OpenAI and Anthropic invest billions of dollars each year training models such as GPT-4 and Claude, but competitive price dumping has made the economics surrounding these platforms unstable. In a radio appearance on Monday, Aidan Gomez, CEO of competitor AI service Cohere, stated that selling model access is soon becoming a "zero margin business." Currently, many AI models cost more than they produce.
"If you're only selling models, for the next little while, it's gonna be a really tricky game," Gomez remarked in an interview with 20VC's Harry Stebbings. By "selling models," he means selling API access to AI models; OpenAI, Anthropic, Google, and Cohere all provide this service to developers, and they all face comparable challenges.
“It’s gonna be like a zero margin business because there’s so much price dumping. People are giving away the model for free. It’ll still be a big business, it’ll still be a pretty high number because people need this tech — it’s growing very quickly — but the margins, at least now, are gonna be very tight.”
Companies developing cutting-edge AI models compete fiercely with one another. The most dependable technique for upgrading AI models today is to add additional computation, which entails writing large cheques to Nvidia for the gear required to make AI models a little smarter. At the same time, there is a race toward the bottom. To retain customers, OpenAI and Google have reduced the cost of accessing their AI models, whereas Meta's open source models are completely free to license.
"That's why there is a lot of excitement at the application layer," Gomez explained, referring to OpenAI's $20 per month ChatGPT membership. According to Gomez, Cohere's AI models will be an appealing business in the long run, but products may be a meaningful method to earn cash in the meanwhile.
In other words, today's AI models waste money—a lot of it. While Microsoft and Google can subsidize or just endure the loss, startups typically cannot. Cohere is one of the few firms building frontier AI models, alongside OpenAI, Anthropic, and Mistral. Several firms, including Inflection, Adept, and Character.ai, have been acquired by huge cloud providers, leaving behind their unsustainable business models but retaining their formidable technology.
However, Big Tech is eating these fledgling companies alive before they can compete.
"It's really dangerous when you make yourself a subsidiary of your cloud provider," Gomez warned, emphasizing that venture capitalists just want a good return, whereas cloud providers may want more. "It's just not good business."
Companies developing cutting-edge AI models face an increasingly tough situation. There is anticipation that advances in model architecture, data efficiency, and processing capacity will result in massive returns for these AI models in the future. However, there is no predicting when or if that day will arrive. And, clearly, not every AI startup today will be able to see it.