AI will reduce business profitability

The authors of this article, Filip Tichý (Partner at Grant Thornton Slovakia) and Jakub Chudík (Co-Founder at Assetario), take you through the world of artificial intelligence in the AI Breakfast series. This article was written without the use of AI.

One often-repeated narrative is that AI technology will increase the profitability of companies that adopt it. AI will replace some human activities, costs will decrease, margins will increase. Awesome! Nevertheless, in our opinion (and according to many experts) it will be just the opposite - implementing AI will reduce profitability. Of course, there will be companies that will make enormous profits from AI, especially tech companies that will bring AI to various products, or "first movers" pioneering companies that successfully implement AI into their business model very early. Once AI becomes a mainstream and widely used technology, there will be a gradual (but rapid) saturation of the market. In fact, AI technology will greatly simplify the entry for new players, mainly into profitable industries, lowering entry barriers, simplifying the use of the technology and reducing the need for "specialists". It will simply be much easier to set up a bank, a law firm, an IT firm, a production company in the creative industry, and so on. Moreover, through competitive pressure, the selling prices of services and products will be reduced. Professional and technological barriers will be significantly reduced, regulatory barriers will remain (or will increase under lobbying pressure).

This means that if a company wants to remain profitable, it will also have to reduce its costs (using AI, of course). The gradual implementation of AI into all areas will go hand in hand with the pressure to reduce selling prices and costs, margins will go down especially in profitable sectors, and there will be a commoditisation of services that have been hitherto specialised. Specialised jobs (especially white collar) will be easier to perform, and more people will do them.

This phenomenon is nothing new, as there are plenty of examples from the past where new technology has caused prices (and profitability) to fall. One example for all - Uber, thanks to its technology platform and innovation, they made it possible for anyone to be a taxi driver. The result - the price of rides (and taxi drivers' profits) have gone down. The quality and accessibility (financial or geographical) of the service has however increased. We can therefore conclude that this change has been positive for the customers.

So should we be unhappy about the emergence of AI because it means the decline of profits? Certainly not! Even if our profit margins are going to decline, AI will bring us tremendous opportunities to develop new services and products to scale. Therefore, even if our (unit) gross margin percentage drops, we still have a great chance to increase our absolute net profit. However, not changing your business model (or changing it very slowly) could be fatal.