AI industry faces cost pressure as demand shifts to cheaper models

to cheaper models">

The AI boom has been built on a basic assumption: Bigger models are more powerful, and the most powerful models win. Now, the industry is about to learn what happens if that assumption starts to break. Mounting costs have already pressured users to give smaller and cheaper models a second look.

This cost-conscious model-shopping is new and it’s unclear how it will affect the industry, but the impact is likely to be significant. One prediction, laid out best by Coinbase co-founder Brian Armstrong, is that it will result in the vast majority of tasks shifting to cheaper models. “[D]emand for intelligence is near infinite, but 80% of workloads will be running on 99% cheaper models within 12-18 months,” Armstrong wrote on X.

“20% of workloads will still run on latest gen models where IQ maxing is important.” It’s hard to overstate what a significant shift it will be for the AI industry if Armstrong’s prediction comes true. Before now, most AI companies have competed on quality, which has meant defaulting to the most advanced available model. If those same jobs can be handled by cheaper models without affecting quality, it would mean a massive shift in the economics of AI.

And critically, much of the savings would be coming out of the pockets of the big labs, dealing a financial blow to OpenAI and Anthropic just as they’re heading for their IPOs. Initial tests suggest that, when the system is arranged right, cheaper models could sub in without any sacrifice in quality. In a recent test by the legal AI tool Harvey, the company was able to reduce inference costs by 3x without reducing quality.

The test, performed in partnership with the inference platform Fireworks AI, combined Claude Opus and Fireworks’ GLM 5.1, and shifted to Opus for the most intensive tasks. The result was a significantly lower load in terms of server time and overall cost. “Quality comes first, and in legal it always will,” Harvey co-founder Gabe Pereyra told TechCrunch, referring to the AI legal services his startup provides.

“However, the definition of quality is evolving from simply using the most powerful model for everything, to using the best model that gets the right answer most efficiently.” This trend is often framed in terms of major labs versus Chinese models or open-weight ones, but that misses the bigger point. The real divide isn’t between proprietary and open models; it’s between large models and small ones. You can save money by switching from GPT-5.5 to DeepSeek’s V4 Flash, but switching to GPT-5.4-mini works just as well.

There’s an active price war going on between in-house inference from the big labs and independently served open-weight models. For the bigger question of small versus large, it doesn’t really matter which kind of small model wins out. All of this might seem obvious — of course you shouldn’t use more compute than necessary — but it runs counter to the scaling-first approach that has dominated the industry until now.