Microsoft To Offer Deepseek Based AI Copilot

Regular readers will know that for a couple years I’ve been saying that Chinese open source AI would win the AI “war” because it’s cheaper and non proprietary (prices can’t just be raised suddenly, or capacities taken away.)

Over the last few months there’s been a lot of screams coming from regular AI users. OpenAI and Anthropic moved to token based billing, which is to say “you pay based on how much you use.” They still weren’t charging full rate, but they were charging a LOT more and users were not happy. One company spent 500 million by mistake: they forgot to put limits on how much their employees could spend.

Oops.

Nor are ordinary users exempt:

I Went From $3,000/Month on Claude to $5/Week on DeepSeek

And honestly? 80% of my work is identical.

For the past two months, I was burning $3-5K monthly on Claude Code. Every idea from design to development to testing – full end-to-end automation, even simulating users to test my products and provide feedback. Extremely token-intensive.

But Claude’s caching sucked, making it insanely expensive. Then I discovered DeepSeek V4.

The numbers: • Claude: $5 input, $25 output per million tokens •

DeepSeek: $0.28 input, <$1 output (with their current discount) • DeepSeek cached: $0.0002 – literally less than a penny The caching optimization is game-changing.

Once DeepSeek has seen content, it basically stops charging tokens. My result: $5/week vs $1,000/week for the same workload.

So now Microsoft has created their own minor Deepseek fork, and will run it on their servers to power Copilot. You can still use a version run by US labs, but if you can’t afford, or justify that, you can use the Deepseek version.

Driving the news: Microsoft says companies using Copilot Cowork will pay based on how much compute they use.

• The company tells Axios it is exploring a fine-tuned version of DeepSeek V4, or another open-source model, as a lower-cost alternative to the Anthropic and OpenAI models now powering Copilot Cowork.
• Microsoft says it expects to make a lower-cost model available in the coming weeks and will confirm its choice then.

Worse than this, there’s beginning to be serious pushback on whether AI is all that useful. Uber’s COO opened the door back in March:

In perhaps the most high-profile example of this growing concern yet, Uber COO Andrew Macdonald acknowledged during a recent podcast appearance that gains in productivity simply weren’t being reflected in the oodles of cash the company has been shelling out on AI.

“That link is not there yet, right?” he told Rapid Response host Bob Safian. “I think maybe implicitly there is more that is getting shipped, but it’s very hard to draw a line between one of those stats and, ‘Okay, now we’re actually producing 25 percent more useful consumer features.'”

“If you’re not actually able to draw a direct line to how much useful features and functionality you’re shipping to your users that trade becomes harder to justify because it’s not free,” he complained. “AI is not free.”

As far as I can tell there’s little evidence that US priced AI is more cost-effective than the employees who were laid off because it was so great. I rather suspect that in most cases, it’s less cost-effective.

But more importantly we have the “it’s better to be wrong with the crowd” effect moving against AI. In almost all positions, including executive ones, if you’re wrong in the same way that everyone else is wrong, it’s no big deal. If you’re wrong against the crowd (say not getting into AI when the rest of your industry is) and it turns out that AI is the next big thing, well, you’re fired.

So much of the AI mania was driven by this and a relentless hype cycle. Now that important people are beginning to push back on it, it’s no longer required to be all-in on AI. And that’s bad for Anthropic and Claude.

AI is not the next coming. It is not going to make it to general AI (not this generation of large language models anyway) and while it does have some utility the US frontier models cost far more to operate than any conceivable return most of their customers will receive. It isn’t the “get rid of three-quarters of your employees” super app corporate leaders were promised.

And to the extent it is useful, well Chinese open source models are more cost effective. As good? Generally no. But they keep catching up, and paying 70 to 97% less makes up for being somewhat behind.

So to the extent that AI is a real industry, odds are high China’s going to win the race. Since the models that will win will be built off open source models that’s not a crisis for anyone, it’s a good thing, far better than a proprietary future.

BUT it does mean that US AI expenditures are probably going to turn out to be the biggest misallocation of resources in centuries: bigger than the housing bubble and bigger than the dot-com bubble (which at least did have a world changing technology behind it.) Not quite the Dutch tulip bubble, but at least the Dutch got lots of pretty flowers of that, instead of massive ugly data centers.

Business is driven by stupid people engaged in group think, especially in the West, far more than most people will admit. Everything Silicon Valley does these days is someone trying to create a monopoly or oligopoly so they can be insanely profitable, while China actually competes on price, and that’s why China keeps eating the West’s lunch.

I’d cry, except that an open source AI world is a far better one than a proprietary one, and every tear some Silicon Valley tech bro cries over a lost opportunity to make a monopolistic buck an angel gets their wings.

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