What Happened
Google's parent company Alphabet posted negative free cash flow of $US5.9 billion for the June quarter, its first negative result since listing in 2004. Capital expenditure doubled year-on-year to $US44.9 billion, outpacing the $US39.1 billion in cash the business generated. Alphabet shares fell more than 7 per cent on the result.
That spending is flowing into the AI infrastructure Australian businesses now depend on, and local firms are paying for it at prices they cannot influence. Kim Teo, chief executive and co-founder of hospitality ordering company me&u, put it plainly: "What we're seeing right now is that AI cost is moving week to week, not year to year."
Sydney software company Dovetail now spends about $US30,000 (A$43,000) a month on the coding tools Claude Code and Cursor, roughly six times its January bill. Engineering headcount has not changed and no developers have been made redundant, according to chief executive and co-founder Benjamin Humphrey.
At the smaller end of the market, the exposure is more direct. Tommy Gregory, 20, runs a marketing agency serving 10 to 15 clients and spends about A$550 a month on software, roughly A$160 of it with Anthropic after upgrading his plan to get past usage limits. "I'm pretty much hostage to them at this point," Gregory said. "There's a line somewhere I wouldn't cross, but triple's not it. If they went five times I'd still pay."
Why It Matters
The pricing dynamic is structural, not cyclical. Every frontier model an Australian business can buy is built offshore, priced in US dollars, and sold on terms the supplier sets. As Humphrey noted: "I can't think of a single thing in that stack that's Aussie, maybe Xero."
The margin pressure this creates is significant. "In SaaS [software as a service] we've enjoyed 80 to 90 per cent margins, but under the new consumption model, our margins for AI features might drop to 50 per cent," Humphrey said. "I think this will fundamentally change the way investors see software companies."
For buyers, the competitive framing is already shifting. "It sometimes feels like our buyers lump all software into 'Claude' or 'Not Claude'," Humphrey added.
Key Details
The Weel Australian AI Spending Index, which tracks thousands of local small and medium businesses, recorded AI adoption at 30.8 per cent in June, up from 22.1 per cent in January. Over the same period, the share of businesses paying the 20 largest traditional software subscription companies fell to 41.6 per cent, a record low for the index.
The shift is happening fast enough that some operators are building vendor flexibility into their strategy. "At me&u we are not wedded to any one model or vendor, and that flexibility is our hedge," Teo said.
Background and Context
Australian technology businesses have long relied on US-built software infrastructure. The difference now is the pricing model. Traditional SaaS subscriptions offered predictable monthly costs. AI tools increasingly charge by consumption, meaning costs scale with usage in ways that are difficult to forecast or cap.
The ABC has previously reported on expectations that Australia's technology sector could grow substantially by 2030, with AI adoption cited as a key driver. The Weel index data suggests that growth is already under way, though the financial terms remain set entirely in Silicon Valley.
What Comes Next
Humphrey's warning about investor sentiment may prove the most consequential near-term effect. If AI consumption costs compress SaaS margins from 80-90 per cent to 50 per cent across the sector, the valuation models that have underpinned Australian software company fundraising will need to be revised.
For individual operators like Gregory, the calculus is simpler and more immediate. Costs are rising, alternatives are limited, and the suppliers know it.