"Software business models have underpinned the tech industry for decades. Companies invest heavily upfront to build software, but each additional copy costs almost nothing to distribute. So revenue scales faster than costs, driving fat profit margins. That dynamic helps explain why Microsoft, the world's largest software company, is so valuable. Big Tech spending on AI data centers and other infrastructure is set to soar again this year."
"AI challenges this model. If this new technology makes employees more productive, companies may need fewer software subscriptions. And as AI tools improve, businesses could replace existing software with AI-driven workflows or even build their own software using AI coding tools. Finally, if software companies embrace AI, that could make their services more expensive to run than traditional software. That would mean rising usage doesn't automatically translate into soaring profitability."
Software stocks suffered a brutal week, aside from a Friday rally, continuing a difficult year for the industry. Traditional software models rely on heavy upfront development costs and near-zero marginal distribution costs, allowing revenue to scale faster than costs and generating high profit margins. Big Tech capex for AI data centers and infrastructure is set to surge, creating pressure to find returns on massive investments. AI can boost productivity, reduce subscription needs, enable replacement of packaged software with AI-driven workflows or in-house tools, and increase operating costs for software providers. Declining profitability and slower growth could substantially lower software valuations.
Read at Business Insider
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