Kishore

This @HedgieMarkets post illustrates where the infinity scalable asset-light technology model meets the physical realities of an asset-heavy business that faces an upward sloping supply curve. We have long argued that AI compute is just another bit-atom commodity (like crypto) that uses a lot natural resources to create a valuable (unlike crypto) virtual asset. On the bit side, Big Tech is a price-maker with fat margins. On the atom side, a price-taker. Big Tech grew up in bits — search, social, e-commerce, office software: asset-light, infinitely scalable, natural monopolies. Build once, serve billions, watch costs fall every year. So they assume AI is the same game and will spend whatever it takes to own the market. But inference is also atoms, i.e. land, critical minerals and electrons, which are mostly molecules. In the commodity world, competition drives price to marginal cost: P = MC, which is upward sloping as volume rises. The better the models get, the faster they compete their own margins down to the physical floor which rises with volume. You can already see it. Microsoft just cancelled Claude Code because the cost to run it exceeded the value it returned — demand retreating the moment price met real cost. The irony: the customer pulling back was itself a hyperscaler. In April, Uber confirmed once again that AI compute demand is price elastic. Bottom line: they assumed AI costs would keep falling like they always did on the bit side; however, on the atom side, there is a hard floor that likely rises in the short run. I am not denying that the margins are still fat. But it’s not the same model. These guys are running towards obsolescing their own pricing power. Why did Rockefeller stop at the gas station and not vertically integrate into cars?