The Commoditization of Services
Happy MLK Day! I just took the dog out to the park and had some time to collect some thoughts on software (and services) margins in the age of agents. Beautiful day to walk and brainstorm. Hope some folks enjoy and get value out of this!
We often look at the invention of the light bulb as a singular moment of technological triumph. But if you really get to the root of it, the story wasn’t just about glass and filaments. It was about the commoditization of light.
Before electrification, light was scarce. It was mostly candlelight or oil lamps. It was dim, expensive, and finite. When the light bulb was invented, people didn’t immediately understand the second and third-order effects. They didn’t foresee neon signs, late-night factory shifts, or the modern internet. But they did know one thing immediately: they no longer needed candles.
Light became so cheap that it ceased to be a luxury and became a commodity. We stopped thinking about the cost of turning on a switch.
We are currently standing at the exact same precipice with AI agents.
The core concept is simple. AI agents are beginning to commoditize what used to be high-margin service industries. We are moving toward a world where services that used to cost hundreds of thousands of dollars will cost tens to hundreds. The end result is inevitable. Services will become ubiquitous and embedded in everything we do, but the margins for the businesses providing them will collapse.
The 10x Deflation
Right now, we are in the boom cycle of the infrastructure build-out. We are obsessing over GPUs and data centers. But as this technology gets deployed, the value of the actual services delivered on top of that infrastructure is going to plummet.
Agents make expensive, human-led knowledge work 10x cheaper and 10x faster.
Consider the current agency model or the vertical SaaS model. These businesses rely on friction. You pay a lawyer a retainer because legal knowledge is gated and time-consuming. You pay a monthly seat fee for software because the utility it provides is scarce.
But what happens when an agent can execute that same workflow for a fraction of a cent in compute costs?
As the technology progresses, we will see a massive compression of value. The service becomes a utility. Over a long enough timeline, industries like software, legal services, and financial planning will stop looking like high-growth tech companies. They will start to look like the business model of a power plant or a water utility.
These will be essential services, required for modern life, but they will not command the premiums they do today.
The Terminal Valuation
This makes the current valuation models for many companies look dangerous. We are used to valuing these businesses based on forward free cash flow, assuming that margins will remain high or expand.
That assumption is wrong.
If the cost of production drops to near zero, the price must eventually follow. The first and second-order effects are easy to see. The current service model is terminal. The current vertical SaaS model is terminal. It will simply be less interesting to build businesses in these spaces because the “moat” of human capital is being filled in by cheap compute.
We are entering an era of service abundance.
The Consumer Surplus
While this is a grim outlook for high-margin service businesses, the end result is actually very good for the end consumer. We are heading toward a golden age of personalized services.
Imagine a world where everything you do online is instantly vetted. You won’t just click “I Agree” on a Terms of Service update. Your personal AI lawyer will read the contract in milliseconds, cross-reference it with your preferences, and ensure your data is safe before you even see the page load.
Your healthcare will move from reactive to proactive. Your personal AI doctor will analyze data from your Whoop band or smart watch in real-time. It will track what you are eating, how you are sleeping, and how you are feeling. It won’t wait for you to schedule an appointment six months out. It will nudge you the moment a metric slips.
This reduces the need for human lawyers and doctors to handle the rote, data-processing layers of their jobs. It pushes those professionals further downstream into more hands-on, high-touch human tasks.
The Rise of the Knowledge Appliance
If raw intelligence is the new electricity, we have to ask who the big winners will be.
When electricity became cheap, the power plants became utilities. The massive value creation didn’t come from selling the electricity itself. It came from the companies that built things you could plug into the wall.
It came from General Electric, Bosch, and Whirlpool.
These companies built the electric motor, the washing machine, and the refrigerator. They took a raw commodity (electricity) and packaged it into a specific, reliable outcome (clean clothes, cold food) that required zero technical skill from the user.
We are about to see the rise of the Full-Stack Agent Company.
These will be the Bosch and GE of the 21st century. They won’t just sell you a “chat” interface or raw access to a model. They will build the Knowledge Appliance.
The “Legal Appliance”: This won’t be a tool for lawyers. It will be a full-stack agent that handles compliance, taxes, and contracts for small businesses automatically. You plug it into your bank account and email, and it does the work.
The “Medical Appliance”: A dedicated agentic loop that integrates with your hardware sensors and acts as your primary care physician, handling 99% of diagnostics and triage without a human in the loop.
The winners won’t be the ones selling the power. The winners will be the ones who build the machines that use the power to solve real physical and digital problems.
The New Utility
We used to pay for light by the candle. Now we pay a utility bill for electricity, and we use as much light as we want without thinking.
In the near future, we will look back at the era of billable hours and seat-based pricing the same way we look at whale-oil lamps. Expensive, inefficient, and dimly lit.
The agents are coming. The margins are compressing. And knowledge work is about to become as cheap and accessible as flipping a switch.
The analogy between GE, General Electric, Bosch, and Whirlpool, and the knowledge appliance fails when we think that the friction that existed to build electrical appliances will not exist when building knowledge appliances.
Hence any companies creating "Legal Appliances" will face massive competition due to the very small barriers to entry.
In this case, the winners will be the ones that actually positioned where the frictions are.
The lawyer, the accountant, the physician, the office staff they each employed are now out of an income. Their income is demand that no longer exits for the items and services they needed, used or acquired. Some of those who provided the the items and services no longer demanded will be out of work and income. The cascade is endless except for those whose wealth is extraordinary. The "knowledge appliance" will have less and less demand by fewer and fewer viable providers of items and services. Until ...