The alarm bells are ringing at $1.2 trillion giant
James Titcomb
Staff at OpenAI’s San Francisco offices are preparing to celebrate a historic milestone.
In the coming months, the company’s AI bot ChatGPT will join a select group of apps that will have more than a billion users.
It will achieve this much faster than any other consumer product in history. It took Facebook eight years to get to this point, and TikTok, the fastest growing to date, just over five.
ChatGPT will last approximately three and a half years.
OpenAI has become one of the world’s most valuable startups since its launch in late 2022, raising tens of billions of dollars and making its CEO Sam Altman one of Silicon Valley’s most prominent figures.
But despite breaking records, OpenAI faces questions about whether it will be repaid the large sums of money investors have poured into the company.
Some have even suggested that the poster child of the AI boom could run out of cash, potentially dragging much of the US tech sector with it.
Founded 11 years ago, OpenAI has also become one of the most valuable and most loss-making companies in history.
The business is valued at US$850 billion ($1.2 trillion), larger than all but 10 companies on the US stock market.
Separately, it told investors it plans to burn US$115 billion by 2029; That’s nearly four times the record $31.5 billion Uber lost before making its first profit.
The sky-high salaries paid to researchers and the extraordinary cost of running energy-hungry AI systems have raised questions about whether the company can justify the investment.
In the past, Altman has outlined plans to spend $1.4 trillion on data centers to strengthen its technology.
This led economist and author Sebastian Mallaby to suggest earlier this year that the company could be strapped for cash.
“My bet is that OpenAI will run out of money in the next 18 months,” he wrote New York Times.
OpenAI, which is backed by Nvidia, Amazon and Microsoft, does not publicly disclose its finances, but a series of defensive actions in recent weeks have revealed that the company’s finances are far from unlimited.
The company shut down Sora, its system for creating AI-generated videos, in part because of the prohibitive cost of running it. It also shut down a TikTok-like app for viewing clips.
Using AI to create video is much more expensive than chatbot chat, so it was an obvious candidate for disruption.
“The economy is completely unsustainable right now,” Sora chairman Bill Peebles said last year.
Enders Analysis, a research group, said the system had “clearly a limited commercial runway”.
‘Commitments they cannot keep’
OpenAI has reportedly suspended work on an “erotic chatbot” for over-18s as part of an effort to drop “side missions” that are not central to its strategy.
It canceled a multibillion-dollar deal with data center provider Oracle this month to expand its flagship Stargate data center in Texas.
A separate project in the UK with British data center company Nscale was promised by the end of this month, but neither company has provided an update since the announcement in September.
Gil Luria, head of technology research at US investment firm DA Davidson, says the company has been forced to withdraw investment plans due to pressure from investors and the approach of rival artificial intelligence providers.
“Until six to nine months ago, they were running away from AI and were the dominant players. Everything they did was great,” he says. “Over the next six months it became clear that they had made commitments that they could not keep.”
A high for OpenAI came last September, when the company first announced plans to spend $300 billion with Oracle. The announcement briefly made Oracle founder Larry Ellison the richest man in the world as the company’s shares soared.
“There was a feeling that everything they touched turned to gold,” says Luria. “Then people started pointing out that they didn’t have $300 billion to spend.”
The Midas touch appeared to fade in November, when Altman became upset when he appeared defensive during a podcast hosted by OpenAI investor Brad Gerstner.
When Gerstner asked how to add up OpenAI’s numbers, Altman replied: “Enough.”
The company’s chief financial officer, Sarah Friar, also suggested that the US government could provide a financial “backstop”, which was later rebuffed by the company.
Later that month, AI rival Anthropic released a new version of its Claude bot that many experts say outperforms OpenAI.
‘code red’
Usage of Anthropic’s computer programming tools exploded in December, and for the first time it appeared that OpenAI was catching up.
ChatGPT is now “significantly behind” Claude, says AI investor Nathan Benaich, and so are the company’s video and rendering systems.
Altman declared a “code red” in December (ironically, Google had used the same phrase shortly after ChatGPT’s launch, threatening to destroy its search business).
Altman ordered staff to divert resources to its core technology and put a number of other ambitious projects on hold.
Plans for a physical device developed with iPhone designer Sir Jony Ive and an OpenAI project to produce its own artificial intelligence chips have fallen silent in recent weeks.
OpenAI executive Fidji Simo said in early March that the company was “doubling down” on areas where it had success, such as its Codex programming app, and wanted to “avoid distraction.”
A spokesman said the company was not reducing infrastructure spending and planned to triple capacity this year.
Luria says pulling back on the company’s spree of spending was likely a condition of its latest financing round, in which the company raised up to $120 billion from investors like Amazon and SoftBank.
Some have even suggested that the poster child of the AI boom could run out of cash, potentially dragging much of the US tech sector with it.
But these fundraising numbers don’t necessarily mean there’s money in the bank.
The funding round included a $50 billion commitment from Amazon, but much of that depends on the company going public or hitting undisclosed milestones.
The $1 billion investment Disney announced last year was canceled last week before any money changed hands, and Nvidia’s $100 billion commitment announced last year was reduced to $30 billion.
Running the company is still very expensive.
Financial pressure is increasing
Independent technology analyst Richard Windsor estimates that the company’s PC spending has grown at the same pace as its revenues over the past three years.
“You may find that this is not a very good financial proposition,” he says.
This means that to break even, the company must either extract more money from its users or its AI models must become much cheaper to run.
While OpenAI sells monthly subscriptions that give access to more powerful systems and extra features, an estimated 95 percent of its users enjoy the free service.
The company began implementing what Altman once called “a last resort” form of advertising.
Shortly thereafter, Anthropic released a Super Bowl commercial mocking the move, prompting a harsh response from Altman.
But the company has few options. It aims to go public as soon as this year and hopes to be valued at more than $1 trillion.
“The consumer AI ecosystem is a must-win if it’s going to justify it. [that] “If people are tired of pouring money into the black hole, you can see very quickly how the company is in trouble,” Windsor says.
Larry Fink, boss of investment giant BlackRock, said this month that euphoria in the tech industry would lead to “a bankruptcies or two” among major AI companies.
The biggest of these have investors’ faith for now. But it will only take a few wrong moves for this to change.
An OpenAI spokesperson said: “Computing is a critical resource when it comes to AI, with user demand outstripping supply. In addition to locking in our long-term computing needs through our infrastructure strategy, we are also ruthlessly prioritizing the allocation of this computing to where it delivers the most long-term economic value.”
Telegraph, London
Get news and reviews on tech, gadgets and games Our Technology Newsletter Every Friday. Sign up here.
