Back in the very good old days, Bill Gates explained to Steve Jobs why producing software was better than tying it to hardware. In the 80’s, Microsoft could just write the code once, and endlessly ship boxes to users for a hefty price, paying almost nothing for each additional user. Apple, by contrast, had to source parts, set up factories, assemble computers, ship to specialized stores, and so on. And for the time, Gates was right. All the mess of Capital Investment belonged to a menagerie of other computer manufacturers, Microsoft walked off with the prize: asset light, huge margins.

“Asset light” mostly won the investing game for the past 50 years: think Microsoft, Google, Facebook, Uber and others as compared, say, to Ford or Boeing or other industrial powerhouses, who have to keep investing in new factories, new real estate, new raw materials, supply chains and all the rest the comes with commercial production on such a scale.

Now, in sort-of plain sight, the so-called hyperscalers are dumping billions into hardware and data centers in a rush not to be left out in the AI race. The fear is, like so many other software concerns, that #2 (or below) will pale in comparison to #1, so everybody needs to outspend and out build the other guy(s). Hence, the greatest software companies become industrial companies, mortgaging their current asset light base to gigantic capex in the hope of remaining at the top of the heap.

Some noise has been made of the circularity of the process, but there is a more fundamental change happening with many of these: they are becoming full-on capex companies, either directly or by guaranteed leasing of hardware facilities for longer terms than the hardware is rated to last!

Here’s a piece in today WSJ making the point:

wsj.com - Leading stocks are losing their low asset edge