OpenAI Is Getting Utterly Desperate

Erotica, apps and browsers won't save the company; they will bury it.

Photo by Codioful (Formerly Gradienta) on Unsplash

LLMs were supposed to change the world. We were promised they would cure cancer, augment scientists, make office jobs a thing of the past, and reach superhuman levels of intelligence. But now we can see that was all total bullshit. AI tools are too inaccurate to boost productivity through augmentation, let alone automate jobs or even resemble a thinking thing. To make matters worse, it is becoming increasingly clear, day by day, that these models are not going to improve, given that their returns are diminishing at lightning speed (read more here). On top of that, no AI company is even remotely profitable, and the market leader, OpenAI, is actually getting further and further away from profitability (read more here) as its costs skyrocket and its revenue growth stalls due to people realising these tools are legitimately crap (read more here). Despite these unavoidable facts, well over a trillion dollars is being poured into this industry, with the vast majority of those funds being funnelled into OpenAI, pushing the valuations of associated companies, like Nvidia, to unprecedented heights. If you headed an AI company, how would you square this hole? How would you rapidly expand revenue to at least pay for this investment and avoid a valuation collapse? Well, for the CEO of OpenAI, Sam Altman, the answer is AI browsers, erotica and AI social media sites! Unfortunately, I think Altman needs to take a serious maths lesson, because none of this makes sense, and these “solutions” will actually make OpenAI’s problems twice as bad.

The Economics

OpenAI has an interesting problem. The only thing their product can do is mimic what already exists, as that is what generative AI does: it takes data and extrapolates trends within it to create something derivatively “new”. It can inherently only create things that are worse than, or nearly as good, as things that are already out there. So, how can you compete in a market with a worse product? Well, by either undercutting the competition in price, flooding the market to drown out the competition, or doing both. That is how Uber and Airbnb grew their businesses, despite the fact that their product is arguably worse than booking a proper taxi or hotel. OpenAI is attempting to do exactly the same thing by allowing the rollout of“erotica” to verified adults, as well by launching its Atlas Browser and Sora social media site.

But here is the big issue: Uber & Airbnb’s costs per unit of service decreased as they grew, so this costly, aggressive growth eventually paid off when economies of scale set in and they achieved profitability. The opposite is true for OpenAI; its costs increase linearly as it grows. The cost per output of an AI is the same no matter the number of users. It doesn’t have any economies of scale. So, growing bigger is not a solution to the profitability problem and will, in fact, make OpenAI’s losses larger.

Even if that weren’t the case — and OpenAI could completely dominate these industries — there isn’t enough revenue available to solve their problem!

Let me show you what I mean.

Atlas

Just over a week ago, OpenAI launched Atlas, an AI browser. It is pitched to directly compete with Google’s Chrome. Basically, rather than having Google Search embedded in the browser, it has ChatGPT’s search functionality. You can download Atlas and use these functions for free. But if you pay $20 a month, you get access to its other features, such as a ChatGPT-powered page summary and some very terrible agentic features.

These paid-for features have some serious problems. Even die-hard AI fanatics have ridiculed them, as they are riddled with security issues and the “agentic” features pretty much don’t work, with no version of ChatGPT being even remotely up to the task. No one will pay for this level of inconvenience. But that is okay, because OpenAI is almost certainly losing a tremendous amount of money here. Again, OpenAI loses hundreds of dollars per month on its $200-per-month ChatGPT subscriptions. And, because people use their browsers far more than they use chatbots, that means OpenAI is almost certainly losing even more for every $20 Atlas subscription.

Honestly, I don’t think the only reason OpenAI provides these features is because they want to say they have offered an agentic AI as promised, but by locking it behind a $20 subscription, they have effectively ensured only gullible AI bros can access it, presumably in hopes that the general public won’t realise that this AI isn’t “agentic” at all. In short, it’s a PR stunt.

Really, this is an attempt to dethrone Google Search. The vast majority of users access search engines through their browser’s default search engine, which is almost always Google Search, which makes $48.5 billion in revenue per year. By poaching users at the source — browser-based search — OpenAI can take a slice of this pie. Indeed, OpenAI has been trying to embed adverts and paid promotions into ChatGPT Search for a while now so they can take on Google at their own game.

But there is an immeasurably large problem with this plan.

Currently, each word ChatGPT generates costs them $0.0003, and a ChatGPT search responds with 30 words on average, meaning a single search query costs OpenAI $0.01. Embedding ads will increase the number of words and the cost per search, but let’s be generous and stick with this $0.01 figure. Google receives more than five trillion searches per year. Let’s assume Atlas is wildly successful and poaches all of these users — well, processing that many search queries would cost OpenAI over $50 billion per year!

In other words, it would cost OpenAI at least $1.5 billion more to replace Google Search than Google Search makes in revenue per year.

Now, let’s also not forget that embedding ads in ChatGPT Search will increase search query complexity and the average number of response words, significantly increasing costs per search. Advertisers are also deeply wary of advertising within chatbot search engines, as the integration is clumsy, and there isn’t the infrastructure to accurately target customers or ensure your advert isn’t placed in a potentially damaging context. Again, AI gets this kind of stuff wrong constantly! So, to draw advertisers away from Google, OpenAI will have to undercut them substantially. In reality, we can expect these losses to be more like $10 billion a year.

This market is only worth $48.5 billion. But if OpenAI dominated it, because of how expensive their models are and how inefficient using them to advertise would be, it wouldn’t make a profit; instead, it would generate huge losses.

“Erotica”

From December, OpenAI will allow verified adults to generate “erotica” stories and imagery from ChatGPT. But let’s call this what it is: porn. For now, video-based porn generation is still off the table. However, I guarantee you that it won’t be for long.