Comment by dragonwriter
5 months ago
With no moat, they aren't placed to capture much value; moats are what stops market competition from driving prices to the zero economic profit level, and that's even without further competition from free products that are being produced by people who aren’t even trying to support themselves in the market you are selling into, which can make even the zero economic profit price untenable.
Market competition doesn't work in an instant; even without a moat, there's plenty of money they can capture before it evaporates.
Think pouring water from the faucet into a sink with open drain - if you have high enough flow rate, you can fill the sink faster than it drains. Then, when you turn the faucet off, as the sink is draining, you can still collect plenty of water from it with a cup or a bucket, before the sink fully drains.
The startups that are using API credits seem like the most likely to be able to achieve a good return on capital. There is a pretty clear cost structure and it's much more straightforward whether you are making money or not.
The infrastructure side of things, tens of billions and probably hundreds of billions going in, may not be fantastic for investors. The return on capital should approach cost of capital if someone does their job correctly. Add in government investment and subsidies (in China, the EU, the United States) and it become extremely difficult to make those calculations. In the long term, I don't think the AI infrastructure will be overbuilt (datacenters, fabs), but like the telecom bubble, it is easy to end up in a position where there is a lot of excess capacity and the way you made your bet means getting wiped out.
Of course if you aren't the investor and it isn't your capital, then there is a tremendous amount of money to be made because you have nothing to lose. I've been around a long time, and this is the closest thing I've felt to that inflection point where the web took off.
> Market competition doesn't work in an instant; even without a moat, there's plenty of money they can capture before it evaporates.
Sure, in a hypothetical market where before they try to extract profits most participants aren't losing money with below-profitable prices trying to keep mindshare. But you’d need a breakthrough around which a participant had some kind lf a moat to get, even temporarily, there in the LLM market.