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by fwipsy
27 days ago
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> While they'd love to reduce their actual costs, they'd only want to do it to the extent they are certain they can keep it secret. So you are saying that frontier AI labs are spending billions of dollars on datacenters as a form of marketing. And they are colluding to hide the fact that they don't need to. Of course they profit more if they are in front, but bleeding money to pretend to be in front is not a winning strategy. They can't fool the market if their models are not actually better, and they know this. |
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No. Your paraphrase is not at all what I was saying. And I certainly don't think they are "colluding." There's a thing which economists call "conscious parallelism" or, sometimes, tacit collusion.
It occurs when competitors in an oligopoly (a market dominated by a few large firms) independently recognize their shared market interdependence. Without any explicit agreement, meeting, or secret communication, changes in pricing, output, and marketing strategies tend to align simply by observing and reacting to each other's public market behavior. It happens quite often, has been extensively studied and isn't illegal. No nefarious cabal required.
> bleeding money to pretend to be in front
I never said bleeding money was the purpose. It's a side effect of pushing the envelope of performance and capability. They have already spent enormous sums on infrastructure and have committed to spend much more in coming years. This is a risky, but potentially winning, business strategy sometimes referred to as "Drag Racing." It pays off best when the bleeding edge stays uniquely valuable AND there are significant barriers, such as massive capital and infrastructure, limiting the number of competitors at that edge.
Once you're committed to playing that strategy, like committing a trillion dollars to corner scarce resources like GPUs, RAM and gigawatts, it's much less good for you if the bleeding edge gets less unique or the necessary capital/infrastructure becomes less of a barrier. Of course, being technology, your financial models assume the competitive barriers will get lower over time, but you've bet a trillion dollars the rate will be slow enough that you'll be able to extract far more than a trillion dollars from all the infrastructure you pre-bought before it depreciates to zero. If the cost barriers your margin projections rely on suddenly fall off a cliff much faster than your ~5 year depreciation schedule, THAT would be problematic, to say the least.
So, here's the rank order of a frontier lab's preferences, assuming they've already sold their soul to fund pre-buying scarce resources.
1. Your own costs get much cheaper faster than you predicted but no one else's costs change AND your customers keep paying the same high rates.
2. If you can't have #1 as a guaranteed, no-risk outcome, then you'd prefer the status quo you already planned for. Your costs and your 2-3 frontier competitor's costs roughly follow the slope your model predicts AND remain huge barriers keeping the mob of low-cost competitors away from the frontier.
3. The absolute disaster scenario would be if the cost barriers protecting you and your 2-3 frontier competitors falls much faster than you modeled and the barbarian horde is unleashed to feast on your margins before you're paid off your infrastructure. Why? Because the front runners have already sunk their costs. If they can't magically be "The One and Only" player with eternally sustainable high margins and super low costs (which is a fantasy), they're fine with #2: trading high-margin, top-dollar customers with their handful of frontier peers. High-margins going away for everyone is death to all the frontier players who've already bought the scarce resources to win a drag race.
The frontier labs have paid a fortune for the world's best AI researchers. Why didn't those researchers discover DeepSeek's early 2025 "breakthrough" before DeepSeek did? IMHO, it's because they weren't assigned to look for that kind of resource optimizing, cost reduction breakthrough. Because you wouldn't devote scarce research bandwidth looking for the kind of breakthroughs you don't want to find (and have bet a trillion $ don't exist). Especially breakthroughs which unleash egalitarian benefits that help everyone (see disaster scenario #3 above). Frontier lab's huge financial commitments to drag racing have painted them into corner where they benefit much more from research that makes models smarter at the same or higher costs than they do from research that lets models deliver the same smarts with fewer resources and costs (lowering barriers and draining moats you're counting on for ROI).