One 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
I am absolutely seeing an explosion in apps. The reason you might not see them is because the app explosion is entirely custom and in house.
I talked with a friend last week, who has never coded before in his life, who built an absolutely incredible fit-for-purpose app for his own job. He gave me a demo and it blew my mind. It will never go beyond his walls, and he will never buy SaaS that only kinda fits what he needs.
I see things like this happening. The proliferation isn't public because why sell it? Just build the thing to make your domain job easier and save thousands per month cancelling SaaS subs.
The ROI of AI is starting to show, but it isn't in terms of growth or selling new things - it's reducing spend across the board on software and tools.
Anecdotally, Claude Code has prompted an explosion of open source projects and prototypes from self-starters. A lot of these are just hobby projects, but some of them genuinely fill a niche that was previously too complicated or unviable to develop otherwise.
Some of them have half baked financial models, but nobody will invest dollars backing a SaaS offering that could easily be replicated, or that could be made redundant tomorrow.
I 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?
Because, 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.
Speaking from my side of the industry (the gaming industry), we are seeing a massive increase in the number of games people are making. Above the growth that was already there.
The distinction is that the games being made are garbage, and I mean worse than shovelware garbage. It's actively made things much harder as someone that fancies himself an indie game curator because you gotta dig through more and more games to find stuff with actual people behind it.
> 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.
I 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.
Article 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?)
There 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.
Maybe 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.
> 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?
"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.
So 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.
Labor, 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!
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.
Yes: 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.
Well 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.
Even 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.)
I 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.
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
I talked with a friend last week, who has never coded before in his life, who built an absolutely incredible fit-for-purpose app for his own job. He gave me a demo and it blew my mind. It will never go beyond his walls, and he will never buy SaaS that only kinda fits what he needs.
I see things like this happening. The proliferation isn't public because why sell it? Just build the thing to make your domain job easier and save thousands per month cancelling SaaS subs.
The ROI of AI is starting to show, but it isn't in terms of growth or selling new things - it's reducing spend across the board on software and tools.
Some of them have half baked financial models, but nobody will invest dollars backing a SaaS offering that could easily be replicated, or that could be made redundant tomorrow.
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.
The distinction is that the games being made are garbage, and I mean worse than shovelware garbage. It's actively made things much harder as someone that fancies himself an indie game curator because you gotta dig through more and more games to find stuff with actual people behind it.
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?
From last month: https://peinsights.substack.com/p/apollo-and-blackstone-clos...
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.
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?
"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.
… usurped by the tech companies?
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!
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.
Pepsi starts collecting the extra profits with zero price reductions.
Thats at odds with current inflation trends to say the least.
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.