It doesn’t just cost more to run OpenAI than it makes — it costs the company a billion dollars more than the entirety of its revenue to run the software it sells before any other costs. [...] OpenAI loses money on every single paying customer, just like with its free users. Increasing paid subscribers also, somehow, increases OpenAI’s burn rate. This is not a real company.
Seems to contradict this:
The cost of [...] the compute from running models ($2 billion) [...] OpenAI makes most of its money from subscriptions (approximately $3 billion in 2024) and the rest on API access to its models (approximately $1 billion).
OpenAI is certainly still losing money overall and might lose even more money from compute costs in the future (if the reported expenses were reduced by them still having Microsoft’s compute credits available). But I’m not sure why the article says that “every single paying customer” only increases the company’s burn rate given that they spend less money running the models than they get in revenue. Even if you include the entirety of 700M they spend on salaries in the “running models” expenses, that would still leave them with about $1.3 billion in profit.
The article does note that ChatGPT Pro subscriptions specifically are losing the company money on net, but it sounds like the normal-tier subscriptions are profitable. Now the article claims that OpenAI spent $9 billion in total, but I could only find a mention of where $5.7 billion of that goes ($2B on running models, $3B on training models, $0.7B on salaries). If some of the missing $3.3 billion was also spent on running the normal product, that’d explain it, but I’m not sure where that money goes.
Well done finding the direct contradiction. (I also thought the claims seemed fishy but didn’t think of checking whether model running costs are bigger than revenue from subscriptions.)
Two other themes in the article that seem in a bit of tension for me:
Models have little potential/don’t provide much value.
People use their subscriptions so much that the company loses money on its subscriptions.
It feels like if people max out use on their subscriptions, then the models are providing some kind of value (promising to keep working on them even if just to make inference cheaper). By contrast, if people don’t use them much, you should at least be able to make a profit on existing subscriptions (even if you might be worried about user retention and growth rates).
All of that said, I also get the impression “OpenAI is struggling.” I just think it has more to do with their specific situation rather than with the industry (plus I’m not as confident in this take as the author seems to be).
Glad you spotted that! Those two quoted claims do contradict each other, as stated. I’m surprised I had not noticed that.
but I’m not sure where that money goes.
The Information had a useful table on OpenAI’s projected 2024 costs. Linking to a screenshot here.
But I’m not sure why the article says that “every single paying customer” only increases the company’s burn rate given that they spend less money running the models than they get in revenue.
I’m not sure either why Ed Zitron wrote that. When I’m back on my laptop, I’ll look at older articles for any further reasoning.
Looking at the cost items in The Information’s table, revenue share with Microsoft ($700 million) and hosting ($400 million) definitely seem mostly variable with subscriptions. It’s harder to say for the sales & marketing ($300 million) and general administrative costs ($600 million).
Given that information, the revenue that OpenAI earns for itself would still be higher than just the cost of running the models and hosting (which we could call the “cost of running software”).
It’s hard to say though on the margin how much cost overall is added per normal-tier user added. Partly, it depends on how much more they use OpenAI’s tools than free users. But I guess you’d be more likely right than not that (if we exclude past training and research compute costs, and other fixed costs), that the overall revenue per normal-tier user added would be higher than the accompanying costs.
Now the article claims that OpenAI spent $9 billion in total
Note also that the $9 billion total cost amount seems understated in three ways:
the amortised research compute amount lags behind the recent higher compute costs for research.
the data costs (which I assume are not variable with user count) do not appear to price in possible compensation OpenAI will be ordered to pay for any past violations identified in ongoing lawsuits.
from an investor perspective, the $1.5 billion(?) worth in profit shares handed out are also a ‘cost’.
This:
Seems to contradict this:
OpenAI is certainly still losing money overall and might lose even more money from compute costs in the future (if the reported expenses were reduced by them still having Microsoft’s compute credits available). But I’m not sure why the article says that “every single paying customer” only increases the company’s burn rate given that they spend less money running the models than they get in revenue. Even if you include the entirety of 700M they spend on salaries in the “running models” expenses, that would still leave them with about $1.3 billion in profit.
The article does note that ChatGPT Pro subscriptions specifically are losing the company money on net, but it sounds like the normal-tier subscriptions are profitable. Now the article claims that OpenAI spent $9 billion in total, but I could only find a mention of where $5.7 billion of that goes ($2B on running models, $3B on training models, $0.7B on salaries). If some of the missing $3.3 billion was also spent on running the normal product, that’d explain it, but I’m not sure where that money goes.
Well done finding the direct contradiction. (I also thought the claims seemed fishy but didn’t think of checking whether model running costs are bigger than revenue from subscriptions.)
Two other themes in the article that seem in a bit of tension for me:
Models have little potential/don’t provide much value.
People use their subscriptions so much that the company loses money on its subscriptions.
It feels like if people max out use on their subscriptions, then the models are providing some kind of value (promising to keep working on them even if just to make inference cheaper). By contrast, if people don’t use them much, you should at least be able to make a profit on existing subscriptions (even if you might be worried about user retention and growth rates).
All of that said, I also get the impression “OpenAI is struggling.” I just think it has more to do with their specific situation rather than with the industry (plus I’m not as confident in this take as the author seems to be).
Glad you spotted that! Those two quoted claims do contradict each other, as stated. I’m surprised I had not noticed that.
The Information had a useful table on OpenAI’s projected 2024 costs. Linking to a screenshot here.
I’m not sure either why Ed Zitron wrote that. When I’m back on my laptop, I’ll look at older articles for any further reasoning.
Looking at the cost items in The Information’s table, revenue share with Microsoft ($700 million) and hosting ($400 million) definitely seem mostly variable with subscriptions. It’s harder to say for the sales & marketing ($300 million) and general administrative costs ($600 million).
Given that information, the revenue that OpenAI earns for itself would still be higher than just the cost of running the models and hosting (which we could call the “cost of running software”).
It’s hard to say though on the margin how much cost overall is added per normal-tier user added. Partly, it depends on how much more they use OpenAI’s tools than free users. But I guess you’d be more likely right than not that (if we exclude past training and research compute costs, and other fixed costs), that the overall revenue per normal-tier user added would be higher than the accompanying costs.
Note also that the $9 billion total cost amount seems understated in three ways:
the amortised research compute amount lags behind the recent higher compute costs for research.
the data costs (which I assume are not variable with user count) do not appear to price in possible compensation OpenAI will be ordered to pay for any past violations identified in ongoing lawsuits.
from an investor perspective, the $1.5 billion(?) worth in profit shares handed out are also a ‘cost’.