AI Is Getting Cheaper, Right?

The overarching narrative of the past two years has been that AI models are getting cheaper for customers. 

Just take a look at this chart, showing how the cost of purchasing access to a GPT-4 level AI model from OpenAI has dropped more than 85% since it was released in early 2023. And that’s without getting into the rise of cheap, open-source AI like DeepSeek which offers more low-cost alternatives to developers.

So it’s interesting when we hear from AI application developers that the models they buy are still just too darn expensive. As a result, many app developers are struggling to get their gross profit margins anywhere near 70% or 80%, the kinds of margins enjoyed by traditional software businesses.

There are a couple potential reasons for this. Crystal Huang, a general partner at GV, told me that, while the costs of older AI models are dropping, AI labs can still charge a pretty penny for each new state-of-the-art model they release, sometimes dozens of times higher than older models.