Monologue: What Happened With DeepSeek?

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0:04Parking shouldn't slow you down. ParkWiz gives every driver a shortcut. Book ahead, save up to 50 % and skip the hassle of circling the block. Park smarter, park faster. ParkWiz. Download the ParkWiz app today and save every time you park. Call Zone Media Hi and welcome to the very first Better Offline monologue. This is going to be a short weekly episode where I take a quick look at something going on in the tech industry that doesn't quite warrant a full episode. One might say they're like quick bites of content quibbies, if you will, and this is a business model that's proven successful time and time again.

0:41This week, I'm going to give you a distilled rundown of a recent situation that rocked both the economy and the AI world for those of you that either need a refresher or rejected the notion of a two-part podcast.

0:58At the end of January, something happened that radically overturned not just the AI industry's status quo, but also called into question the dominance of the American tech industry. Our story starts on January 20th, when a little-known Chinese company called DeepSeek released its R1 AI model, terrifying the Western tech behemoths that plowed over$200 billion combined into data centers and industrial-grade graphics processing units, GPUs for others, to power generative AI models like those behind ChatGPT and Anthropics Claude. Like OpenAI's O1 model, DeepSeq's R1 model is a reasoning model, which is a way to say that it works through problems step by step, showing the users the steps it took to reach its conclusion.

1:40Generally, when you make a request of a generative model, it generates an answer probabilistically, meaning it's guessing at each next bit, based on the request you've made. In the case of OpenAI's O1 model, and indeed DeepSeq's R1 model, the model thinks. And I use that term loosely. These models do not know anything, they're not thinking, they have no consciousness. But they think through each step by generating it piece by piece and reviewing it piece by piece with separate parts of the model. In theory, this ability to reason means it's well-suited for tasks where there's a definitive right and wrong answer, like logic and maths.

2:14It's also what makes it different from the standard chat GPT or GPT-4-0, which is considerably faster as it doesn't undertake this step-by-step thinking, and thus is better suited for more open-ended questions, such as what would it be like if Garfield had a gun? To be clear, this doesn't mean the answers are any good. Now, just a few weeks earlier, DeepSea could release another model, albeit to far less fanfare, likely due to it being launched the day after Christmas, of course. But nevertheless, it was called v3, and it was still pretty impressive. v3 competes with the same model that powers ChatGPT, as I just mentioned, which, at the time of recording this, is called GPT-40.

2:53And that's a more general-purpose kind of product. It can write code and solve maths problems, but it's better suited for tasks that are rooted in language. Writing that term paper, summarizing a document, whatever it is you do with this. And it's also important to know that this is the most commonly used style of model. you're not really getting reasoning in everything, at least not yet. And I don't know how prevalent it will ever be. Now, DeepSeq's tech didn't just match OpenAI and capabilities. It was also purportedly cheaper to train and to operate. Whereas OpenAI's GPT-4 model reportedly cost$100 million to train, some experts estimate that DeepSeq's reasoning model, called R1, cost a lot less than that, and their V3 model actually cost less than$6 million to train.

3:37This figure is open to some debate. But the big thing is about these models is they're dramatically cheaper. They can be run on your computer, though much slower, or they can be run in other cloud infrastructure. And in the case of the V3 model, the one that competes with ChatGPT, it was actually about 50 times cheaper. And the reasoning model R1, about 30, which is crazy. Now, these are the prices that are run on the servers where DeepSeq runs, but we're very quickly going to see, as other people host them, exactly how much cheaper they are. And they're more efficient too, which is crazy. They're so much more efficient.

4:13And it's also important to note that they train these models using older generation Nvidia chips because they had sanctions on them from China. They got some of the newer ones too through weird resellers. But nevertheless, this made it much harder for them to get GPUs in general. And thus, they were able to kind of squeeze more power out of them. They had to come up with really interesting kind of assembly language level stuff where they did extra things with the GPUs that, well, the fat and happy tech executives never thought of. And Sam Altman and his ilk from OpenAI never really thought of because, well, why would they have to be?

4:46Why would they have to think of that? They had the unlimited money cheat from the hyperscalers like, in the case of OpenAI, funded by Microsoft, in the case of Anthropic, funded by Amazon and Google. And this is where the narrative has begun to kind of fall apart. Because all of this has made it much harder to justify these companies building new data centers and buying new NVIDIA GPUs. This entire AI boom has been based off of the assumption that the only way to build powerful models was to get the biggest, most hugest chips from NVIDIA each year, and that there was just no way to make these models cheaper.

5:18Now, as an aside, OpenAI lost$5 billion in 2024, and all of their products are unprofitable, even their$200 a month OpenAI ChatGPT Pro subscription. I hate these terms, by the way. They're all different. Nevertheless, less. Everyone assumed that there was never going to be a more efficient model, and I personally made the mistake of saying, well, if it was going to be more efficient, surely they would want it to be. Or they could do that, right? Right? Maybe they just have to do this stuff, even though it's stupid. That was never the case, and DeepSeek proved it. Crucially, DeepSeek released its models under an open source license, meaning any company can reuse and repurpose its tech without having to pay anyone anything, any license fees or anything, or ask anyone for permission.

6:02OpenAI, by contrast, keeps its technology under lock and key. Despite their name, OpenAI is a deeply secretive organization, open in name only. In summary, DeepSeek has created a viable alternative to OpenAI's tech and indeed anthropics that's equally capable, vastly cheaper, an open source, and proven that you don't need the most expensive and powerful chips to do so. And they kind of came out of nowhere. Well, DeepSeek isn't exactly a tiny little startup. They're also not a Silicon Valley giant with billions of dollars of venture capital, or someone who's backed by one of the many different companies with a$3 trillion market cap.

6:38They started off as a side project from a Chinese hedge fund. No, I'm not kidding. Now, still an$8 billion under management hedge fund. They're not small at all. it's so strange it's a kind of cynical version of david versus goliath where david is a hedge fund baby and goliath is several different hyperscalers taped together with a bad idea but anyway put yourself in the shoes of open ai ceo and co-founder sam altman you've crafted this public perception of yourself as a visionary that isn't just bringing generative ai to the masses but you're on the path that will bring about artificial general intelligence, which is to say, an AI that's as capable as a human being.

7:18You've crafted this myth, not just about yourself, but about your company and what you'll do. And this has allowed you to, in essence, defy the laws of physics when it comes to business. You can burn money at a rate unlike any tech company in history, with no hope of making a profit, or at least not in the short to medium term, and no real expectation that you'll do so, as investors will still line up to give you more money, with your company valued at even more ludicrous numbers seemingly every other month. You can say these outlandish things like you need$7 trillion to build the infrastructure and chip manufacturing capacity to bring your plans to life, and you don't get laughed out of the room.

7:52If I said this shit, they'd ask me if I had a concussion. You can say stuff like, I want to build$500 billion worth of data centers, and instead of people rolling their eyes, the world's largest tech companies and investors will say, damn man, that's sick. And then it turns out that you were wrong. You'd always assume that AI must be expensive, that the models used to power your apps like ChatGPT and Dali, their image generator, they'd always cost more to build. They'd always cost more to run. They'd always require more powerful hardware. Or maybe you just never thought about it too hard because you never have to worry about money.

8:29And to grow, to build more capable AI models, you assume that you would always need more money and so much more money than anyone's ever had. And then here comes this Chinese company didn't just replicate the functionality of your model. And on top of that, by the way, O1 is OpenAI's one moat. It was their one thing that people liked. It was their most sophisticated AI model. But this company came along and did it on a shoestring budget, both for actually training it, even if the estimates are off by like factors of 10. But these things are more efficient too. And this company didn't even have access to the most capable GPUs.

9:05They by Microsoft or Amazon or Google. And wow, and what did they do next with this thing they built that's competitive with your only real moat? They gave it away. Oh, goodness me, Sammy, things aren't looking good at all. And this is where Sam Altman's at. This is where OpenAI and the companies that backed it and their competitors, this is where they're all at. The decisive lead they once enjoyed has, like a puddle on a hot day, evaporated. And you'd see that happen a lot here in beautiful Las Vegas, Nevada. Now, don't get me wrong, OpenAI still burns money. But now, when Sam Altman dusts off his begging bowl, investors will ask, perhaps for the first time, one very simple question.

9:45Why?

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