Korva is a scroll of the internet’s best ideas.
Software sold copies of a string
The era of high margins
The software vision was high upfront costs and then very high gross margins, with high net margins hopefully arriving one day. They often didn't arrive until private equity forced them out. That era of high margins was a coincidence of selling strings. SaaS itself is just a business model where you pay per person per month or per year for a tool that helps you use your computer.
Compute costs every time
Compute is different. A prompt can't be written once and its output sold in copies, because the compute runs every single time and the marginal cost is not zero. The expected result is lower gross margins, much thinner net margins, and far more scale.
Scale and the Walmart effect
Low margin with low scale is not a good business, so returns accrue to the biggest providers. That is why companies worth three to four trillion dollars, unthinkable ten years ago, are now ordinary to discuss, and why ten trillion dollar companies seem plausible. It looks like a Walmart effect in software, with the SaaS provider as the mom and pop shop when Walmart comes to town.
Why does software cost almost nothing to copy?
Software has high fixed costs, because engineers must write it, and tiny variable costs, because duplicating a file takes a trivial amount of storage and bandwidth. Economists call the cost of one more unit the marginal cost. When it is near zero, gross margins can reach 80 percent or more at mature software companies. That structure is why investors long prized software over hardware.
Why does an AI answer cost compute every time?
Large language models generate text by running a calculation through billions of numbers for each piece of text they produce. Every query therefore uses processor time and electricity. Providers run this on specialized chips in large data centers. The cost scales with how many people ask and how long the answers are.
What did Walmart do to small-town retail?
A 2005 study by economist Emek Basker examined counties where Walmart opened stores. She found that retail employment rose in the short run, but some of that gain faded as nearby retailers closed over the following years. Other researchers have found a net loss of retail jobs in comparable studies. The pattern showed how a large chain's cost advantages can reshape local competition.
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