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Better Offline Podcast Episode Summary: Why OpenAI Is A Terrible Business
Episode Overview In this episode of *Better Offline*, host Ed Zitron discusses the alarming state of OpenAI, which recently reached a valuation of $157 billion. Despite this impressive number, Zitron argues that OpenAI operates a fundamentally flawed business model, burning billions of dollars annually without a clear path to profitability.
Key Themes and Concepts
- OpenAI's Financial Instability
- Annual Losses: OpenAI is projected to lose $5 billion in 2024, raising concerns about the sustainability of its business model as costs are expected to rise.
- Funding Needs: OpenAI’s business model requires continuous funding, having just raised approximately $6.6 billion, but the need for more financial resources is imminent.
- Generative AI's Limitations
- Technical and Practical Costs: Generative AI is costly and unreliable; actual use cases vary widely in terms of effectiveness and practicality.
- Burn Rate: OpenAI reportedly spends $2.35 to generate every dollar of revenue, indicating a deeply unsustainable financial model.
- Market Dynamics
- Valuation and Investor Concerns: The inflated valuation of $157 billion is contingent on the assumption that OpenAI can convert to a for-profit entity, which poses significant challenges.
- Competition: With major companies like Google and Microsoft entering the generative AI space, OpenAI faces increasing competition, complicating its revenue stream.
- Crisis in Generative AI
- Subprime AI Crisis: Zitron introduces the concept of a “subprime AI crisis,” where companies relying on OpenAI's discounted services may face ruin when prices inevitably rise.
- Market Demand: The low revenue generated from API access raises questions about genuine demand for generative AI solutions.
- Optimistic Projections vs. Reality
- OpenAI’s projected revenues of $11.6 billion by 2025 are seen as unrealistic given its current business model and user conversion rates which are low, with only about 3% of users converting to paying customers.
Arguments and Insights
- Zitron emphasizes the absurdity of OpenAI’s situation, where a company needing large amounts of capital to survive is valued unusually high.
- The episode critiques the tech industry's "growth at all costs" mentality, suggesting that it leads to reckless spending without a viable plan for profitability.
- OpenAI's reliance on Microsoft for infrastructure raises concerns regarding its independence and ability to innovate.
Conclusion Zitron paints a bleak picture of OpenAI’s future, suggesting that without significant changes in its operational model or a breakthrough in either technology or market engagement, the company may struggle to maintain its valuation or business viability. The ongoing financial and structural challenges could lead to wider implications not only for OpenAI but also for the generative AI industry as a whole.
Further Engagement Listeners are encouraged to engage with programs and discussions surrounding the episode, including links to social media, newsletters, and community forums related to *Better Offline*.
Additional Resources
- [Better Offline Links](https://www.tinyurl.com/betterofflinelinks)
- [Ed Zitron on Twitter](https://twitter.com/edzitron)
- [Discord Community](https://chat.wheresyoured.at)
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This summary captures the critical insights and arguments made in the episode regarding the precarious state of OpenAI and the broader generative AI market while encouraging listeners to reflect on the implications of these challenges.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00This is an iHeart Podcast.
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3:22As 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, and it doesn't actually do that much. And the real-world use cases range from kind of helpful to unhelpful 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 Ed, my mate's granny's uncle's dog uses ChatGPT to brainstorm or something else equally flimsy.
3:59And I really need you to put all of this in context. OpenAI loses$5 billion a year. And basically every big tech company has 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.
4:35I 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 any other way. I don't really take much joy in watching these things burn.
5:12Sure, I admit it's pretty funny thinking about Sachin Adela getting fired, or Sandhap Asshai 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.
5:44And 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.
6:26Since 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 OpenAI's rush launch of its O1. And that model, by the way, was codenamed Strawberry. Rumored price increases for ChatGPT in the future. Now 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 ScaleAI, 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 magical thinking really is.
7:07I 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're a member of the media that's written something vague about AI, and you've kind of carried water for Sam Altman, 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 OpenAI, their most recent funding round, and how bad their business is, and exactly how worried you should be about them.
7:44Now, 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, is, well, heavily subsidized by big tech and heavily discounted by companies like OpenAI 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 expired during the financial crisis and people suddenly started losing their houses.
8:22In 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 OpenAI 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 realise that the only thing that can grow forever is a cancer.
8:58I'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.
9:17As I've explained in agonizing detail in the past in my newsletter, OpenAI 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 OpenAI, 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, bringing in a reported$6.6 billion in cash, along with opening a$4 billion revolving credit line from banks like JP Morgan, Citi, and a bunch of others that should know better after the acquisition of Twitter.
10:08Investors in the funding round included Josh Kushner's Thrive Capital, NVIDIA, and of course Microsoft, who was somehow undeterred by the abrupt exit of OpenAI CTO Miramarati days before the round closed. Also joining 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 OpenAI. And that alone should start getting people a little worried. You see, SoftBank's founder, Masayoshi Son, is what we in the business call a dumbass. I realise this is a very broad brush to paint somebody with, but let me explain.
10:45SoftBank's Vision Fund bumped$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.
11:20OpenAI 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 Coatube Management, there aren't enough of them to fill out a$6.6 billion funding round, and because OpenAI needed that much, not wanted, needed, their only real choices were to go to Masayoshi-san, 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 dodgier investors in the Middle East.
11:59MTMGX, a$100 billion 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 South 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.
12:36Kind 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 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 OpenAI's desperate fundraising comes down to one thing, one really obvious thing. They need so much money.
13:13They 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, and Anthropics CEO Dario Amadei predicted that future models may cost as much as$100 billion to train. And OpenAI, 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 OpenAI 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.
14:00And 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.
14:38And I mean, this is worrying because I don't think there's any historical precedence of a company, a non-profit at least, that had this much money then 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.
15:16While it's hard to say for certain, it's likely this deal and 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 OpenAI, 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 OpenAI 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 late or ask a company to pay my rent because my job involves me just burning piles of cash?
16:06No, 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 arseholes of the tech industry, is allowed to live in this fantasy land based on marketing hype. Now before we go into it though, I'd like to enjoy one of the following lovingly crafted advertisements that in no way seem out of place from anything I'm saying.
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20:30And we're back. So, to put it bluntly, OpenAI 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 that OpenAI expected to raise the price of ChatGPT +, 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 signaled 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.
21:14In 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 OpenAI is making internal revenue estimates I would describe as, and this is a technical term, absolutely fucking ridiculous. OpenAI'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 OpenAI says that it expects to make$11.6 billion in 2025, and an astonishing$100 billion by 2029, a statement that is so egregious that I'm surprised it's not some kind of financial crime to say it.
22:05For 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 OpenAI... What are you fucking talking about? It drives me insane. And also, by the way, all of those companies make more money than they spend. OpenAI, 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. 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?
22:48What the f - No, seriously, OpenAI loses money on every single transaction, every single time that somebody uses ChatGPT or Plus or connects one of their models. and while it might make money selling premium subscriptions i severely doubt those subscriptions are turning a profit and they 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 open ai'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.
23:31And 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. OpenAI is nothing like Amazon Web Services. First of all, OpenAI owns none of its infrastructure, as everything, everything is run on Microsoft's Azure cloud.
24:10Secondly, Microsoft also, as part of an OpenAI funding round 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 has ever been raised in the history of tech. Worse still, OpenAI's technology doesn't get cheaper as it scales. In fact, it does the opposite. This is not like other businesses you want to compare this to.
24:48Stop 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. At 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.
25:27So about$1.6 billion in OpenAI lost in 2024, right? You want to know what year that was? 2020, the year when people couldn't go outside. And there were 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 OpenAI is with a few statements. For starters, OpenAI 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.
Read the full transcript
26:05And its current cost of revenue, so$2.35 to make a dollar, OpenAI will spend$27 billion to hit$11.6 billion. Even if OpenAI 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 their free users. And those free users lose the money every single time they use it.
26:45and even if they added a two dollar 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 and open ai's latest gpt4 model it cost 100 million dollars to train and more complex models like the orion one they're allegedly coming up with and i imagine oh one which i'll 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 OpenAI's trading costs would be about$3 billion in 2024.
27:23The costs are not coming down, people. Now, here's another problem. Buzzy tech companies need exciting things to get investors and customers jazzed. And OpenAI, well, never really had anything exciting or truly important since the launch of GPT 3.5. And even their latest reasoning model, like I said, I'll get to it next episode, it's not been 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.
28:01What is going on with this company? But putting that aside, OpenAI'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, OpenAI'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.
28:38It'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 suggest that OpenAI 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 OpenAI'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.
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32:42All 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.
33:20ChatGPT Plus is marketed to individuals for$20 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, OpenAI can use anything you do as training data, unless you explicitly opt out. OpenAI also sells access to a Teams product, which costs$25 a user a month if paid 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.
34:06It 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.
34:54OpenAI 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 through 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's that say about the growth trajectory for this company or the actual usage of generative AI products?
35:35That's the question for later in the show. But first, let's talk dollars. So as 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.
36:13and you may think well ed couldn't you be horribly wrong couldn't it be that they're actually ripping they'd got they got a million enterprise subscribers wouldn't that be good wrong oh 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 dollars a year that's 10 million users spending about 20 bucks a month which equates to 200 million multiplied by $12,$2.4 billion. Dad, I swear I was listening to 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.
36:55While 10 million paying customers might seem like a lot, ChatGPT is effectively to generate 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. OpenAI 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 OpenAI has, and I quote, 350 million people using their services each month as of June.
37:34Though it's unclear if that includes those using the API, I would guess that's ChatGPT users. Collectively, this means that OpenAI, the most popular company in the industry, in the most prevalent industry, in the 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. ChatGPT 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.
38:16The 97 % who won't give them the credit card, it's not great. And I think that lack of conversion might be because ChatGPT and ChatGPT Plus are really similar products. ChatGPT Plus lets you use the product more often and have access to newer 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. And 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 out of the free version.
38:54I'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 ChatGPT loses the company money, it's reasonable to believe that paying users would be far more of a burden on the system. While there's a chance that OpenAI 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 in all school.
39:25Or, oh, it's like a gym, it's like a show. 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.
39:58These 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 million people to actually pay for ChatGPT. But how do you grow that to 20 million or 40 million people?
40:34I 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 ChatGPT 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 GPT plus versus the business ones at 11.11%, OpenAI 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 ChatGPT +, who would also need to renew at the same price point to hit$7.4 billion, or about$660 million a month.
41:30It would also have to make an additional$933 million in revenue from its business or enterprise clients, which again, would require OpenAI to more than triple their users and retain the current ones. To triple these users to actually do this, ChatGPT 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 achieving. It would require making ChatGPT something far more compelling than it already is, in ways that I can't even imagine.
42:10Just 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 OpenAI, about their very top-heavy subscription-driven business, why it isn't going to grow, why they need 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 OpenAI's revenue comes from providing other companies the means to integrate generative AI into their systems.
42:54It 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 open ai only makes a billion dollars a year selling api access and thus let 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 open ai aren't really making it very much money at all.
43:57If 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 OpenAI Dev Day event, its developer conference, which took place on October 1st, the company said that over 3 million developers are building apps using OpenAI's infrastructure. That works out to about $333 a developer, and that's far less money than other companies which make money by providing a service through their API actually make.
44:32Twilio, 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$1 billion from OpenAI's models. So in the event that OpenAI and Microsoft are making about$1 billion in annualized revenue by providing access to OpenAI'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...
45:27Wait, is OpenAI making less money from OpenAI'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 a product market fit. According to a survey by Andreessen Horowitz, a VC, earlier in the year, and I quote, the 2023 market share of closed source models was estimated at 80 to 90 percent, with the majority of that share going to open AI. And open source ones would include things like Meta's Llama 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 OpenAI and 30 % going to Microsoft.
46:14Assuming that the latter numbers are true or even close to true, this suggests that the generative AI market is really small. If OpenAI, 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? OpenAI is making so little selling access to their models, and it suggests that, despite this hype cycle, there either is an interest in integrating these products from developers, or when these integrations are actually in there, consumers aren't really into them or using them.
47:02Remember, 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 OpenAI as a result of users not really caring. While ChatGPT has brand recognition, companies integrating OpenAI's 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?
47:36Have 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.
48:21And as I previously mentioned, while costs could foreseeably come down, all signs point to them increasing. GPT-4 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 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, OpenAI's global marketing push has succeeded in making lots of people intrigued enough to try a completely free service that only loses them money.
48:59While it's usually great news that a product has 300 or more million free users, every time somebody uses a service like ChatGPT, it loses the company money. And in the case of ChatGPT, good lord, they must be losing so much. The information estimated in July that OpenAI will spend around$4 billion in server costs in 2024 to run ChatGPT 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 cost of acquiring it. And that's before you factor in 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.
49:41And 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 OpenAI could potentially reduce costs, they've shown no proof that they can and they tried once well at least one got out the so-called arrakis 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 fundraising you see they just raised 6.5 6.6 billion dollars in capital and 157 billion dollar valuation this means that all future rounds have to be at that valuation or higher.
50:23A 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 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 Alibaba, which debuted on the NYSE with a market cap of nearly$170 billion. That figure is more than double the runner-up.
51:00Facebook, which had a value of$81 billion. And I want to give you some history on that one too. 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 markets pulverized Facebook for that. Do you think that they're going to be, oh yeah, so your company loses five or more billion dollars 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 IPO? And yet there's more problems too. I don't know how OpenAI is meant to convert itself from its weird nonprofit structure into a for-profit company.
51:39I 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 six to nine percent 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 in 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 these 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.
52:41ChatGPT'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 OpenAI survive? I don't think it can. OpenAI 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.
53:28Perhaps 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.
54:08Where'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. This company's 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 OpenAI 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.
54:48While Meta and OpenAI 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.
55:22Because if they don't raise their prices, how are they going to be able to afford to keep going? I don't bloody know, but we'll get into it next episode.
55:37Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Ossowski. You can check out more of his music and audio projects at mattosowski.com. M-A-T-T-O-S-O-W-S-K-I.com You can email me at ez at betteroffline.com or visit betteroffline.com to find more podcast links and, of course, my newsletter. I also really recommend you go to chat.wheresyoured.at to visit the Discord and go to r slash betteroffline 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.
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From the publisher
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.
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