[nwiswell]

> if they don't make the numbers make sense soon then I don't see things ending well for OpenAI.

This is pretty much obvious just from the valuations.

The wild bull case where they invent a revolutionary superintelligence would clearly value them in the trillions, so the fact that they're presently valued an order of magnitude less implies that it is viewed as an unlikely scenario (and reasonably so, in my opinion).

[tptacek]

You don't need science fiction to find the bull case for OpenAI. You just have to think it stands to be the "next" Google, which feels increasingly plausible. Google's current market capitalization is in the trillions.

[paxys]

Google is a digital advertising company. OpenAI hasn't even entered the ads business. In the absolute best case they can take over a large chunk of Google's search market share, sure, but that still doesn't make it anything similar to Google in terms of finances. How do they start making the queries profitable? What do they do when their competitors (Claude, Gemini, Llama, Mistral, Grok and several others) undercut them on price?

[plaidfuji]

Google didn’t start as an ads company. It started as a blank text box that gave you a bunch of good answers from the internet in a list of links.

Were there competitors that did the same thing? AltaVista? Yahoo? Did they undercut on cost? Google was free, I guess. But Google won because it maintained its quality, kept its interface clean and simple, and kept all the eyeballs as a result. Now Google is essentially the entry point to the internet, baked into every major browser except Edge.

Could ChatGPT become the “go-to” first stop on the internet? I think there’s a fair chance. The revenue will find its way to the eyeballs from there.

[Shakahs]

Well when you describe it that way, OpenAI also started as a blank text box that gave you a bunch of good answers, and they've already expanded with other services.

I already use ChatGPT as my first go-to stop for certain search queries.

[ywvcbk]

I guess the difference (at least at comparable development stages) is that a single user query cost almost nothing for Google compared to how much money running ChatGPT costs.

I wouldn’t be surprised if OpenAI were still losing money even with the same CPM that Google search has.

[tgma]

I am not bearish on OpenAI, but the analogy is flawed in that Google probably raised, I don't know, less than 50 million, before it was actually profitable.

[NomDePlum]

It quickly moved into ads though. Incorporated late 1998 and started selling ads in 2000.

Normal people would need to start using a Chat GPT owned interface for search to make an ad based business viable surely? And there's no real sign of that even beginning to happen.

[tptacek]

This subthread is full of people explaining why they don't believe OpenAI could successfully match Google's financial performance. Sure. I'm not investing either. My point isn't that they're going to be successful, it's that there are plausible stories for their success that don't involve science fiction.

[jt2190]

People don’t seem to understand that investment portfolios are personal, that just because an investment doesn’t make sense for their portfolio doesn’t mean that it doesn’t make sense for anyone’s. Allocating a tiny fraction of a portfolio to high risk/high reward investments is a sound practice. When those portfolios are, say, large pension funds, the total sum to invest can be hundreds of millions.

Dissenters should consider that their might be short plays, that if what they think is true they could make some money.

[fnordpiglet]

Google also offered a free product. OpenAI isn’t offering a free product but a subscription product plus metered API product amongst other. Their economics are structurally better than googles assuming they can keep growing their captured market share. Their outrageous costs are also opportunities to optimize costs, including massive amounts of R&D, etc. They don’t need to be profitable now - in fact as bezos demonstrated with Amazon for many years, profit is an indication you’ve run out of uses for capital to grow.

[airstrike]

> OpenAI isn’t offering a free product

I encourage you to visit https://chatgpt.com in incognito mode.

[fnordpiglet]

That’s demoware.

[vitorgrs]

That's like saying Youtube isn't free because there's a subscription...

[ywvcbk]

> Their economics are structurally better than googles assuming

Are they? I would guess that the cost per query for Google, even back then was insignificant compared to how must OpenAI is spending on GPU compute for every prompt. Are they even breaking even on the $20 subscriptions?

During their growth phase Google could make nothing from most of their users and still have very high gross margins.

OpenAI not only has to attract enough new users but to also ensure that they are bringing more revenue than they cost. Which isn’t really a problem Google or FB ever faced.

Of course presumably more optimized models and faster hardware might solve that longterm. However consumers expectations will likely keep increasing as well and OpenAI has a bunch of competitors willing to undercut them (e.g. they have to keep continuously spending enough money to stay ahead of “open/free” models and then there is Google who would probably prefer to cannibalize their search business themselves than let someone else do it).

> in fact as bezos demonstrated with Amazon for many years, profit is an indication you’ve run out of uses for capital to grow.

Was Amazon primarily funding that growth using their own revenue or cash from external investors? Because that makes a massive difference which makes both cases hardly comparable (Uber might be a better example).

[iepathos]

Ads are the most likely monetization path for openai. They want to capture as many users right now and can pull the trigger on ads whenever they want to start juicing users further. As long as the funding flows they can delay the ads. Google and Facebook were ad free initially for years only switching to it for monetization after building up critical user mass.

[ywvcbk]

To cost per user for Google and FB was/is almost insignificant(relative to LLMs). So all the ad revenue was almost free cash.

It’s not even clear if OpenAI is breaking even with the $20 subscription just on GPU/compute costs alone (the newer models seem to be a lot faster so maybe they are). So incrementally growing their revenue might be very painful if they keep making the UX worse with extra ads while still simultaneously losing money on every user.

Presumably the idea is that costs will go down as HW became faster and models themselves more optimized/efficient. But LLMs themselves already seem to almost be a commodity so it might become tricky for OpenAI to compete with a bunch of random services using open models that are offering the same thing (while spending a fraction on R&D)

[fooster]

They’re already monetized in lots of ways. I doubt ads make much sense or are necessary.

[fumar]

I would say they are likely already working through a potential ads experience

[kibibu]

With slipping consumer standards around separating ads from real content, OpenAI are in a position to much more insidiously advertise than Google.

[mulmen]

Google started as a useful search service then corrupted itself with ads. This is the same thing that Facebook and Reddit did. It’s not hard to imagine an LLM that provides “sponsored” responses.

So it’s a long term bet but the idea that Google would lose to an LLM isn’t far fetched to me.

[gammarator]

The unit economics appear to be substantially different.

[Ekaros]

Also Google's adds are not just in their products. They are absolutely everywhere step down from other big players. And I don't think OpenAI can beat that moat. It is entirely different game, and very hard to enter or someone else would have done it.

[ants_everywhere]

But don't they need a moat? They're running against not only every major tech company with access to training data and also all the open source models.

The models will have diminishing returns and other players seem better suited to providing value added features.

[trhway]

you don't need a moat during the gold rush. You need scale - largest number of biggest shovels with which the stuff to be shoveled the fastest. There is so much money right now to be sucked up from the world. We're talking valuations in AI at $100M+ per employee.

https://finance.yahoo.com/news/uae-backs-sam-altman-idea-095...

>The models will have diminishing returns

Wasn't that the going thinking before ChatGPT? And before AlexNet. Of course, we'll again be having some diminishing returns until the next leap.

[ywvcbk]

> the stuff to be shoveled

They are spending a lot on shovels but it’s not clear that there is that much “stuff” (consumer demand) to be shoveled.

VC money can only take you so far, you still need to have an actual way of making money.

LLMs might effectively replace Google but they are already a commodity. It’s really not clear what moat OpenAI can build when there are already a bunch of proprietary/open models that are more or less on the same level.

That basically means that they can’t charge much above datacenter cost + small premium longterm and won’t be able achieve margins that are high enough to justify current valuation.

[mise_en_place]

The moat is a first-party integration with Windows, a third-party integration with iOS, and first-mover advantage. The discount rate still isn't very high; ~5% is the risk-free rate. 157 billion is a reasonable valuation.

[mrbungie]

Integrations are not OAI's moat as those are primarily UX developments that are kept by Apple/MSFT. Right now, and if they want, they can change some lines of code to get up and running with another provider, like Anthropic or whatever.

Only moat OAI has right now is advanced audio mode / real-time audio API, plus arguably o1 and the new eval tools shown the other day as those are essentially vertical integrations.

And maybe, like you said, first-mover advantage. But is not that clear, as even Anthropic got ahead in the race for a while with Claude 3.5 Sonnet.

[BobbyJo]

> Google's current market capitalization is in the trillions.

2 trillion. Approximately 13x OpenAI's current valuation. Google nets almost 100 billion a year. OpenAI grosses 4 billion a year.

Wild numbers.

[tptacek]

A private pre-IPO investment is a bet on where OpenAI will be 10 years from now, not where they are now.

[BobbyJo]

Yes, but they generally shoot for 5-10x. So they are betting on OpenAI growing gross revenue like 20x assuming their costs stay the same.

[tptacek]

The later the investment stage, the lower the expected multiple, but also I don't know that 20x is a crazy expectation to have about OpenAI? It might not happen, but people really fixated on that "might", which is not what venture investing is about.

[BobbyJo]

20x isn't crazy, but its what they need just to reach parity P/E with Google (assuming their costs remain flat). In order for the investment to make sense they have to grow much much more than that to account for the extra risk, otherwise you're better off buying Google stock.

If we throw out some conservative numbers, and assume costs will rise super modestly, you have to believe OpenAI's earning will grow 50-100x for the investment to make sense. They'd have to maintain their current growth rate for 5+ years, but I wouldn't be surprised if their revenue growth is already slowing

[GiorgioG]

To someone that uses OpenAI's tools everyday and generally finds them to be genius morons, I disagree that it feels increasingly plausible they stand to be the next Google.

[nitwit005]

You're kind of selling investing in Google instead, given that they're one of OpenAI's competitors.

[tptacek]

If you think Google wins and crushes them, sure.

[azinman2]

In 2023 Google had $307.39B in revenue and $24B in profit last quarter (suggesting ~100B in profit this year). Meanwhile OpenAI is losing money and making no where near these sums.

[notahacker]

In fairness, whilst Google did reach profitability early (given the VCs had got their fingers burned on internet companies in 1999, they didn't have much choice) its revenues were lower than OpenAIs at IPO stage. The IPO was both well below Google's original hopes and considered frothy by others in the Valley because at the time the impressive and widely-used tech, limited as a business argument seemed to totally apply to the company that did search really well and had just settled the litigation for cloning Yahoo's Overture advertising idea. And their moat didn't look any better than OpenAIs

And much as AI hype irritates me, the idea that the most popular LLM platform becomes a ubiquitous consumer technology heavily monetised by context-sensitive ads or a B2B service integrated into everything doesn't seem nearly as fanciful as some of the other "next Googles". At the very least they seem to have enough demand for their API and SaaS services to be able stop losing money as soon as VCs stop queuing up to give them more.

[tptacek]

Facebook got all the way to an IPO with business fundamentals so bad that after the IPO, Paul Graham wrote a letter to all the then-current YC companies warning them that the Facebook stink was going to foul the whole VC market in the following years. Meta is now worth something like 1.4T.

[tempusalaria]

Facebook grew 100% and had 45% gaap operating margins the year before their IPO.

Facebooks IPO financials were among the best financials at IPO ever

OpenAI has negative 130% adjusted operating margins.

[tptacek]

I don't think OpenAI is about to IPO.

[impulser_]

FB financials were incredibly good at their IPO.

Revenue - 3,711 - 88% YoY growth.

Net Income - 1,000

Cash - 3,908

Tell me how those are bad?

[yifanl]

Facebook made it out by committing click fraud against advertisers on a massive scale, which I don't see as a viable path for sama (even ignoring any legal concerns) considering that openAI isn't a platform company.

[tptacek]

Look, I don't care. At some point we're just arguing about the validity of big tech investing. I don't invest money in tech companies. I don't have a strong opinion about Facebook, or, for that matter, about OpenAI. I'm just saying, you don't need a sci-fi story about AGI to see why people would plow this much money into them. That's all.

[fhdsgbbcaA]

Google has also magnificently shit the bed with Gemini; their ads business is getting raked over the coals in court; they are a twice convicted monopolist; and are driving away top talent in droves.

It reminds me of the old joke:

Heard about the guy who fell off a skyscraper? On his way down past each floor, he kept saying to reassure himself: So far so good... so far so good... so far so good.

[impulser_]

People have been talking about the downfall of Google and FB/Meta for years now and yet every single year both of them still grow, still print money, and run the most used products in the world by far.

Google's generative ai models probably are used more in a day than the rest combined. Google is a highly profitable business that still has never not grown YoY in its nearly 3 decade history.

In you mind you might think Google is going down, but in reality they have only been going up for nearly 3 decades now.

[riku_iki]

> their ads business is getting raked over the coals in court

only display ads business, which is a fraction of total ads revenue

[fhdsgbbcaA]

It’s all wired together.

[riku_iki]

display ads probably wired to google infra, but google search + youtube + ads can exists on their own.

[miohtama]

Uber has not had a profitable year from their core business during its life time.

[insane_dreamer]

> which feels increasingly plausible.

not really; ChatGPT may have the brand name but there are other offerings that are just as good and which can be incorporated into existing apps that have a captive userbase (Apple, Google, Meta). Why should I switch to another app when I can do genAI within the apps that I'm already using.

[riku_iki]

> You just have to think it stands to be the "next" Google, which feels increasingly plausible. Google's current market capitalization is in the trillions.

for this, in addition to "google" part, they also need to build "ads" part for monetization, which is also not trivial task.

[scarface_74]

Besides name recognition, what’s special about OpenAI at this point?

I was prototyping some ideas with ChatGPT that I wanted to integrate into a MVP. It basically involved converting a users query into a well categorized JSON object for processing downstream. I took the same prompt verbatim and used it with an Amazon Bedrock hosted Anthropic model.

It worked just as well. I’m sure there will be plenty of “good enough” models that are just as good as Open AI’s models.

[insane_dreamer]

> Besides name recognition, what’s special about OpenAI at this point?

nothing

[__loam]

Do you want to know how much traffic OpenAI has pulled off Google in the past two years? Because it's not pretty lol. It's definitely single percentage points if not less than a percent (can't remember the exact numbers). They're a rounding error compared to Google.

[electrondood]

Is there a source for this data?

I personally always use ChatGPT over Google.

[__loam]

https://datos.live/predicted-25-drop-in-search-volume-remain...

Love the use of the personal anecdote to refute my point BTW.

[dudeinjapan]

Its also plausible they are the next AltaVista.

[tboyd47]

That assumes that the revolutionary superintelligence is willing to give away its economic value by the trillions. (Revolutionary superintelligences are known to be supergenerous too)

[fnordpiglet]

I assume it needs super amounts of hardware and super amounts of energy. No one gets a free ride not even superintelligences or people working for health insurance.

[Eisenstein]

I would put odds on whatever it is generating the revenue having the leverage at the table. 'We pay your salary which allows you to eat' is a poor argument when the opposing one is 'without me your company would be losing money'.

[tboyd47]

That's true. Thankfully, superintelligences are also poor at negotiating and projecting their own income, so you can still make a handsome profit off of them.

[epolanski]

But even if they invent revolutionary super intelligence, big if, what's stopping other companies to follow suit? Talent between these companies moves fast, some start their own.

Hell even open source models are nowadays better than the best models this billions burning company had just 6 months ago.

I'm lost at what is the moat here, because I really don't see it and I don't believe any of these companies has any advantage at all.

[bpodgursky]

It actually represents the scenario where they invent a revolutionary superintelligence that doesn't kill the VCs investing in the firm, and allows them enough control to take profit. In the top range ASI capacity outcomes, the sand god does not return trillions to the VCs.

This actually represents only the narrow "aligned" range of AI outcomes, so it makes sense it's a small one.

[seanhunter]

Judging by the ones I have met, the VCs probably believe that any kind of superintelligence would by definition be something that would like them and be like them. If it wasn’t on their side they would take it as incontrovertible proof that it wasn’t a superintelligence.

[sally_glance]

Thanks, made me giggle because it rings true! But what if... it's training actually caused it to acquire similar motivation?

(Don't want to think about that too much but man just imagine... A superintelligence with Sam Altman mindset)

[bpodgursky]

I am not sure who you have met, but I have mostly talked to VCs with the same range of optimism and concerns regarding AI as normal technologists.