Techcrunch reports that AI coding tools have "very negative" gross margins. In other words, they are losing money on every user.
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I'm skeptical of AI coding as it exists today, and while I'm bullish on long-term prospects for AI writing software, am very dubious that simply using LLMs is going to be the answer.
However.
Startups typically do lose money. They'll burn money as they acquire a userbase --- their growth phase --- and transition to profitability later. I don't think "startups in area X tend to be losing money" is terribly surprising.
Ok, but it isn't just startups burning money here like there's no tomorrow - it's also major industry leaders (Microsoft, Facebook, Apple, Google, Nvidia, etc.) dumping hundreds of billions into infrastructure and development of a tech that has, so far, shown 0 positive returns for anyone and everyone. Everyone involved is pouring in money like it's going out of style, largely because they see this as a potential pathway to infinite profits down the line, just as long as THEY are the ones to get there first; consequences be damned. WHEN this bubble pops, not IF, it'll be messy. Extremely messy.
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Exclusive: The high costs and thin margins threatening AI coding startups
Coding assistant startups are highly unprofitable, says a source familiar with Windsurf financials.
TechCrunch (techcrunch.com)
Now I'm suddenly tempted to start using it. or at least coming up with a bot to keep it busy.
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Selling grain for coal, coal for iron and iron for paper is capitalism, but not a bubble.
Whether it becomes a normal thing depends on the cost.
That's not capitalism, that's a market.
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It would be just cheaper to self-host something for the whole company then?
Open-source AIs are there and they are very much competitive with proprietary solutions.If you want OpenAI level response times you might be surprised how expensive self-hosting gets.
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I didn't say they couldn't be resold, they simply won't have as wide a potential user market like an generic GPU would. But think about it for a sec, you've got thousands of AI dedicated gpu's going stale whenever a datacenter gets overhauled or a datacenter goes bust.
that's gonna put a lot more product on the market that other datacenters aren't going to touch - no one puts used hardware in their racks - so who's gonna gobble up all this stuff?
not the gamers. who else needs this kind of stuff?
no one important puts used hardware in their racks
FTFY. Just about every msp I've worked for has cut corners and went with 2nd hand (or possibly grey market) hardware to save a buck, including the ones who colo in "real" data centers. I would not be surprised to find that we're onboarding these kinds of cards to make a bespoke AI platform for our software customers here in a few years.
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This post did not contain any content.
Exclusive: The high costs and thin margins threatening AI coding startups
Coding assistant startups are highly unprofitable, says a source familiar with Windsurf financials.
TechCrunch (techcrunch.com)
Yes, this is part of the business model. The goal is to get everyone addicted to their service, then jack the price up to profitable margins. It's the same model Netflix and Amazon used. Bothe services lost money for over 10 years before becoming profitable.
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I can't name anyone in the company I work for thats had llms revolutionize their job
I’m jealous, my director at a software company has a second laptop just for AI so he doesn’t have to deal with IT and is insistent on using it for every project. One of his annual goals is 100% of his division using AI at least once per day. For every person against AI, there is another who can’t get enough.
The stupid are easily addicted.
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The 'cloud' was a pretty big thing though... everyone used to self host, now only some self host.
AWS, GCP, Azure make a lot of money
But it wasn't new anything new. The "cloud" services were literally the internet, just made a little easier for stupid people. Just like this llm shit isn't really new. The paid off media wants idiots to think its revolutionary but its not. Its a chatbot that sometimes gets stuff right.
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Now I'm suddenly tempted to start using it. or at least coming up with a bot to keep it busy.
Holy crap, has anyone ever attempted to create an "AI fork bomb"? Go to one of these agent bots, and tell it to create accounts with the other agent code bots. These new accounts will all be told to create accounts on all the other code bots services. And do this recursively forever. So the flow would be 1 bot makes lets say 5 bots. Each of those 5 bots make 5 more bots. And each of those 5 bots make 5 more. So the total number of running bots becomes like 1 * 5 * 5 * 5 * 5...
Obligatory, this is purely hypothetical, and you should never do this for legal reasons.
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Yes, this is part of the business model. The goal is to get everyone addicted to their service, then jack the price up to profitable margins. It's the same model Netflix and Amazon used. Bothe services lost money for over 10 years before becoming profitable.
Venture capitalism is what it's called, I think
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Current gen models got less accurate and hallucinated at a higher rate compared to the last ones, from experience and from openai. I think it's either because they're trying to see how far they can squeeze the models, or because it's starting to eat its own slop found while crawling.
https://cdn.openai.com/pdf/2221c875-02dc-4789-800b-e7758f3722c1/o3-and-o4-mini-system-card.pdf
Those are previous gen models, here are the current gen models: https://cdn.openai.com/pdf/8124a3ce-ab78-4f06-96eb-49ea29ffb52f/gpt5-system-card-aug7.pdf#page10
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Holy crap, has anyone ever attempted to create an "AI fork bomb"? Go to one of these agent bots, and tell it to create accounts with the other agent code bots. These new accounts will all be told to create accounts on all the other code bots services. And do this recursively forever. So the flow would be 1 bot makes lets say 5 bots. Each of those 5 bots make 5 more bots. And each of those 5 bots make 5 more. So the total number of running bots becomes like 1 * 5 * 5 * 5 * 5...
Obligatory, this is purely hypothetical, and you should never do this for legal reasons.
Sounds like a great idea, although no, commoners are not given the same privileges as capitalists. So I'm afraid there will be problems indeed.
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This post did not contain any content.
Exclusive: The high costs and thin margins threatening AI coding startups
Coding assistant startups are highly unprofitable, says a source familiar with Windsurf financials.
TechCrunch (techcrunch.com)
Caveat: this applies to literally every new technology especially in the VC funded world.
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how do you book software work so far out? for some reason my software clients seem to all want their stuff yesterday
I've been doing it for like 20+ years now so I have a very solid client base and very solid referrals. All my new clients now are referred to me by previous/existing clients so it gives me the luxury of booking well in advance.
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AI Is A Money Trap
In the last week, we’ve had no less than three different pieces asking whether the massive proliferation of data centers is a massive bubble, and though they, at times, seem to take the default position of AI’s inevitable value, they’ve begun to sour on the idea that
Ed Zitron's Where's Your Ed At (www.wheresyoured.at)
Damn. We're looking at another recession when this bubble bursts, aren't we?
Just great.
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AI Is A Money Trap
In the last week, we’ve had no less than three different pieces asking whether the massive proliferation of data centers is a massive bubble, and though they, at times, seem to take the default position of AI’s inevitable value, they’ve begun to sour on the idea that
Ed Zitron's Where's Your Ed At (www.wheresyoured.at)
Thanks buddy!
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This post did not contain any content.
Exclusive: The high costs and thin margins threatening AI coding startups
Coding assistant startups are highly unprofitable, says a source familiar with Windsurf financials.
TechCrunch (techcrunch.com)
Basically, the only reason some of these vaguely functional AI tools actually work okay is because they haven't been ruined with inevitable monetisation yet.
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Venture capitalism is what it's called, I think
Venture capitalism is when you give somebody money to start a business in hopes that they make it big, giving you really valuable equity for relatively little money. What you're thinking of is blitzscaling. Scale up in an unsustainable way in order to gain market dominance, so that you can use that to become profitable.
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Basically, the only reason some of these vaguely functional AI tools actually work okay is because they haven't been ruined with inevitable monetisation yet.
Already the cost is quite high. A prolific year can easily burn 100usd a day in tokens and they have not even started to enshitify.
Some of the cost to run these models will come down a bit if Nvidia gets some actual competition which I'm sure will happen in the medium to long term because the hyper scalers definitely don't like paying Nvidia's AI ransom and the Chinese don't want to be beholden to a company the US can influence.
We will see which happens first.
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I've been doing it for like 20+ years now so I have a very solid client base and very solid referrals. All my new clients now are referred to me by previous/existing clients so it gives me the luxury of booking well in advance.
I appreciate your response!
