Why Open AI Will Not Worth a Trillion Dollars (the bearish case)

Everyone is talking about Chat GPT-4, which is the flagship product of Open AI, founded by Sam Altman and others. So what does the future hold for Open AI from an investing perspective? Buy or sell? Deal or no deal? This topic has been debated to death online, but I will throw my hat into the ring as well.

In January 2023 Microsoft announced an investment in Open AI, valuing the start-up at $30 billion. This seems like a lot until you consider this is a third of Facebook/Meta’s 2011 valuation, and I am not even including inflation. So in other words, a company whose technology has taken the internet by storm and may even change or revolutionize our understanding of intelligence and have major implications for the US economy, such as in regard to automation and job loss, is less valuable than circa-2010 Facebook (with the blocky layout and back when people were playing Farmville).

So this means Open AI is cheap? I don’t think so. At a $30 billion valuation, it earns only $100 million annual revenue (projected for 2023), which is tiny relative to valuation even by start-up bubble standards. As for profits? Forget it. It reminds me of the hype over We Work, another massively overvalued, unprofitable, and overhyped post-Covid start-up, which lost 90% of its value in 2021-2022. In 2020, ‘work from home’ (WFH) was supposed to revolutionize everything, with publicly traded companies like Teladoc, Peloton, and Zoom being major players– the share prices of which have subsequently collapsed 80 percent or more. As turns out, mounting an iPad on an exercise bike and then selling it at a huge mark-up during a pandemic when gyms are closed, does not justify an $80 billon valuation when the pandemic is over. Today, AI seems like the latest fad or ‘hype cycle’ to replace the WFH craze.

I have seen some call Chat GPT the ‘next World Wide Web’ (WWW), which I also disagree. The WWW became so important and successful because it became another medium of information, following in the path of television, but way bigger. Domain names are like destinations, analogous to stores or malls, but without physical scarcity. This makes it perfect for advertisers, merchants, and publishers. Chat GPT does not however lend itself to a new medium of information interface or infrastructure, but rather builds on the WWW, like an app.

Another problem with Chat GPT is gathering the necessary data, which involves crawling and organizing huge troves of content. This makes it like Google, but the difference is Chat GPT is like a parasite in that it offers nothing in return for having crawled your data, whereas Google drives traffic and ad revenue to publishers, which makes it worthwhile for both parties. This will compel publishers to block access to entities associated with Chat GPT or demand some other form of credit, remittance, or attribution. Some may be surprised to learn even simple things like song lyrics can be copyrighted. The question if AI-generated art can be copyrighted is hotly debated, but if copyrighted/trademarked works are appropriated by AI for commercial purposes, it could run afoul of trademarks (such as selling Dall-E generated art that has Disney logos and characters in it).

I don’t think today’s current AI offerings are that revolutionary from a commerce standpoint, because they mostly focus on content creation, which is a tiny industry relative to advertising and the $2 trillion Google + Meta juggernaut, cloud hosting, or online retail. The products are cool, but I don’t see it becoming the next Amazon, Microsoft, META, Tesla, etc. No one is going to need to pay Open AI a lot of money to generate content when generating content from ‘micro workers’ (Fivrr, Upwork, etc.) is already very cheap, or if companies like Adobe use their own propriety AI features to replicate the functionality of Dall-E and others.

A month ago Martin Shkreli put out a video “Traditional Tech is Dying & Open AI is Now a Threat.” I disagree. I only see ‘traditional tech’, like Google and Microsoft, getting stronger (also, Microsoft owns a large stake in Open AI). Just because Open AI is getting a lot of media hype and has a working and successful product, does not means it will lead to the sort of commercial dominance and widespread use Google/YouTube has. If Open AI cannot keep coming up with new iterations of Chat GPT, or if the media or public loses interest, it will fall back into obscurity. Social networks have the advantage of being addicting and having network effects, which keeps people pulled in regardless of what the media says.

Also, armchair pundits focus too much on growth. Slowing growth is not as bad as it seems when you have near-total market dominance and huge profits, as Google, Microsoft, and Meta have. Tech CEOs, like Google’s Sundar Pichai, are always sorta pessimistic or warry of slowing growth such as in conference calls or press releases. This is because CEOs face more criticism and possible legal/regulatory risk for being too optimistic and things not working as well as expected, then being too pessimistic and surpassing expectations, so this asymmetry always favors taking a cautious tone and overplaying risks.

Moreover, just because companies use Open AI features or products does not mean it will make Open AI investors rich or lend itself to a high valuation. Programming languages are the backbone of technology and the web, yet no one is getting super rich developing C++, Python, or php. The reason why Facebook/META earns so much money is because large companies spend so much on advertising–billions of dollars a year, and this is multiplied by thousands of companies, year after year. Advertising is one of the biggest expenses of most B2C companies, and is recurring. A retail company may spend 10-20% of its revenue on marketing. Sure, Chat GPT can automate a helpdesk, but is this worth a trillion dollars even if it becomes the leading global player in help desks? Likely not.

Overall, Chat GPT seems to only fill a relatively small niche, like content creation, than being a major ‘digital infrastructure’ player. This makes it more like Adobe, which fills a specific niche, and less like Microsoft, Amazon, Apple, or Google, which have much broader use or applicability. People use Microsoft and Apple products everyday, but Chat GPT is more like a toy that you play with a few minutes or hours out of curiosity before moving on to something else. Unlike Facebook/Instagram or YouTube, it’s not a cornerstone, addiction, or obsession of people’s lives, nor is there any way to easily integrate advertising, such as with META or Google. There is nothing about Chat GPT that will make consumers spend thousands of dollars for new iterations, such as the latest iPhone or the latest Tesla.

In summary, for the above reasons, I think a ‘stable’ valuation above $100 billion for Open AI (like Uber, which for the past 7 or so years has fluctuated between a $30-70 billon valuation), let alone ever hitting a trillion dollars, seems unlikely. I would not invest.