If even Microsoft is feeling the AI spend, how is the average small business supposed to play?
The labor TAM for AI sits mostly with SMBs. They make up roughly half of private sector employment. But right now the vast majority of them are barely touching AI at all.
Recent numbers show only 25 to 35 percent of small businesses have tried any generative AI tools. Most of that is light use. The ones actually stitching together subscriptions and avoiding big API bills are probably under 15 percent of the market. That means we have only scratched a tiny fraction of the potential labor TAM.
When the cheap options get more expensive or go away, it will be even harder to get these businesses onboard. Most SMBs do not have the budget for heavy API usage. They do not have the internal skills or time to train up and incorporate AI. And they do not have money for a consultant team or FDEs.
That means the big productivity gains and labor market changes people are talking about will take longer than expected.
🦔Microsoft canceled its internal Claude Code licenses this week after token-based billing made the cost untenable, even for a company with effectively infinite cloud resources. Uber's CTO sent an internal memo warning the company burned through its entire 2026 AI budget in just four months. American AI software prices have jumped 20% to 37%, and GitHub (owned by Microsoft) is dropping flat-rate plans for usage-based billing across its products.
My Take
The AI subsidy era is ending in real time. The same company that put $13 billion into OpenAI and built the Azure infrastructure powering most of Anthropic's compute just looked at the bill from a competitor's coding tool and decided it was not worth paying. That is not a productivity failure on Anthropic's end. Token-based pricing is forcing every enterprise customer to confront the actual cost of running these models at scale, and the number turns out to be far higher than the flat-rate experiments suggested.
This ties directly to my Gemini Flash post yesterday. Anthropic, OpenAI, and Google all raised effective prices in the last six months. Enterprises that built workflows assuming AI costs would keep falling are now watching annual budgets evaporate in months. Two outcomes look likely from here. Either enterprises scale back AI usage to fit budgets, which slows the revenue ramp the labs need to justify their valuations ahead of IPOs, or the labs cut prices and absorb the losses, which makes the unit economics worse at exactly the wrong moment. Both paths land in the same place, the numbers stop working, and somebody has to take the writedown.
Hedgie🤗