What happened
Wells Fargo analysts, led by Michael Turrin, argue that falling inference costs from rapid open-model development by DeepSeek, Meta, Nvidia, and others will strengthen established software vendors rather than undermine them. The bank points to Microsoft's Copilot (which surpassed 30 million paid seats in fiscal Q4) and ServiceNow's AI products (which crossed $1 billion in annual contract value during Q2) as examples of how incumbents can embed cheaper intelligence into platforms customers already rely on.
Why it matters
Rather than displacing dominant software vendors, lower-cost AI could expand total AI usage across enterprises—allowing companies like Microsoft and ServiceNow to deepen customer lock-in by integrating AI directly into workflows and products. Wells Fargo sees this as favorable to established players with large installed bases and distribution networks, while smaller, narrower AI vendors face pressure. For investors, the question is whether falling costs translate into higher usage without eroding the pricing power these vendors maintain.
What to watch
Monitor Copilot seat growth, Azure AI consumption, and ServiceNow's AI contract value for signs that usage is accelerating faster than AI economics deteriorate. A sustained rise would validate Wells Fargo's thesis; if customers view AI intelligence as interchangeable, software companies will need to prove that workflow integration, proprietary data, and distribution are strong enough to preserve margins.
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Wells Fargo's thesis hinges on a structural advantage that incumbents in enterprise software enjoy: a large installed base of customers already paying for their platforms. As open-model development accelerates—driven by DeepSeek's progress and renewed U.S. competition from Meta and Nvidia—the cost of inference (the computational step where an AI produces an answer) is falling. Rather than seeing this as a threat, Wells Fargo argues it is a tailwind for vendors like Microsoft and ServiceNow because they can afford to embed cheaper AI directly into products customers already use and depend on for critical workflows. This contrasts with a scenario in which a single frontier model dominates the market and customers switch to specialized AI-native vendors.
The bank's confidence rests on observable momentum: Microsoft 365 Copilot has already grown to 30 million paid seats, and ServiceNow's AI products generated $1 billion in annual contract value by Q2—both signs that enterprises are adopting AI not as a standalone tool but as a feature of their existing software stack. However, the critical risk Wells Fargo identifies is margin erosion through commoditization. If AI intelligence itself becomes a fungible input—something customers view as interchangeable across vendors—then the pricing power and switching costs that protect these incumbents will erode. The outcome depends on whether usage growth outpaces the decline in AI economics.
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