AI is eating something worse than software

Software execs have repeatedly said that AI can't replace their applications, but it seems to be replacing something more important — their revenue.

Why it matters: Enterprise AI spend is feeding the SaaSpocalypse narrative.

Driving the news: IBM issued a profit warning before announcing disappointing earnings this week. Big Blue says customers are shifting spending away from software and infrastructure to chips and servers.

Workflow automation company Pegasystems also missed estimates, noting that "unprecedented changes in the AI market caused clients to delay their purchasing decisions."

What they're saying: "For a time, AI providers acted a little bit like drug dealers offering their products for free or charging $20 a month for what felt like unlimited usage," Pegasystems CEO Alan Trefler said on the earnings call.

He says the cost uncertainty of AI has led companies to freeze spending.

State of play: Neither company claimed that AI was replacing what their software does, but conceded that customers have only so much cash to spend and right now their focus is AI.

Zoom out: Private equity execs have said the disruption creates an opportunity to buy software companies, but deal flow has yet to reflect that.

Instead, PE software deals had the biggest decline in value of any sector, and deal count dropped to its lowest level in more than two years.

The bottom line: AI's consumption of customer spend is making arguments over its ability to replace software irrelevant.