The rapid emergence of DeepSeek, a more efficient artificial intelligence (AI) model, is reshaping the AI investment landscape. By offering highly competitive performance at significantly lower costs, DeepSeek challenges the competitive dynamics of established hyperscalers—companies that once viewed monumental spending as a key barrier to entry.
Soon after DeepSeek entered the mainstream conversation, Microsoft CEO Satya Nadella took to social media to defend their massive AI investments, stating: "Jevons' paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket." Nadella suggests that improvements in efficiency will drive higher demand, benefiting companies deeply embedded in the AI ecosystem. However, it is important not to conflate this broader adoption with the potential for future investment returns.
Jevons' Paradox exists alongside the Capital Cycle—a framework with significant investment implications. Popularized by Edward Chancellor in Capital Returns: Investing Through the Capital Cycle,1 the Capital Cycle outlines a predictable sequence:
In AI, recent surges in infrastructure spending have not only inflated capacity, but also facilitated a rise in competition, which could potentially dampen future returns. The arrival of more efficient models only amplifies this risk. Current leaders are investing hundreds of billions of dollars into a product with minimal switching costs, making it easy for companies to switch providers in favor of more cost-effective alternatives. This dynamic weakens the pricing leverage of incumbent firms, accelerating commoditization in the sector.
Take, for example, GPT-4.5, which costs 15-20 times more than its predecessor, with relatively less operational improvements. Even OpenAI’s CEO, Sam Altman, acknowledged on X that the new model “won’t crush benchmarks.” This highlights the growing pressures on pricing and profitability, signaling potential turbulence ahead for established players.
Important Disclosures & Definitions
1 Chancellor, E. (2015). Capital Returns: Investing Through the Capital Cycle. Springer.
Capital Cycle: an economic concept where capital (money) flows into industries with high returns, leading to increased competition and eventually lower returns, causing capital to flow out, creating a cycle of investment and disinvestment.
Hyperscaler: a cloud service provider that offers independent software vendors and other businesses with the ability to handle computing, storage and other key IT processes for millions of users.
Jevons Paradox: named after economist William Stanley Jevons, suggests that technological advancements that increase resource efficiency can paradoxically lead to increased consumption of that resource, rather than decreased consumption, due to a combination of factors including lower prices and increased demand.
AAI000903 03/18/2026
