell tokens at a loss. Agreed that increasing model size could drive token prices up however so far there's been a very strong trend in the opposite direction with smaller models becoming increasingly capable thanks to advances in theory and implementation. Edit: A glaring omission on my part there is that growth of aggregate industry demand for tokens has the potential to outpace increases in supply provided by new datacenters buildouts. So tokens certainly could go up depending on how things play out.
- decimalenough 4mo agoI've switched to non-SOTA models, which deliver comparable value at a fraction of the cost. A full day of coding with Deepseek is approx $1 in tokens, and at least for my use cases the quality is equivalent to Claude.
- profsummergig 4mo agoIf you don't mind sharing... what's your preferred vendor for Deepseek
- fancy_pantser 4mo agoNot who you asked, but if you're looking for a rec, I've been using GLM and Deepseek models through Deepinfra because the prices are decent for US-based deployments and there's acceptable throughput and policy/terms. I'd love to find another that lowers prices over time when they roll out e.g. multi-token prediction instead of just taking a larger margin, but I don't know of any today.
- kazinator 4mo agoThere is no reason to believe the ROI runway is not long inside the tech sector either. I mean, you cannot base that on claims made by the AI sub-sector of the tech sector; of course they are going to claim nothing other than that eating their dogfood is great ROI with a short runway.
- rybosworld 4mo agoOne thing I can't square: if the cost to build an application goes to zero, we should see a proliferation of apps, especially from the AI labs. The fact that we aren't seeing an app explosion (I think) is evidence that building applications people will pay for is significantly more complex than just prompting claude/codex/etc
- mattnewton 4mo agoI think a) the labs are releasing very fast and b) why would they implement the long tail of app features when they can effectively sell tokens to every user to write their own version of the app, which is what is currently happening?
- nstart 4mo agoBecause, as the gp pointed out, if the cost is least to the labs, then why not reap the benefits too? Hypothetical. Assume you can in fact point agents at a tool and say "replicate it. Make no mistakes". You then have software being instantly copy-able. Assume these agents can then be pointed to a customer feedback board in perpetuity and they autonomously upgrade the software over time. They analyze usage patterns and behave like PMs figuring out what to prune and what to build. Then the maintenance part of the stack also goes to zero. Over time, the highest margin competitiveness will go to the distributor of the tokens. Aka the AI model makers. In a world like that (which the frontier labs claim is within a year or two of happening) it feels like it's only a matter of time before they opt to own the entire stack down to the consumer apps. Kind of like Amazon deciding they want to knock off products doing well and then favour their own product over the original seller. My guess is that if the capability arrives the only reason the frontier labs don't move to own the entire stack immediately is because of optics. Boil the frog instead.
- esafak 4mo agoThere is more to selling software than writing it. You have market, support, and sell. Do you think their resources are well spent doing that across the gamut of software? Of course not; companies specialize.
- Legend2440 4mo agoIf you need immediate ROI (say, because you just invested a trillion dollars into datacenters) you may be out of luck. And I don't think this is unusual. It took decades for previous technologies to be fully integrated into existing businesses. In the 80s you could see the IT revolution everywhere... except the productivity statistics, which didn't catch up until the 90s. LLMs are still very new and have significant limitations (like prompt injection and high token costs) that are very likely solveable but will take time.
- sharadov 4mo agoMicrosoft, Amazon are all building forward deployment engineering teams - to increase AI adoption. It will take time, but it will happen.
- ingvay7 4mo agoFeels like a new consulting wave which is implementation-led by AI vendors taking a large share of the services layer. The existing consulting companies (big 4 etc) will have to shift to niche advisory or heavy channel partnerships with way fewer consultants.
- cmiles8 4mo agoThis is more marketing hype than substance. Amazon isn’t “building” a team, it’s broadly just taking existing people and now calling them “forward deployment engineering teams.” Also, adoption isn’t lacking because of lack of awareness. Adoption isn’t happening because the math doesn’t add up and the ROI isn’t there. Consulting pixie dust can’t fix that.
- frrgg 4mo agoAh man it’s gonna be hilarious when this comes crashing down -and it will. It’s pretty obvious ‘demand is infinite’ was always a lie - demand is infinite only when price approaches zero lol! Prices are going further away from zero not closer
- StackOptimist 4mo ago[flagged]