2024-07-29 - How Does OpenAI Survive- - Omnivore

# How Does OpenAI Survive? #Omnivore ## Colophon title:: How Does OpenAI Survive? type:: [[clipped-note]] tags:: [[&omnivore]] url:: https://www.wheresyoured.at/to-serve-altman/ archive:: https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152 date:: [[2024-07-29]] ## Highlights tags:: > I am hypothesizing that for OpenAI to survive for longer than two years, it will have to (in no particular order): * Successfully navigate a convoluted and onerous relationship with Microsoft, one that exists both as a lifeline and a direct source of competition. * Raise more money than any startup has ever raised in history, and continue to do so at a pace totally unseen in the history of financing. * Have a significant technological breakthrough such that it reduces the costs of building and operating GPT — or whatever model that succeeds it — by a factor of thousands of percent. * Have such a significant technological breakthrough that GPT is able to take on entirely unseen new use cases, ones that are not currently possible or hypothesized as possible by any artificial intelligence researchers. * Have these use cases be ones that are capable of both creating new jobs and entirely automating existing ones in such a way that it will validate the massive capital expenditures and infrastructural investment necessary to continue. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#5e94fcc0-3019-488b-949c-87dad82d2ed6) ^5e94fcc0 tags:: > I ultimately believe that OpenAI in its current form is untenable. There is no path to profitability, the burn rate is too high, and generative AI as a technology requires too much energy for the power grid to sustain it, and training these models is equally untenable, both as a result of ongoing legal issues (as a result of theft) and the amount of training data necessary to develop them. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#ffec2dd2-80db-4308-9655-b446878ccacf) ^ffec2dd2 tags:: > There is no historical precedent for anything that OpenAI needs to happen. Nobody has ever raised the amount of money it will need, nor has a piece of technology required such an incredible financial and systemic force — such as rebuilding the American power grid — to _survive,_ let alone _prove itself as a technology worthy of such investment._ [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#c69b6101-a17c-493a-9344-20bb186dbedc) ^c69b6101 Noted, but just because something hasn’t happened doesn’t mean that it won’t? tags:: > OpenAI has raised the most money of any generative AI company ([$11.3 billion](https://www.crunchbase.com/organization/openai?ref=wheresyoured.at)), has arguably the most attention in the press, and both popularized and created the Large Language Mode (LLM)l business model that allowed the current generation of "AI-powered" startups to exist. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#6ef23a40-949c-46c9-89bb-900f6020d820) ^6ef23a40 tags:: > fail.[ I have exhaustively discussed the problems with this industry](https://www.wheresyoured.at/pop-culture/) in the past, and I won't reiterate those points other than to illustrate what I believe is a deep instability in the tech ecosystem, and my point here is to coldly explain why OpenAI, in its current form, cannot survive longer than a few more years without a stunning confluence of technological breakthroughs and financial wizardry, some of which is possible, much of which has no historic precedence. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#e80a67dc-a58e-40e2-9464-4e41a06f4084) ^e80a67dc tags:: > Pre-AGI in this case refers to anything OpenAI has ever developed, as it has yet to develop AGI and has[ yet to get past the initial "chatbot" stage of its own 5-level system of evaluating artificial intelligence](https://www.wheresyoured.at/put-up-or-shut-up/#:~:text=According%20to%20Bloomberg%2C%20these%20five%20levels%20go%20from%20Level%201%20%28%22Chatbots%2C%20AI%20with%20conversational%20language%22%29%20to). [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#dd0080cf-ff11-4fb2-823c-a18e66da1415) ^dd0080cf [[to-lookup]] OpenAIs 5 stages of product. tags:: > [Semafor reports that](https://www.semafor.com/article/11/18/2023/openai-has-received-just-a-fraction-of-microsofts-10-billion-investment?ref=wheresyoured.at), at least by November 2023, OpenAI had received "a fraction" of the $10 billion investment, which was (is?) delivered in tranches (stages), and that a "significant portion" of that money was in cloud compute credits, meaning that Microsoft's investment was predominantly in the supposed value of a currency that can only be used on its own services. For those who don’t fully understand how weird this is, it’s like an airline investing in a company but, instead of providing cash, it hands over air miles. You can still travel, but you are locked into A) one airline and B) their interpretation of what one “mile” is actually worth. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#8db881d8-44d8-4dd2-b8d9-b4e5260e0da5) ^8db881d8 Alright, but there is need to consider how central this alternative currency is to the organisation as well. In OpenAI's case, cloud computing credits are pretty important. In the travel - airlines miles analogy, if it is a tourism company, then it isn't so bad. If it is unrelated, i.e. let's a say a manufacturer whose products don't even get exported (airline miles would be for passenger travel and not goods, but still, precluding that as well), then, yes, airline miles are not very useful to them. tags:: > What's confusing is that [multiple](https://www.cnbc.com/2023/04/08/microsofts-complex-bet-on-openai-brings-potential-and-uncertainty.html?ref=wheresyoured.at)[ reporters](https://www.bloomberg.com/news/articles/2024-06-28/microsoft-s-13-billion-openai-pact-faces-extra-eu-scrutiny?ref=wheresyoured.at) have said that Microsoft had invested "$13 billion" in OpenAI, yet I can't find the two billion dollars anywhere. Was it in 2021? Was the amount $2 billion? Was it cash, or credits? This number has been reported so regularly for so long, and it's extremely strange that so many have just assumed this happened. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#3df1cc58-08c7-4cc0-9a17-0242a329d0af) ^3df1cc58 tags:: > In many ways, OpenAI's continual existence is as an R&D facility for Microsoft's generative AI business unit, one with the dice rigged in Microsoft's favor. In the event of OpenAI's collapse, OpenAI's technology would still run on Microsoft's servers, and Microsoft would still have access to both OpenAI's intellectual property and products, and in turn be able to sell them. In the event that OpenAI thrives and future generations of GPT become remarkably profitable and successful, Microsoft harvests billions of dollars of profits while still retaining access and license to any research or products used to get there. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#56989aab-d330-4bcd-ba4d-3af99942c444) ^56989aab tags:: > It's a devil's deal, one that you would only make if you were burning so much cash that it was necessary to find a benefactor with deep pockets, one that could bail you out repeatedly as you chewed through billions of dollars every year. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#17402c79-dd52-42dc-a5b0-dff52baa57a8) ^17402c79 Maybe, but also speculative. tags:: > The Information surmises that OpenAI thus has an operating loss of **$5 billion a year.** That also assumes that OpenAI's revenue is on the higher-end, and could balloon to **$6 billion or more.** [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#8ff0719d-3ccc-446d-bdab-efa618028f1a) ^8ff0719d tags:: > Assuming everything exists in a vacuum, **OpenAI needs at least $5 billion in new capital a year to survive.** This would require it to raise more money than has ever been raised by any startup in history, possibly in perpetuity, which would in turn require it to access capital at a scale that I can find no comparable company to in business history. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#43ee427c-ea94-4772-8b05-ccf0bb5365aa) ^43ee427c tags:: > Furthermore, debt financing is usually a little harder to get, with onerous cash-heavy terms that can eat a company alive in a bad month. Comparables at this scale are few and far between.[ Based on data from CBInsights](https://www.cbinsights.com/research-unicorn-companies?ref=wheresyoured.at), the only private companies that compete are TikTok developer ByteDance ($225 billion,[ raised $9.5bn](https://www.crunchbase.com/organization/bytedance?ref=wheresyoured.at)) and SpaceX ($150 billion,[ raised $9.8bn](https://www.crunchbase.com/organization/space-exploration-technologies?ref=wheresyoured.at)), with Stripe ($70 billion (though I've seen $65 billion),[ raised $9.4bn](https://www.crunchbase.com/organization/stripe?ref=wheresyoured.at)), Shein ($66 billion,[ raised $4.1bn](https://www.crunchbase.com/organization/shein-b79e?ref=wheresyoured.at)) and Databricks ($43 billion,[ raised $4bn](https://www.crunchbase.com/organization/databricks?ref=wheresyoured.at)) just behind. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#9dccebf9-8437-46ca-b2f8-7078634a761c) ^9dccebf9 tags:: > What I'm trying to establish is that OpenAI would have to, at its current pace: * Raise more money than anyone ever has before — likely at least $3 billion, but more like $10 billion, and do so soon, likely within the next six months. * Raise either multiple rounds, or the largest funding round ever raised by any company, and then have to keep doing so in perpetuity. * Raise at either a massive down-round — by taking on more money at a reduced valuation — or raise at a valuation higher than any privately-held company ever has. In all of these cases, OpenAI would have to show investors both how it intends to grow revenue and reduce costs, and do so in such a way that it would reassure investors that OpenAI would not simply return asking for more capital in a few months. It would also likely have to amend their corporate structure,[ as Sam Altman has suggested it might](https://www.reuters.com/technology/artificial-intelligence/openai-ceo-says-company-could-become-benefit-corporation-information-2024-06-15/?ref=wheresyoured.at#:~:text=June%2014%20%28Reuters%29%20%2D%20OpenAI,The%20Information%20reported%20on%20Friday.). [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#a3aa5f35-7b05-4964-86ce-51e0ddafb3e5) ^a3aa5f35 The persistence of the "hype" has a role to play here, too. There may also be a lot riding on keeping valuations high for others with skin in the game + limited alternatives to show stock markets / investors. And unless these cool down, much of this may happen with favourable terms for OpenAI. It may ultimately amount kicking the can down the road. We'll see. tags:: > The Revenue, Cost and Market-Fit Problem [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#053b0953-f050-4683-bfa1-071737ff8a34) ^053b0953 # tags:: > As I've written repeatedly,[ generative AI is deeply unprofitable](https://www.wheresyoured.at/pop-culture/), and[ based on the Information's estimates](https://www.theinformation.com/articles/why-openai-could-lose-5-billion-this-year?rc=kz8jh3&ref=wheresyoured.at), the cost of goods sold is unsustainable. OpenAI's costs have only increased over time, and the cost of making these models "better" are only increasing, and have yet to,[ to paraphrase Goldman Sachs' Jim Covello](https://www.goldmansachs.com/intelligence/pages/gs-research/gen-ai-too-much-spend-too-little-benefit/report.pdf?ref=wheresyoured.at), solve the kind of complex problems that would justify their cost. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#c9233d55-238e-4b0a-9cb2-abad6cfa02c4) ^c9233d55 tags:: > Furthermore, transformer-based models have become heavily-commoditized, with competition from independent(ish) companies like Anthropic's Claude and Meta's LLama, all trained on the same massive data-sets, to the point that ChatGPT's biggest advantage is in its brand. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#2454d4e5-2dc3-43c7-9084-d6f879ef3f34) ^2454d4e5 tags:: > As a result, OpenAI's revenue might _climb_, but it's likely going to climb by reducing the cost of its services rather than its own operating costs. OpenAI appears to be operating in the standard valley monopoly model — get as many customers as possible and then work out how to get profitable — but is doing so using a technology that is uniquely expensive to both operate and iterate upon. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#b1509656-27c9-4f1d-897e-ea13277126e6) ^b1509656 Same 'silicon valley playbook' tags:: > OpenAI also has a problem with its marketing.[ Sam Altman has repeatedly misled the media about what "AI might do,"](https://www.wheresyoured.at/sam-altman-is-full-of-shit/) conflating generative AI — which does not "know" things and is not "intelligence" — with the purely-theoretical concept of an autonomous, sentient artificial intelligence. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#c44c21e6-fdcd-4a2d-8ca9-33dd5097731c) ^c44c21e6 tags:: > While there may be ways to reduce the costs of transformer-based models, the level of cost-reduction would be unprecedented, and likely require entirely new chips, cooling solutions and physical server architecture, none of which OpenAI develops. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#945e31f2-42e2-4192-9888-632dc4da19af) ^945e31f2 tags:: > One thing I am not heavily-discussing is the fact that there doesn't seem to be general-purpose adoption of generative AI. These numbers are hard to establish, but what I have previously established for certain —[ in particular based on Goldman Sachs' reporting](https://www.wheresyoured.at/pop-culture/) — is that _actual meaningful revenue_ is yet to materialize. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#bc85b397-320c-47f9-8f21-0e6eee7b8f52) ^bc85b397 tags:: > To summarize: * OpenAI's only real options are to reduce costs or the price of its offerings. It has not succeeded in reducing costs so far, and reducing prices would only increase costs. * To progress to the next models of GPT, OpenAI's core product, the company would have to find new functionality. * OpenAI is inherently limited by GPT's transformer-based architecture, which does not actually automate things, and as a result may only be able to do "more" and "faster," which does not significantly change the product, at least not in such a way that would make it as valuable as it needs to be. * OpenAI's only other option is to invent an entirely new kind of technology, and be able to productize and monetize said technology, something that the company has not yet been able to do. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#46c85570-c013-45b8-a56b-316312b01f45) ^46c85570 tags:: > A Note On Energy: [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#49d524f5-b37e-4d4b-b95b-c99306098722) ^49d524f5 tags:: > Scaling AI would require an investment in power generation that would be equivalent in ambition to the New Deal, or Eisenhower’s Interstate Highway System, and it would need to happen quickly. That’s something that doesn’t happen in the power-generation world. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#51149e37-2f3a-4c63-8111-a6b81bb426a4) ^51149e37 tags:: > For context, in 2021 it took an average of 2.8 years for [a new solar farm to be connected to the electrical grid](https://thundersaidenergy.com/downloads/renewables-how-much-time-to-connect-to-the-grid/?ref=wheresyoured.at#:~:text=The%20median%20time%20to%20receive,2021%2C%20which%20is%202.8%20years.). Two years later, that [time rose to four years](https://www.nytimes.com/2023/02/23/climate/renewable-energy-us-electrical-grid.html?ref=wheresyoured.at). [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#f5fa7dfa-4b1d-4b3d-bccc-d47726c7d218) ^f5fa7dfa tags:: > For OpenAI to continue scaling, it is reliant on a dramatic expansion of the power grid, at a time when (according to Brian Janous of Cloverleaf Infrastructure) the wait times are [ranging from 40-70 months to spin up new power projects](https://www.goldmansachs.com/intelligence/pages/gs-research/gen-ai-too-much-spend-too-little-benefit/report.pdf?ref=wheresyoured.at) [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#c93b817e-1778-4345-af50-771de91717ff) ^c93b817e tags:: > A Grim Situation [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#cf8c60cc-a6e5-441b-90f2-be420f950992) ^cf8c60cc tags:: > For OpenAI to continue operating, things have to change dramatically. * In the event that OpenAI is making the highest-end of their reported revenue range — $4.5 billion — and it has that much in the bank as we speak, it will have to raise at least $2 billion, or as much as $10 billion, within the next 12 months. * In the event that it hasless than a billion in the bank, OpenAI will likely have to raise $5 billion, and do so in the next three to six months. * Otherwise, OpenAI will either have to _at least_ halve their operating costs, _all while maintaining the current pace of revenue,_ or find a way to literally double its revenue while keeping costs at the same rate. Even then, these numbers are extremely concerning — though I add there are always things that I don't know as OpenAI is a private company, and thus isn’t subject to the same disclosure rules as publicly-traded companies. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#a7be2550-28ff-43c4-a09e-f59808c23572) ^a7be2550 tags:: > If I had to just choose a number, I hypothesize that OpenAI needs to raise $20 billion in the next two years to even stay in the game, and to get any further — something that isn't guaranteed — will cost them another $20 billion. For context, according to Crunchbase, the aggregate of all funding in 2023 was $299.2 billion, with $147 billion raised so far in 2024\. OpenAI would have to regularly make up 5-10% _of all startup funding, forever_, _or at least until it works out how to lose less or make more money._ [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#d7ef8bd0-7f11-4f31-a512-dd6634e8a154) ^d7ef8bd0 tags:: > If we humor this idea as the ultimate goal of pumping this company full of money, what are its plans to go public? [Altman said as recently as June 2023 that its company structure would prohibit an IPO](https://www.reuters.com/technology/openai-ceo-has-no-ipo-plan-due-strange-company-structure-2023-06-06/?ref=wheresyoured.at) [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#46318119-3183-4dfa-93ef-9eceea1f47b7) ^46318119 Company structure can change, yes? tags:: > Furthermore, I hypothesize a race to the bottom in generative AI will significantly hamper OpenAI's ability to expand revenue, compounded by the fact that we're approaching the limits of transformer-based architecture. And because OpenAI (and the competition) are so deep in the hole with transformer-based models, I believe they will continue to drive billions into them, burning money on training them using data that may or may not have been legally acquired, and any lawsuit that goes in favor of the plaintiff would have potentially apocalyptic consequences for these models, requiring them to be retrained from scratch with an entirely new dataset, costing further hundreds of millions or _billions_. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#089ac53d-7f67-4be5-af6c-62cce35f43ed) ^089ac53d tags:: > Without OpenAI, the bottom drops out of the entire generative AI market, and will more than likely brutalize any public stock associated with the generative AI boom. [⤴️](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152#c4e45fc5-e8df-4b13-bc79-5520b17bb8ab) ^c4e45fc5 And this is why it may survive i.e. is it now too important to too many people to fail? [Read on Omnivore](https://omnivore.app/me/https-www-wheresyoured-at-to-serve-altman-190ff69a152) [Read Original](https://www.wheresyoured.at/to-serve-altman/)