Key insights
- The article discusses the deflationary nature of compute and its impact on software companies like Adobe and ServiceNow. While compute costs decrease, these companies are expected to maintain subscription prices, leading to margin expansion. The high CAPEX and energy requirements for data centers create a barrier to entry, favoring large players like Amazon and Microsoft. This dynamic could positively influence US equities by supporting the profitability of software companies.
The Compute Paradox: Is Big Tech Building a Moat or a Commodity Trap?
Does the trajectory of compute pricing change your Big Tech DCF models, or are you just betting on the margin expansion of software users like Adobe and ServiceNow?
1. Compute is Inherently Deflationary
While Moore's Law is slowing, Huang’s Law (exponential GPU growth) has taken over.
Hardware Efficiency: New architectures (Blackwell/Rubin) provide massive "compute per watt" gains. The unit cost of a single AI token is crashing.
The ASIC Shift: Custom chips (AWS Trainium, Google TPU) are "stripped-down" for AI. These offer inference at a 30-50% discount compared to general-purpose GPUs.
2. The Margin Expansion Play
In a market with five major players (AWS, Azure, GCP, Oracle, CoreWeave), basic compute (IaaS) is becoming a commodity.
API Price War: OpenAI/Azure API costs have dropped 90% in 18 months.
The Software Win: As unit costs drop, companies like Adobe and ServiceNow will likely keep their subscription prices stable, pocketing the savings as pure margin expansion. Even if their total compute spend rises due to volume, their efficiency scales faster.
3. The New Moats: CAPEX and Energy
If compute is getting cheaper, why aren't there more competitors?
The $100B Barrier: The entry price for a top-tier data center is now $50B–$100B in annual CAPEX. Very few companies on earth can play this game.
Power is the Bottleneck: The constraint is no longer the chip; it’s electricity. Providers securing nuclear and renewable contracts (Amazon/Microsoft) have a cost advantage that silicon can’t beat