Better Offline - Why OpenAI Is A Terrible Business

Episode Date: October 9, 2024

As of last week, OpenAI is now worth $157 billion - yet below the hood is a far darker story. In this episode, Ed Zitron explains the cold, hard truth - that OpenAI is a terrible business that burns billions of dollars, and its failure to scale its cloud business tells a dark tale about the wider generative AI industry.  --- LINKS: https://www.tinyurl.com/betterofflinelinks Newsletter: https://www.wheresyoured.at/ Reddit: https://www.reddit.com/r/BetterOffline/  Discord: chat.wheresyoured.at Ed's Socials: https://twitter.com/edzitron https://www.instagram.com/edzitron https://bsky.app/profile/zitron.bsky.social https://www.threads.net/@edzitronSee omnystudio.com/listener for privacy information.

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AllZone Media. Hello and welcome to Better Offline. I'm your host, Ed Zittron. As ever, please check the episode notes for links to the things that I'm talking about. Now, frequent listeners know that I'm immensely skeptical of generative AI, both as a technology but also as a business. It's expensive. It's unreliable.

It doesn't actually do that much. And the real world use cases range from kind of helpful to unhelpful, to, to not really useful in any way, shape or form, and definitely not useful enough to justify hundreds of billions of dollars in spending. And I know somebody is going to email and say, but head, my mate's granny's uncle's dog uses chat GPT to brainstorm or something else equally flimsy, and I really need you to put all of this in context. Open AI loses $5 billion a year, and basically every big tech company is blown past their

emissions targets, with few signs that they'll ever bother to try and meet them again, all in pursuit of the piddliest or most convoluted use cases in history. It's a goddamn farce. And that's why Generative AI is such a regular topic on this show. I feel like the tech industry is experiencing a kind of collective madness, a delusion that seeing companies like Microsoft and Google, both their companies and our planet on a technology that continually fails to deliver on, well, anything.

I want to say here, and I actually wrote down this supposedly massive potential, But what was the potential ever? Can anyone actually tell me what this was meant to do other than AGI? Anyway, eventually I see this all falling apart. And I think there's going to be a calamitous event when everything does actually unravel. I return so often to generative AI because I truly fear the damage that this confrontation will cause. And I'm concerned about the damage that's happening right now, if I'm honest. And while my tone's often acerbic, and I don't think you'd have it in any other way, I don't really take much joy in watching these things burn. Sure, I admit, it's pretty funny thinking about Satchan Adela getting fired, or Sondapasai getting fired, or both of them looking stupid. But it's not the same thing.

My glee's kind of tempered when I stop and think about what all of this means, or will mean, I should say, for the companies trying to get funding right now, or for the companies that will try and raise money after the bubble bursts, and for the tech workers that will get laid off, either because Microsoft and Google want to put more money into data centers and GPUs, or because their generative AI bets have gone tits up and they need to save money some other way. And so I hope you'll forgive me for a somewhat more somber tone to this episode. I want to, again, make a clear-headed analysis of where we are today and where I think we're going. And the reason I'm retreading this path is because over the last month or so, we've seen some really, really alarming signs about the accelerating crisis

in generative AI and whispers that the party will soon come to a halt. Now, you may remember a few episodes back that I started talking about pale horses of the AI apocalypse, signs that things were falling apart like layoffs at AI companies, price increases or decreases, internal discord at these big AI companies, speciously impressive yet, kind of flimsy product announcements, and so on and so forth. Since then, I've kind of been proven right several times. Multiple pale horses have emerged. There was a big stupid magic trick to impress investors in the form of open AIs rush launch of its 01, and that model, by the way, was code named Strawberry.

Rumored price increases for chat GPT in the future. They're looking at $44 a month by 2030, and they're looking at potentially thousands for models in the future. And then layoffs at scale AI, which is one of the biggest players in AI training data, if not the biggest. And these are all signs that things are beginning to fall apart. And I think it's important to explain how precarious things are right now, despite all of the money sloshing around, and how dangerous the power of the power of

magical thinking really is. I want to express my concerns about the fragility of this movement and the obsessiveness and directionless that brought us here. And I want us all to kind of do better. And I don't mean you the listener, but if you remember the media that's written something vague about AI and you've kind of carried water for Sam Orkman, it is time to stop. It was already time to stop some time ago, I should just be clear, but now really is the time to stop. But this week's a two-parter, and I'll be explaining things, well, in two parts, obviously. First of all, we're going to talk about Open AI, their most recent funding round, and how bad their business is, and exactly how worried you should be about them.

Now, the second part is going to be about something I'm calling the subprime AI crisis, where I see a growing bubble of companies integrating generative AI at prices, well, heavily subsidized by big tech and heavily discounted by companies like Open AI and Anthropic. Should either of these companies get desperate, or I don't know, actually want to make more money than they spend, they're inevitably going to have to raise the prices to match their actual costs, which will likely make the existence of many AI startups completely untenable. You know, kind of like when the teaser interest rates on subprime mortgages expire during the financial crisis, and people suddenly started losing their houses.

In any case, these are going to be meaningful, yeah, kind of brutal episodes, in part because while it's enjoyable to watch big tech burn or get embarrassed, there's a real human cost, like I said, and the damage to our environment is already being done and might not even stop when Generative AI does. And whether Microsoft and Google and the other Big Generative AI backers slowly wind down their positions or cannibalize their companies to keep Open AI and Anthropic alive, I'm convinced that the end result is still going to be the same. I fear tens of thousands of people will lose their jobs, and much of the tech industry will suffer as they realize that the only thing that can grow forever is a cancer.

I'm going to paint you a bleak picture, not just for the big AI players, but for tech more widely, and for the people that work at these companies, and tell you why I think the conclusion to this sordid saga, as brutal and damaging as it will be, is coming sooner than you think. Let's begin. As I've explained in agonizing detail in the past in my newsletter, Open AI will have to continue to raise more money than any startup has ever raised in history, in perpetuity, just to survive. They're going to burn $5 billion this year, and yes, that's after they make their revenue, and costs are only set to increase over the next few years as they develop bigger models. Their business, as it stands, is completely untenable, and I'm going to explain why in a bit.

Nevertheless, that's why Open AI, the ostensible non-profit that may soon become a for-profit, who bloody knows at this point, raised a funding round at a valuation of $157 billion, dollars, bringing in a reported $6.6 billion in cash, along with opening a $4 billion revolving credit line from banks like J.P. Morgan, City, and a bunch of others that should know better after the acquisition of Twitter. Investors in the funding round included Josh Kushner's Thrive Capital, Nvidia, and of course Microsoft, who was somehow undeterred by the abrupt ex-ifs, open AI, CTO, Miramorati, days before the round closed. Also joining in the fray was SoftBank, the Japanese investment company with a track record of making some of the worst.

bets in history, and they dumped $500 million into Open AI. And that alone should start getting people a little worried. You see, SoftBanks founder Masayoshi's son, ease what we in the business call a dumbass. I realize this is a very broad brush to paint somebody with, but let me explain. SoftBanks Vision Fund dumped $16 billion into WeWork, which, by the end of last year, by the way, was worth $44 million, and nearly a billion dollars into Wirecard. which turned out to be an elaborate fraud with its leadership either facing criminal charges or becoming fugitives from justice in Russia.

SoftBank has become effectively synonymous with burning cash on terrible bets and lost over $32 billion in the last three years. The problem that OpenAI faces is that they need an absolute shit ton of money and generally the only companies that need that much are the ones that may not have a sustainable business model. Open AI demanded a minimum investment of $250 million from investors, and while regular American VCs might have that much, and indeed had, in the case of Costler and Coatum management, there aren't enough of them to fill out a $6.6 billion funding round, and because Open AI needed that

much, not wanted, needed, their only real choices were to go to Masayoshi's son, who's a man who put tons of money into stupid things and believes he was put on this earth to make digital superintelligence, and I've linked to that, by the way, it's insane. Oh, I mean, there's also another choice, you know, the far dodgyer investors in the Middle East. Enter MGX, a hundred billion dollar investment fund backed by the United Arab Emirates to invest primarily in AI and semiconductor companies. This should also be a big warning sign that things are going poorly, because absolutely nobody raises from the UAE or the Sauds because they want to.

They're the place you go if you need a lot of money, and you're not confident anybody else is going to give it to you. Other aspects of this deal are also a bit worrying. One of them being that one of the founding partners of MGX is the sovereign wealth fund of Abu Dhabi, which brought in around $500 million into Anthropic in 2023. Kind of a conflict of interest. Do you think any of these people actually goddamn care, though?

They're all working to the same rot economy nonsense. Anyway, as I mentioned previously, OpenAI now has access to that $4 billion. dollars in debt from banks in that revolving credit facility too. And that's also not brilliant for a company that just burns cash. I don't know what the interest rate on it is, but I can't imagine it's great. Generally revolving credit lines are worse interest rates. So that's great, I guess. But Open AI's desperate fundraising comes down to one thing, one really obvious thing. They need so much money. They needed like $10 billion here, and they kind of got it in this wonky way,

but they need that money to survive, because, like I said, they lost $5 billion in 2024. And that figure is likely to increase, as more complex models demand more compute and more training data. An anthropic CEO Dario Amadei predicted that future models may cost as much as $100 billion to train. And Open AI, by the way, they may have just raised the biggest round in history. They're going to have to raise another round again soon. And I'll explain why. While Open AI succeeded here, it was only after a fairly arduous process where they'd already tried to raise a $100 billion valuation earlier in the year, and that specifically turned off

investors because of the huge price tag. And there's this, by the way, to quote the information, there's a growing concern over the overvaluation of generative AI companies. Oh, you fucking think? Do you think that there's a concern here? Well, after this podcast, you're going to be really, really concerned, I guarantee. Anyway, to get the round done, OpenAI committed to converting itself from a non-profit to a for-profit entity. Failure to do so within two years will see their funding converted into debt,

which, by the way, will be the kiss of death for a company that only ever loses money. The deal, per Reuters, also includes provisions that would allow investors to adjust the valuation or claw back their investment should the transition from non-profit to for-profit fail. And I mean, this is worrying because I don't think there's any here. historical precedence of a company, a non-profit at least, that had this much money than converted. And what complicates that as well is converting a business of this scale from a non-profit to a for-profit, well, it involves transferring assets. And because any assets previously donated to the public benefit, as Alexander Reid partner at Baker Holsteller, is quoted as saying in the

Wall Street Journal, cannot be converted into a private benefit without compensating the public for the loss. Every asset, which includes things like patents and other intellectual property, would have to be paid for. While it's hard to say for certain, it's likely this deal in the process of untangling OpenAI from its non-profit beginnings is really only going to add to OpenAI's cash problem. And it's not like that was a good problem to deal with in the beginning. And now I will do a thorough review and analysis of Open AI, because I want you to see exactly how stupid things have become in the tech industry,

and how ridiculous all of this. Writing this boiled my blood, by the way, because when you see how lossy this company is, when you really ingest how bad Open AI is and how stupid it is that we've let this happen, and we, meaning the tech industry, you then will think on your own lives and be like, wow, you think I could pay my rent, like, late,

or like ask a company to pay my rent because my job involves me just burning piles of cash. No, you wouldn't be able to lose money for a business. You and I, we have to operate normally. Not Sam Altman, though. Sam Altman doesn't have to be normal. Sam Altman, like all of the gilded assholes of the tech industry, is allowed to live in this fantasy land based on marketing hype.

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Cream a chicken suit. This is Help from a Hypocrite, the worst advice from the dumbest people you know. Listen to Help from a Hypocrite as part of the Mike Cultura podcast network available on the IHartRadio app, Apple Podcasts, or wherever you get your podcast. And we're back. So, to put it bluntly, open AI is an absolute dog of a company. On September 27th, the New York Times reported that OpenAI would lose $5 billion in 2024, a number which the information had estimated back in July. And the OpenAI expected to raise the price of ChatGPT Plus, its premium product,

to $22 a month by the end of 2024 and a remarkable $44 a month by 2030. Interestingly, and worryingly, the Times also confirmed another hypothesis of mine. That, and I quote, Fundraising material also signalled that OpenAI would need to continue to raise money over the next year because its expenses grew in tandem with the number of people using its products. In simpler terms, OpenAI may have raised $6.5 or $6.6 billion in funding literally a week ago, but they need to raise more, probably the same amount or more. I'm going to say within the next six months.

And the Times also reports that Open AI is making internal revenue estimates that I would describe as, and this is a technical term, absolutely fucking ridiculous. Open AI's monthly revenue hit $300 million in August, and the company expects to make $3.7 billion this year. The company will, as mentioned, lose $5 billion anyway, and I'm going to keep reminding you of that. Yet Open AI says that it expects to make $11.6 billion in 2025 and an astonishing $100 billion by 29, a statement that is so egregious that I'm surprised it's not some kind of financial crime to say it. For some context, by the way, Microsoft makes about $250 billion a year, Google about $300 billion a year, and Apple about $400 billion a year.

So, yeah, I guess by 2030, that's how big Open AI. Why you fucking talk? It drives me insane. And also, by the way, all of those companies make more money than they spend. Open AI, on the other hand, spends $2.35 to make $1. If you remember one thing from this podcast, it's that. Every dollar they make, they have to spend $2.35 to get... It drives me insane, people.

We don't have to live in these conditions. How do I do this? How do I get to burn money? What the f? No, seriously, Open AI loses money on every single transaction, every single time that somebody uses chat GPT or plus or connects one of their models. And while it might make money selling premium subscriptions, I severely doubt those subscriptions to turning a profit, and I really do think losing money even on their power users.

And as I'll get into the next episode, I believe there's also a subprime AI crisis brewing because OpenAI's API services, which let people integrate their models into products, are currently priced to attract customers in scale, and increasing these prices to match the actual cost will likely make this product unsustainable for many businesses currently relying on these discounted rates.

And that's if they have any usage, but I'll also get to that later. Now, if you're anything like me, you have somebody who's told you that OpenAI is a growth business, and that it will just turn the knob to make itself profitable, much like Amazon Web Services, which is Amazon's cloud computing product did years ago. Now, I just want to be clear if you're listening and you think that you're just wrong.

You're just completely wrong. You're living in a fantasy land. Wake the fuck up. I'm sick and tired of hearing this crap. Open AI is nothing like Amazon Web Services. First of all, OpenAI owns none of its infrastructure. As everything, everything is run on Microsoft's as your cloud. Secondly, Microsoft also, as part of an OpenAI funding around from 2019,

has full access to all of OpenAI's pre-AGI research, which is all of it, by the way, and full license to sell and integrate all of their technology. They have complete free reign over OpenAI's intellectual property. Thirdly, Amazon Web Services did not immediately start with a deficit so great that it required raising more money than's ever been raised in the history of tech. Worse still, Open AI's technology doesn't get cheaper as it scales. In fact, it does the opposite. it. This is not like other businesses you want to compare this to. Stop saying this to people. It's ridiculous.

And I know why people say this, and I am ranting and you just have to forgive me. I know that people don't want to believe that this much money can be wrong. It can be. It is currently being wrong. You are watching and listening to it being wrong. This is not like Google Cloud. It is not like the early days of the internet. It is not like Amazon Web Services. It's nothing like them. all. There is no historical example like this. Not even Uber. Uber at least had a business model. In the worst year of its life, Uber lost, I think, $6.6 billion or something like that. So about $1.6 billion in Open AI lost in 2024, right? You want to know what year that was? 2020, the year when people couldn't go outside. And there are many years after they probably should have

stayed indoors too, but that's a different podcast. The point I'm making is, if you've got a comfortable little thing in your soul that's saying, this is just like things I've seen before. They'll turn it around. They absolutely won't. And now I'm going to break down exactly how untenable Open AI is with a few statements. For starters, Open AI is trying to hit $11.6 billion of revenue by the end of 2025. And to do that, it will have to triple its revenue. And its current cost of revenue, so $2.35 to make a dollar, Open AI will spend $27 billion to hit $11.6 billion, even if Open AI somehow halves their costs, and by the way, in the next year they're going to be building a brand new model, which will cost them an absolute shit ton of money, they'll

still lose $2 billion in 2025 to hit these revenues. However, I must be clear, these costs are going up. They need this company to grow by 300%. And the only way they're going to do that is by making a new model. And the only thing that's really growing at this company is they're free users, and those free users lose the money every single time they use it. And even if they added a $2 price increase to chat GPT plus and a similar price on their business plans like teams and enterprise, these things aren't really going to significantly move the needle without also adding a bunch of growth on top. An Open AI's latest GPT4 model, it cost them $100 million to train and more complex models like the Orion one they're allegedly coming up with, and I imagine 01, which will get to next

episode, they're going to cost them an absolute shit ton more to build. And also, by the way, the information estimated back in July that Open AI's training costs would be about $3 billion in 2024. The costs are not coming down people. Now, here's another problem. Buzzy tech companies need exciting things to get investors and customers jazzed. And Open AI, well, I haven't really had anything exciting or truly important since the launch of GPT 3.5. And even their latest reasoning model luck I said, I'll get to it next episode. It's not being particularly impressive. That model, by the way, is much more expensive to run and uses something called chain of thought reasoning, which I'll get into. But nevertheless, it takes more power to run because they're

doing way more calculations. And they didn't even have a use case when they announced it. What is going on with this company? But putting that aside, Open AI's products are also becoming increasingly commoditized with Google, Meta, Amazon, and even Microsoft building their own large language models and other models to compete. Worse still, these models are using effectively identical training data, which they're also running out of, which makes their outputs and, by extension, the technology itself, kind of similar. But most worrying of all, and I'm really going to drum on this one later, Open AI's cloud business, so the one where they connect their models to other businesses and then the businesses

sell products to customers using those models' technology, it's small. It's really small. It's small to the point that it suggests there's a fundamental weakness in the generative AI industry. It's extremely worrying that the biggest player in the game only makes a billion dollars, less than 30% of its revenue, from selling access to its supposedly innovative technology. And fundamentally, I can't really find any compelling evidence that suggests that open AI is going to be able to sustain this growth. In fact, I really can't find any historical comparison for this company. And I also feel like Open AI's growth is already stumbling.

But if you don't want to stumble through life bereft of joy or growth or happiness, I really recommend you buy one of the following things. And if you can't buy it, download it. And if you can't download it, go into a shop and demand that they start stocking it. And if they'll just give it to you, demand that you can give them money. Listen to the advertisers. Another podcast from some SNL late-night comedy guide, not quite. Unhumor me with Robert Smygle and friends.

me and hilarious guests from Jim Gaffigan to Bob Odenkirk to David Letterman help make you funnier. This week, my guest, SNL's Mikey Day and headwriter, Streeter Seidel, help an acapella band with their between songs banter. There's the worst singer in the group. The worst? Yeah. Me. Is there anything to the idea that because you're from Harvard, you only got in because your parents made a huge donation. To the group.

The yarn herds, right? That's the name. The Harvard Yard. They're open. Do you have a name suggestion? We're open. Since you guys are middle aged, one erection. Listen to humor me with Robert Smigel and Friends on the IHeart Radio app, Apple Podcasts, or wherever you get your podcast.

Huber me. I need some jokes to make me seem funny. Run a business and not thinking about podcasting, think again. More Americans listen to podcasts than ad-supported streaming music. from Spotify and Pandora. And as the number one podcaster, IHearts twice as large as the next two combined. So whatever your customers listen to, they'll hear your message. Plus, only IHeart can extend your message to audiences across broadcast radio.

Think podcasting can help your business. Think IHeart. Streaming, radio, and podcasting. Call 844-844-I-Hart to get started. That's 844-8-4-I-Hart. Jacob Kingston grew up in an isolated polygamous sect. We were God's chosen, Kingdom on Earth. He felt destined for greatness.

So when a swaggering Armenian businessman catapults Jacob into an extraordinary world, he doesn't look back. Ferraris and Lamborghinis, private jets, meeting the president of Turkey. I'm Michelle McPhee, and this is one of the most shocking criminal conspiracies I've ever come across. When Jacob met Levant this plant to a billion dollar fraud. But with two kings from entirely different worlds, just how? How long can their empire survive? The largest tax investigation in American history. You need to tell me what you know.

Is somebody coming after me? Jacob told Levan, you're ruining my life. Listen to Kingdom of Fraud on the IHeart Radio app, Apple Podcasts, or wherever you get your podcast. Life throws hurdles big and small. The question is, how do you conquer them? On Hurtle with Emily Abadi, we sit down with the most inspiring women

in sports and wellness. Professional athletes, coaches, and Olympic champions to talk about the challenges that shaped them and the mindset that keeps them going. From the WNBA standout, Kate Martin and rising hockey star, Layla Edwards. If a boy can do it, I don't see why a girl can't. Like, I've never understood that.

Like, it didn't make sense in my brain. It's hard to be in spaces that no one looks like you, but don't ever feel like you don't belong. Don't let that be the reason you don't do it. An Olympic champs Gabby Thomas and Katie Ladeki. The ability to show a gold medal to someone and have their face light up and smile, that means the world to me.

And that's what motivates me to win more gold medals. At our level, at this scale, like being able to fail in front of the entire world. Like, I can do anything. I can do anything. Because resilience isn't just about winning. It's about showing up, even when it's hard. Listen to Hurtle with Emily Abadi

on the IHeart Radio app, Apple Podcasts, or wherever you get your podcasts. Presented by Capital One, founding partner of IHeart women's sports. The story I've told myself about love or relationships can then shape my behavior, and that can lead me to sabotage the possibility of connection. This Mental Health Awareness Month, tune into the podcast deeply well with Debbie Brown and explore the journey of healing, self-discovery, and returning to yourself. We explore higher consciousness, emotional well-being, and the practices that help you find clarity, peace, and self-mashy, in a world that can feel overwhelming.

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from the Black Effect Podcast Network on the IHeart Radio app, Apple Podcasts, or wherever you get your podcast. All right, we're back. So for the next part of this episode, I'm going to dig into exactly how OpenAI makes money, which is going to require me to lay out its various businesses and products, and it's going to have a lot of numbers. Trust me, it's worth it, because this shit is insane.

So according to the New York Times, OpenAI expects ChatGPT to make about $2.7 billion in revenue in 2024, with an additional billion dollars in revenue coming from other businesses using OpenAI's technology. Roughly 73% or $2.7 billion of OpenAI's revenue comes from selling premium versions of ChatGPT called Plus, Teams and Enterprise. ChatGPT Plus is marketed to individuals for 20 bucks a month, offering faster response times priority access to new features and capabilities not found in the free product like image generation, which you can get in so many different other places. Importantly, Open AI can use anything you do as training data unless you explicitly opt out. Open AI also sells access to a team's product, which costs $25 a user a month if pay annually,

so $300 a year per user, and $30 a user a month if paid monthly. From this point on, your data is excluded from that used to train OpenAI's models by default. OpenAI sells enterprise subscriptions that include an expanded context window for longer prompts, meaning you can give more detailed instructions, admin controls, and enhance support and ongoing account management. It isn't clear how much this costs, but I found a Reddit thread from a year ago that suggests it's about $60 a user a month with a minimum of 150 seats on an annual contract. I also believe OpenAI offers discounts for customers who buy in bulk, very standard software-as-a-service business model. A further billion dollars or 27% of OpenAI's revenue comes from OpenAI licensing its models and services via its API.

One thing you notice when you look at its price page is that there's this huge variety of models and APIs available, and that there's massive amounts of variation in pricing too. I look into these in depth in my newsletter, which, by the way, is called OpenAI is a bad business, and it's worth reading if you want to know, if not just for the fact that the pricing in its various services is also super messy, but you don't need to know that right now. Open AI also makes about 200 million a year

selling access to its models through its Microsoft, according to Bloomberg, where OpenAI takes a 20% cut of all revenue. And by the way, that's not on top of the billion. This means that OpenAI only makes about $800 million a year by selling access to its API. That 200 million is on top. I want to add how worrying this is, both for OpenAI and the larger Generative AI market. If OpenAI, the most prominent name in all of Generative AI, is only making a billion dollars a year from selling the shovels with a gold rush,

what does that say about the growth trajectory for this company, or the actual usage of Generative AI products? That's the question for later in the show. But first, let's talk dollars. Suppose it stands, OpenAI makes the majority, like I said, more than 70% of its revenue from selling access to premium versions of ChatGPT. A few weeks ago, the information reported that ChatGPT Plus had more than 10 million paying subscribers and that it had 1 million more than were paying

for higher priced plans for business teams. As I've laid out previously, this means that OpenAI is making about $200 million a month from consumer subscribers, but business teams is a very vague, it isn't obvious what it means. It could mean the team plan. It could mean the enterprise plan. And you may think, well, Ed, couldn't you be horribly wrong? Couldn't it be that they're actually ripping? They've got 10, they got a million enterprise subscribers. Wouldn't that be good? Wrong. The New York Times has my back here. Based on their reporting, we can actually get a little more specific. Chat GPT Plus has 10 million customers, making open AI around $2.4 billion.

a year. That's 10 million users spending about 20 bucks a month, which equates to 200 million, multiplied by 12, 2.4 billion dollars. Dad, I swear I was listening in math sometimes. This means, by the way, that business users make up about $300 million a year in revenue, or $25 million a month, which isn't really great. While 10 million paying customers might seem like a lot, Chad GPT is effectively to generate of AI what Google is to search. 10 million people paying for this kind of table stakes. And the idea that this company can triple that number in a year is absolutely ridiculous. Open AI has been covered by effectively every media outlet in the world. It's mentioned in almost every single conversation about AI, even when it's not about generative AI and has the backing

and marketing push of Microsoft and pretty much the entirety of Silicon Valley. ChatGPT has over 200 million weekly users and the New York Times reports that Open AI has, and I quote, 350 million people using their services each month as of June, though it's unconstitutional. clear if that includes those using the API, I would guess that's chat GBT users. Collectively, this means that OpenAI, the most popular company in the industry, in the most prevalent industry talked about to everyone and everywhere, can only convert about 3% of its free users into paying customers. Now, by the way, eager listeners may go, well, 3 to 8% conversion, that's not bad, right? Right? Wrong. Generally, free products don't cost this much to run.

chat GPT itself is extremely expensive whether it's free or whether it's premium it's the same thing so yeah those 350 million people they're more of like a parasite than anything the 97% who won't give them the credit card it's not great and i think that lack of conversion might be because chat gptt and chat gpt plus are really similar products chat gpt plus lets you use the product more often and have access to new models but there's no obvious new thing you can do as a result. You can't really upsell to Plus unless you've found someone who's already worked out the use case for themselves. An OpenAI remains piss poor at actually marketing this product, mostly because of the limitations of what a large language model can do. As a result, most people

diddling with ChatGPT will get what they need to at the free version. I'd also argue that those willing to pay for a Plus subscription are more likely to use the platform way, way more than free users, And because every prompt on chat GPT loses the company money, it's reasonable to believe that paying user would be far more of a burden on the system. While there's a chance that open AI could have a chunk of users that aren't particularly active, one cannot run a business based on selling stuff you hope that people won't use. And no, no, it's nothing like a gym or insurance. Stop it.

When I wrote the newsletter and I said that, I got so many people who thought they were the cleverest people at all school. Oh, it's like a gym, it's like insurance. It's not the same. Stop it. You're not clever. No one's impressed. And I should be clear, there's also a reason why enterprise customers are generally more desirable

than private individuals. As with any other consumer-centric subscription product, regular customers are far more likely to cut their spending when they don't feel like they're getting value from the product or when their household budget demands it or there's economic problems. Just look at Netflix. They were the biggest name. Well, they still are the biggest name in streaming. And they lost a million customers in 2022 because of the cost of living crisis.

these are real things that will happen to OpenAI if they're not already happening. ChatGPT Plus is likely for many people, kind of a lifestyle product. And the problem is that when people lose their jobs or inflation hikes happen, or cheaper things come along that do much the same thing, these products are the first to get slashed from the budget. And that's before any arbitrary or silly or desperate price increase is done by a company that isn't a good business. Honestly, it's kind of remarkable that OpenAI found 10,000.

million people to actually pay for chat gbt. But how'd you grow that to 20 million or 40 million people? I think they need like 30 million by the end of 2025. How's that happen? Very worrying. Anyway, at present, OpenAI makes about $225 million a month. That's $2.7 billion a year by selling these premium subscriptions. To hit $11.6 billion in 2025, OpenAI would have to increase revenue from chat GPT customers by 310%. If we consider and forgive me, I'm going to do some maths at you. The current ratio of plus subscriptions to teams and enterprise subscriptions, about 88.89% is GPD Plus versus the business ones at 11.11%. Open AI would need to find 18.29 million paying users, and that's at the new price point of 22 bucks a month,

while also retaining every single one of the current subscribers to chat GPD Plus, who would also need to renew at the same price point to hit $7.4 billion, or about $6,000. $660 million a month. It would also have to make an additional $9333 million in revenue from its business or enterprise clients, which, again, would require Open AI to more than triple their users and retain the current ones. To triple these users, to actually do this, chat GPT has to meaningfully change, and it has to do so soon, or disclose multiple, meaningful, powerful use cases that are so impressive that 18 million new people agreed to give them $22 a month. That's an incredible and I would say insane goal, and one that I do not think this company is capable of achieve me.

It would require making ChatGPT something far more compelling than it already is in ways that I can't even imagine. Just as the company lost multiple members of its senior leadership team, it doesn't look good. There needs to be a meaningful change. Now, I know I've already given you a lot of worrying things about Open AI, about their very top-heavy subscription-driven business, why it isn't going to grow, why it to grow faster than anyone's ever grown, why they need to stop losing so much money. But there's something else to be worried about. There's something even flimsier about this business, and it's actually something that's disastrous.

It's disastrous, I'm serious. It is simply disastrous how little of Open AI's revenue comes from providing other companies the means to integrate generative AI into their systems. It is astonishingly bad. I cannot be clear enough here. Before I wrote this script, before I wrote the newsletter that led to it, I believed in my heart of hearts

that how open AI made their money was from providing access to their models. That makes sense, right? Because this company's talked about everywhere. Their technology's meant to be innovative. Everyone's meant to use it, right? That makes sense. Surely most of their money would come from people getting

in on the revolution and then integrating the revolution into their products and then people using the revolutionary thing. Right? Wrong! First of all, if OpenAI only makes a billion dollars a year selling API access and thus letting you integrate the models into your products, it suggests that even the biggest company in generative AI cannot find enough customers to make its business viable. Secondly, it suggests there's a remarkably small amount of demand for generative AI integrations. Or consider another way that the companies connecting to OpenAI aren't really making it very much money at all. If the generative AI revolution were really here, surely OpenAI, the household name in large language models, would be rolling in cash from their API business, not leaving it at

less than 30% of their annual revenue. This isn't the case, it's so strange. So at the 2024 open AI Dev Day event, its developer conference, which took place in October 1st, the company said that over 3 million developers are building apps using OpenAI's infrastructure. That works out to about $333 of developer, and that's far less money than other companies which make money by providing a service through their API actually make. Twilio, a company that makes its money sending SMS messages and push notifications for companies, over the past quarter made about a billion dollars in revenue. That's what OpenAI made from renting out its models and APIs over the past year. Twilio also made roughly $4 billion over the last four quarters, which is more than OpenAI's

projected revenue for the entirety of 2024. As I mentioned before, OpenAI makes $200 million of its $1 billion revenue from Microsoft reselling its models, a 20% cut that suggests that Microsoft too is making about a billion dollars from Open AI's models. So, in the event that Open AI and Microsoft are making about a billion dollars in annualized revenue by providing access to Open AI's models. Again, these are estimates based on current growth trajectories. It suggests that there's only $2 billion in annual revenue coming from both of these companies combined, and that's without... Wait, is Open AI making less money from Open AI's models than Microsoft is? Oh my God, this business is a stinker. And this also suggests that generative AI as a technology doesn't have the product market fit.

According to a survey by Andresen Horowitz, a VC, earlier in the year, and I quote, the 2023 market share of close source models was estimated at 80 to 90%, with the majority of that share going to open AI. And open source ones would include things like Meta's Lama model, which is kind of open source. That's a whole other thing. Anyway, another survey from IoT Analytics published late last year suggested that the number might look a little different, with 39% of the market share going to open AI and 30% going to Microsoft. Assuming that the latter numbers are true or even close to true, this suggests that the

generative AI market is really small. If Open AI, which dominates with, I'd wager about 30% of the market, is only making a billion dollars a year from selling access to its models at this stage in this massive hype bubble. There might not even be $10 billion of annual revenue from companies integrating Generative AI into their products. That's tiny! And this should be where all the money is! If this stuff is the future of everything, why is the revenue stream so painfully weak?

Open AI is making so little selling access to their models, and it suggests that despite this hype cycle, there either isn't interest in integrating these products from developers, or when these integrations are actually in there, consumers aren't really into them or using them. Remember, these products are charged on usage, and so it's possible for generative AI to be integrated into a service but not actually drive much revenue for Open AI as a result of users not really caring. Or chat GPT as brand recognition, companies integrating open AIs models into their products are far more indicative of the long-term health of both the company and the industry itself. Because if OpenAI can't convince people to integrate and use this shit, do you think others are succeeding?

I mean, think about it. Where have you seen some weird chatbot appear in your life? Where have you seen an LLM poked into something you use? Have you been like, oh good, I can't wait? Or have you just kind of tried to ignore it? Maybe you've interfaced with it and it sucks. There are some decent products, like there are email clients that summarize emails. Microsoft Teams, apparently people really like the summarization, but we're meant to be describing the future here. We're meant to be describing something exciting and sexy, not, huh, this summarized a meeting for me.

Interesting. But looking at these numbers, it's hard to imagine how OpenAI will more than triple revenue in the next 15 months to hit $11.6 billion in sales. Furthermore, at its current burn rate, OpenAI is currently spending, like I said, $2.35 to make a buck, meaning that $11.6 billion in revenue could cost as much as $27 billion to actually make. And as I previously mentioned, while costs could foreseeably come down, all signs point to them increasing. GPT4 cost $100 million to train, and more complex future models will cost hundreds of millions or billions to train. As I mentioned, the information said that training costs were.

would look like $3 billion in 2024, and I think it's fair to assume that the new models are just as costly, if not more so. Yet there's something deliciously ironic about all of this, that despite a clear lack of user interest in generative AI, Open AI's global marketing push has succeeded in making lots of people intrigued enough to try a completely free service that only loses them money. While it's usually great news that a product has 300 or more million free users,

every book time somebody uses a service, like Chat GPD, it loses the company money. And in the case of Chat GPD, good Lord, they must be losing so much. The information estimated in July that Open AI will spend around $4 billion in server costs in 2024 to run Chat GPD and host other companies running their services using GPT and its other models, effectively meaning that every dollar of revenue is immediately eaten by the costs of acquiring it. And that's before you factor in that more than 1,500 people, as many as 1,700 people now work at OpenAI, which is another $1.5 billion or more in costs.

And other costs, by the way, are on top of that. They've got real estate, taxes. Stock grants, this is all very bad. And while Open AI could potentially reduce costs, they've shown no proof that they can. And they tried once, while at least one got out, the so-called Iraqis model from last year that they tried to show that was meant to be more efficient.

It failed to launch. That's not a good sign, is it? But there's one more problem. There's still more problems. And this one, well, this one was caused by their fund raising. You see, they just raised $6.5, $6.6.6 billion in capital, at $157 billion valuation. This means that all future rounds have to be at that valuation or higher.

A lower valuation, which is called a down round, would make current investors quite pissy and send a very loud signal to the market that the company is having trouble because nobody thinks they're worth what they used to be, which in turn would overwhelmingly suggest that OpenAI's only way to survive is to raise its next valuation at a $200 billion valuation and require yet another giant raise. I would say at least $10 billion. For context, the biggest IPO valuation in US corporate history was Alabama, which debuted on the M.

M.YSE with a market cap of nearly $170 billion. That figure is more than double the runner-up, Facebook, which had a value of $81 billion. And I want to give you some history on that one too. The Facebook's initial IPO was really bad because people were concerned about mobile users and not monetizing them. Well, they won that one. But the market's pulverized Facebook for that. Do you think that they're going to be, oh yeah, so your company loses $5 or more billion a year and you have no path to profitability? Yeah, let's put you up on a NASDAQ.

Sounds perfect. Fuck that. No, they're not going to do that. How is this company going to do? How is this company going to IPO? And yet there's more problems, too. I don't know how Open AI is meant to convert itself from its weird non-profit structure into a for-profit company. I don't know if it's possible.

It won't be easy. And what's crazier is, and there's so many little things like this in the story where you're like, people are going to look back on this and think, wow, we were goddamn stupid. At least I hope they did. But Open AI has two years from close to convert from a non-profit to a for-profit. Or their funding will convert into debt. I think it's 6 to 9% interest. hey, this isn't good.

Also, at some point, open AI is going to have to work out a way to go public, like I said. Because otherwise, why did people invest? Why did people bother? They could do future secondary sales, and at some point, if that's all they're going to be able to do, and secondary sales referring to selling private stock to another individual. Well, I mean, at that point, it's a Ponzi scheme. You're just pulling in money to hand out money to other people eventually.

it's not good. This company has no path to profitability. It doesn't have one. And regardless of what happens with everything I'm mentioning, they still need to raise more funds. ChatGPT's free version is an actual poison on OpenAI's system. It's a marketing channel that burns billions of dollars to introduce people to a product that only 10 million people will actually pay for. And OpenAI's future depends largely on its ability to continue convincing people to use it. So how does this continue? How does Open AI survive? I don't think it can. Open AI is a disaster in the making, and behind it sits a nastier, shittier disaster, a lack of fundamental strength in the generative AI market writ large. If OpenAI can only make a billion dollars as the leader in this market, and really I mean 800 million,

because the other 200 million comes from Microsoft, it suggests that there's not really developer or user interest in generative AI products writ large. Perhaps it's the hallucination problem. where it authoritatively states something that isn't true. Or maybe it's just that generative AI isn't something that produces interesting interactions with a user. While you could argue that somebody could work out a really cool product, it's time to ask why Amazon, Google, Meta, OpenAI, Apple, and Microsoft have failed to make one, one in the last two years. Where is it?

Where's the killer app? And no, it's not early days. Shut up. More money than anything has ever raised. has gone into these companies, more attention has gone into these companies than any other hyperscaler movement ever, even the metaverse. Where's the product, man? Where is it? And while this bubble can continue coasting for a little while longer, nothing about the open AI story looks good. These companies lost. They're bleeding money with every single interaction with the customer,

and they're flogging software that's best kind of useful and at worst, actively harmful to the environment. Unless something significantly changes, like a massive scientific breakthrough in energy or compute efficiency, I just don't see how Open AI makes it two more years. And worse still, if my hypothesis about the wider market is true, there might just not be a viable business in making and selling large language models. While Meta and Open AI might be able to claim hundreds of millions of users on these services, I don't see any evidence that these people will make them any money, and in fact, I only see evidence they'll lose it. And if I'm right, we're watching VCs and companies like Microsoft burn tens of billions of dollars to power the next

generation of products that nobody really gives a shit about. And in the next episode, I'm going to go into the much bigger problem, the subprime AI crisis, where everyone building on these platforms is inevitably going to get rug pulled when OpenAI and Anthropic and other companies raise their prices. Because if they don't raise their prices, how are they going to be a able to afford to keep going. I don't bloody know, but we'll get into it next episode. Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Mattosowski. You can check out more of his music and audio projects at Mattisowski.com. M-A-T-T-O-S-O-S-K-I.com. You can email me at E-Z at Better Offline.com or visit

Better Offline.com to find more podcast links and, of course, my newsletter. I also really recommend you go to chat. Where's your e-E-O-O-L-L-Line.com. ed.orgad.com, to visit the Discord, and go to our slash better offline to check out our Reddit. Thank you so much for listening. Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, visit our website, coolzonemedia.com, or check us out on the IHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Another podcast from some SNL late-night comedy guy, not quite.

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