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Despite the popular take that LLMs have no moat and are burning cash, I find OpenAI's situation really promising. Just yesterday, they reported an annualized r

Despite the popular take that LLMs have no moat and are burning cash, I find OpenAI's situation really promising. Just yesterday, they reported an annualized revenue run rate of 10B. Their last funding round in March valued them at 300B. Despite losing 5B last year, they are growing really fast - 30x revenue with over 500M active users. It reminds me a lot of Uber in its earlier years—fast growth, heavy investment, but edging closer to profitability.

rgavuliak 1y ago
I don't think the no moat approach makes sense. In a world where more an more content and interaction is done with and via LLMs, the data of your users chatting with your LLM is a super valuable dataset.
bitpush 1y ago
The problem is your costs also scale with revenue. Ideally you want to have control costs as you scale (the first you build is expensive, but as you make more your costs come down). For OpenAI, the more people use the product, the same you spend on compute unless they can supplement it with another ways of generating revenue. I dont unfortunately think OpenAI will be able to hit sustained profitability (see Netflix for another example)
- Legend2440 1y ago
  >(see Netflix for another example) Netflix has been profitable for over a decade though? They reported $8.7 billion in profit in 2024.
  - amazingamazing 1y ago
    They increased prices and are not selling a pure commodity tho
- aizk 1y ago
  > sustained profitability (see Netflix for another example) What? Netflix is incredibly profitable.
  - bitpush 1y ago
    Probably a bad example from my part, but also because of increasing the costs and offering a tier with ads. I was mostly talking about the Netflix as it was originally concieved. "Give access to unlimited content at a flat fee", which didnt scale pretty well.
    - whiplash451 1y ago
      Isn't this exactly what they offer today?
- tptacek 1y ago
  All costs are not equal. There is a classic pattern of dogfights for winner-take-most product categories where the long term winner does the best job of acquiring customers at the expense of things like "engineering to reduce costs". I have no idea how the AI space is going to shake out, but if I had to pick between OpenAI's mindshare in the broadest possible cohort of users vs. best/most efficient model, I'd pick the customers. Obviously, lots of nerds on HN have preferences for Gemini and Claude, and having used all three I completely get why that is. But we should remember we're not representative of the whole addressable market. There were probably nerds on like ancient dial-up bulletin boards explaining why Betamax was going to win, too.
  - awongh 1y ago
    We don't even know yet if the model is the product though, and if OpenAI is the company that will make the AI product/model, (chat that keeps expanding into other functionalities and capabilities) or will it be 10,000 companies using the OpenAI models. (well, it's probably both, but in what proportion of revenue)
    - tptacek 1y ago
      Right, but it might not even matter if all the competitors are in the ballpark of the final product/market fit and OpenAI holds a commanding lead in customer acquisition. Again: I don't know. I've got no predictions. I'm just saying that the logic where OpenAI is outcompeted on models themselves and thus automatically lose does not hold automatically.
  - stavros 1y ago
    [flagged]
  - TZubiri 1y ago
    Unlike Uber or whatsapp, there's no network effect. Don't think this is a winner takes all market, there was an article where we had this discussion earlier. Players who get a small market share are immediately profitable proportional to the market share (given a minimum size is exceeded.)
- Magmalgebra 1y ago
  Anyone concerned about cost should remember that those costs are dropping exponenentially. Similarly, nearly all AI products but especially OpenAI are heavily _under_ monetized. OpenAI is an excellent personal shopper - the ad revenue that could be generated from that rivals Facebook or Google.
  - smelendez 1y ago
    It wouldn't surprise me if they try, but ironically if GPT is a good personal shopper, it might make it harder to monetize with ads because people will trust the bot's organic responses more than the ads. You could override its suggestions with paid ones, or nerf the bot's shopping abilities so it doesn't overshadow the sponsors, but that will destroy trust in the product in a very competitive industry. You could put user-targeted ads on the site not necessarily related to the current query, like ads you would see on Facebook, but if the bot is really such a good personal shopper, people are literally at a ChatGPT prompt when they see the ads and will use it to comparison shop.
    - whiplash451 1y ago
      Alternative: let users reduce their monthly bill by accepting a sponsored answer with a dedicated button in the UI (with many potential variants)
- simonw 1y ago
  "... as you make more your costs come down" I'd say dropping the price of o3 by 80% due to "engineers optimizing inferencing" is a strong sign that they're doing exactly that.
  - asadotzler 1y ago
    You trust their PR statements?
    - TZubiri 1y ago
      It's not a PR statement, it's a change in price. Literally putting money where the mouth is.
      - theappsecguy 1y ago
        Or they are trying to gobble up market share because Anthropic has been much better than OpenAI
        petesergeant 1y ago
        Providers are exceptionally easy to switch. There's no moat for enterprise-level usage. There's no "market share" to gobble up because I can change a line in my config, run the eval suite, and switch immediately to another provider. This is marginally less true for embedding models and things you've fine-tuned, but only marginally.
      - Davidzheng 1y ago
        o3 probably used to have a HUGE profit margin on inference, so I'd say it's unclear how much optimo was done;
        programjames 1y ago
        I find it pretty plausible they got an 80% speedup just by making optimized kernels for everything. Even when GPUs say they're being 100% utilized, there are so many improvements to be made, like: - Carefully interleaving shared memory loading with computation, and the whole kernel with global memory loading. - Warp shuffling for softmax. - Avoiding memory access conflicts in matrix multiplication. I'm sure the guys at ClosedAI have many more optimizations they've implemented ;). They're probably eventually going to design their own chips or use photonic chips for lower energy costs, but there's still a lot of gains to be made in the software.
- marsten 1y ago
  You raise a good point that this isn't a low marginal cost business like software, telecom, or (most of) the web. Efficiency will be a big advantage for companies that can achieve it, in part because it will let them scale to new AI use cases. With the race to get new models out the door, I doubt any of these companies have done much to optimize cost so far. Google is a partial exception – they began developing the TPU ten years ago and the rest of their infrastructure has been optimized over the years to serve computationally expensive products (search, gmail, youtube, etc.).
- ACCount36 1y ago
  The bulk of AI costs are NOT in inference. They're in R&D and frontier training runs. The more inference customers OpenAI has, the easier it is for them to reach profitability.
ToucanLoucan 1y ago
I mean sure, it's very promising if OpenAI's future is your only metric. It gets notably darker if you look at the broader picture of ChatGPT (and company)'s impact on our society. * We have people uploading tons of zero-effort slop pieces to all manner of online storefronts, and making people less likely to buy overall because they assume everything is AI now * We have an uncomfortable community of, to be blunt, actual cultists emerging around ChatGPT, doing all kinds of shit from annoying their friends and family all the way up to divorcing their spouses * Education is struggling in all kinds of ways due to students using (and abusing) the tech, with already strained administrations struggling to figure out how to navigate it Like yeah if your only metric is OpenAI's particular line going up, it's looking alright. And much like Uber, it's success seems to be corrosive to the society in which it operates. Is this supposed to be good news?
- arealaccount 1y ago
  Dying for a reference on the cult stuff, a quick search didn’t provide anything interesting.
  - ToucanLoucan 1y ago
    Scroll through the ChatGPT subreddit right now and tell me there isn't a TON of people in there who are legitimately unwell. Reads like the back page notes of a dystopian novel.
    - arandomhuman 1y ago
      I think this is less caused by ChatGPT/LLMs and more of a phenomenon in social media circles where people flock to "the thing" and have poor social skills and mental health generally speaking.
  - wizzwizz4 1y ago
    https://futurism.com/chatgpt-mental-health-crises https://futurism.com/chatgpt-mental-health-crises, which references the more famous https://www.rollingstone.com/culture/culture-features/ai-spiritual-delusions-destroying-human-relationships-1235330175/ https://www.rollingstone.com/culture/culture-features/ai-spi... but is a newer article.
seydor 1y ago
their moat is leaky because llm prices will be dropping forever and the only viable model will be a free model. Eventually everyone will catch up. Plus there is the thing that "thinking models" can't really solve complex tasks / aren't really as good as they are believed to be .
- Zaheer 1y ago
  I would wager most of their revenue is from the subscriptions - both consumer and business. That pricing is detached from the API pricing. The heavy emphasis on applications more recently is because they realize this as well.
therealdrag0 1y ago
As an anecdote they have first mover advantage on me. I pay monthly but mostly because it’s good enough and I can’t be bothered to try a bunch out and switch. But if the dust settles and prices drop i would be motivated to switch. How much that matters maybe depends if their revenue comes from app users or API plans. And first mover only works once. Now they maybe coasting on name recognition, but otherwise new users maybe load balanced among all the options.
deleted 1y ago
[deleted]
jillesvangurp 1y ago
The moat is increasingly becoming having access to billions needed to finance the infrastructure needed to serve billions. That's why Google is still in the game. They have that and they are very good at massive scale and have some cost advantages there. OpenAI is very good at this as well because of their brand name. For many people ChatGPT is all they know. That's the one that's in the news. That's the one everybody keeps talking about. They have many millions of paying users at this point. This is a non trivial moat. If you can only be successful by not serving most of the market for cost reasons, then you can't be successful. It's how Google has been able to guard its search empire for a quarter century. It's easy to match what they do algorithmically. But then growing from a niche search engine that has maybe a few tens of thousands of users (e.g. Kagi) to Google scale serving essentially most of this planet (minus some fire walled countries like Russia and China), is a bit of a journey. So Google rolling out search integration is a big deal. It means they are readying themselves for that scale and will have billions of users exposed to this soon. > Their last funding round in March valued them at 300B. Despite losing 5B last year, they are growing really fast Yes, they are valued based on world+dog needing agentic AIs and subscribing to the extent of tens or hundreds of dollars/month. It's going to outstrip revenue things like MS Office in its prime. 5B loss is peanuts compared to that. If they weren't burning that, their ambition level would be too low. Uber now has a substantial portion of the month. They have about 3-4 billion revenue per month. A lot of cost obviously. But they managed 10B profit last year. And they are not done growing yet. They were overvalued at some point and then they crashed, but they are still there and it's a pretty healthy business at this point and that reflects in their stock price. It's basically valued higher now than at the time of the Softbank investment pre-IPO. Of course a lot of stuff needed to be sorted out for that to happen.

rgavuliak 1y ago

I don't think the no moat approach makes sense. In a world where more an more content and interaction is done with and via LLMs, the data of your users chatting with your LLM is a super valuable dataset.

bitpush 1y ago

The problem is your costs also scale with revenue. Ideally you want to have control costs as you scale (the first you build is expensive, but as you make more your costs come down). For OpenAI, the more people use the product, the same you spend on compute unless they can supplement it with another ways of generating revenue. I dont unfortunately think OpenAI will be able to hit sustained profitability (see Netflix for another example)

Legend2440 1y ago
>(see Netflix for another example) Netflix has been profitable for over a decade though? They reported $8.7 billion in profit in 2024.
- amazingamazing 1y ago
  They increased prices and are not selling a pure commodity tho
aizk 1y ago
> sustained profitability (see Netflix for another example) What? Netflix is incredibly profitable.
- bitpush 1y ago
  Probably a bad example from my part, but also because of increasing the costs and offering a tier with ads. I was mostly talking about the Netflix as it was originally concieved. "Give access to unlimited content at a flat fee", which didnt scale pretty well.
  - whiplash451 1y ago
    Isn't this exactly what they offer today?
tptacek 1y ago
All costs are not equal. There is a classic pattern of dogfights for winner-take-most product categories where the long term winner does the best job of acquiring customers at the expense of things like "engineering to reduce costs". I have no idea how the AI space is going to shake out, but if I had to pick between OpenAI's mindshare in the broadest possible cohort of users vs. best/most efficient model, I'd pick the customers. Obviously, lots of nerds on HN have preferences for Gemini and Claude, and having used all three I completely get why that is. But we should remember we're not representative of the whole addressable market. There were probably nerds on like ancient dial-up bulletin boards explaining why Betamax was going to win, too.
- awongh 1y ago
  We don't even know yet if the model is the product though, and if OpenAI is the company that will make the AI product/model, (chat that keeps expanding into other functionalities and capabilities) or will it be 10,000 companies using the OpenAI models. (well, it's probably both, but in what proportion of revenue)
  - tptacek 1y ago
    Right, but it might not even matter if all the competitors are in the ballpark of the final product/market fit and OpenAI holds a commanding lead in customer acquisition. Again: I don't know. I've got no predictions. I'm just saying that the logic where OpenAI is outcompeted on models themselves and thus automatically lose does not hold automatically.
- stavros 1y ago
  [flagged]
- TZubiri 1y ago
  Unlike Uber or whatsapp, there's no network effect. Don't think this is a winner takes all market, there was an article where we had this discussion earlier. Players who get a small market share are immediately profitable proportional to the market share (given a minimum size is exceeded.)
Magmalgebra 1y ago
Anyone concerned about cost should remember that those costs are dropping exponenentially. Similarly, nearly all AI products but especially OpenAI are heavily _under_ monetized. OpenAI is an excellent personal shopper - the ad revenue that could be generated from that rivals Facebook or Google.
- smelendez 1y ago
  It wouldn't surprise me if they try, but ironically if GPT is a good personal shopper, it might make it harder to monetize with ads because people will trust the bot's organic responses more than the ads. You could override its suggestions with paid ones, or nerf the bot's shopping abilities so it doesn't overshadow the sponsors, but that will destroy trust in the product in a very competitive industry. You could put user-targeted ads on the site not necessarily related to the current query, like ads you would see on Facebook, but if the bot is really such a good personal shopper, people are literally at a ChatGPT prompt when they see the ads and will use it to comparison shop.
  - whiplash451 1y ago
    Alternative: let users reduce their monthly bill by accepting a sponsored answer with a dedicated button in the UI (with many potential variants)
simonw 1y ago
"... as you make more your costs come down" I'd say dropping the price of o3 by 80% due to "engineers optimizing inferencing" is a strong sign that they're doing exactly that.
- asadotzler 1y ago
  You trust their PR statements?
  - TZubiri 1y ago
    It's not a PR statement, it's a change in price. Literally putting money where the mouth is.
    - theappsecguy 1y ago
      Or they are trying to gobble up market share because Anthropic has been much better than OpenAI
      - petesergeant 1y ago
        Providers are exceptionally easy to switch. There's no moat for enterprise-level usage. There's no "market share" to gobble up because I can change a line in my config, run the eval suite, and switch immediately to another provider. This is marginally less true for embedding models and things you've fine-tuned, but only marginally.
    - Davidzheng 1y ago
      o3 probably used to have a HUGE profit margin on inference, so I'd say it's unclear how much optimo was done;
      - programjames 1y ago
        I find it pretty plausible they got an 80% speedup just by making optimized kernels for everything. Even when GPUs say they're being 100% utilized, there are so many improvements to be made, like: - Carefully interleaving shared memory loading with computation, and the whole kernel with global memory loading. - Warp shuffling for softmax. - Avoiding memory access conflicts in matrix multiplication. I'm sure the guys at ClosedAI have many more optimizations they've implemented ;). They're probably eventually going to design their own chips or use photonic chips for lower energy costs, but there's still a lot of gains to be made in the software.
marsten 1y ago
You raise a good point that this isn't a low marginal cost business like software, telecom, or (most of) the web. Efficiency will be a big advantage for companies that can achieve it, in part because it will let them scale to new AI use cases. With the race to get new models out the door, I doubt any of these companies have done much to optimize cost so far. Google is a partial exception – they began developing the TPU ten years ago and the rest of their infrastructure has been optimized over the years to serve computationally expensive products (search, gmail, youtube, etc.).
ACCount36 1y ago
The bulk of AI costs are NOT in inference. They're in R&D and frontier training runs. The more inference customers OpenAI has, the easier it is for them to reach profitability.

ToucanLoucan 1y ago

I mean sure, it's very promising if OpenAI's future is your only metric. It gets notably darker if you look at the broader picture of ChatGPT (and company)'s impact on our society. * We have people uploading tons of zero-effort slop pieces to all manner of online storefronts, and making people less likely to buy overall because they assume everything is AI now * We have an uncomfortable community of, to be blunt, actual cultists emerging around ChatGPT, doing all kinds of shit from annoying their friends and family all the way up to divorcing their spouses * Education is struggling in all kinds of ways due to students using (and abusing) the tech, with already strained administrations struggling to figure out how to navigate it Like yeah if your only metric is OpenAI's particular line going up, it's looking alright. And much like Uber, it's success seems to be corrosive to the society in which it operates. Is this supposed to be good news?

arealaccount 1y ago
Dying for a reference on the cult stuff, a quick search didn’t provide anything interesting.
- ToucanLoucan 1y ago
  Scroll through the ChatGPT subreddit right now and tell me there isn't a TON of people in there who are legitimately unwell. Reads like the back page notes of a dystopian novel.
  - arandomhuman 1y ago
    I think this is less caused by ChatGPT/LLMs and more of a phenomenon in social media circles where people flock to "the thing" and have poor social skills and mental health generally speaking.
- wizzwizz4 1y ago
  https://futurism.com/chatgpt-mental-health-crises https://futurism.com/chatgpt-mental-health-crises, which references the more famous https://www.rollingstone.com/culture/culture-features/ai-spiritual-delusions-destroying-human-relationships-1235330175/ https://www.rollingstone.com/culture/culture-features/ai-spi... but is a newer article.

seydor 1y ago

their moat is leaky because llm prices will be dropping forever and the only viable model will be a free model. Eventually everyone will catch up. Plus there is the thing that "thinking models" can't really solve complex tasks / aren't really as good as they are believed to be .

Zaheer 1y ago
I would wager most of their revenue is from the subscriptions - both consumer and business. That pricing is detached from the API pricing. The heavy emphasis on applications more recently is because they realize this as well.

therealdrag0 1y ago

As an anecdote they have first mover advantage on me. I pay monthly but mostly because it’s good enough and I can’t be bothered to try a bunch out and switch. But if the dust settles and prices drop i would be motivated to switch. How much that matters maybe depends if their revenue comes from app users or API plans. And first mover only works once. Now they maybe coasting on name recognition, but otherwise new users maybe load balanced among all the options.

deleted 1y ago

[deleted]

jillesvangurp 1y ago

The moat is increasingly becoming having access to billions needed to finance the infrastructure needed to serve billions. That's why Google is still in the game. They have that and they are very good at massive scale and have some cost advantages there. OpenAI is very good at this as well because of their brand name. For many people ChatGPT is all they know. That's the one that's in the news. That's the one everybody keeps talking about. They have many millions of paying users at this point. This is a non trivial moat. If you can only be successful by not serving most of the market for cost reasons, then you can't be successful. It's how Google has been able to guard its search empire for a quarter century. It's easy to match what they do algorithmically. But then growing from a niche search engine that has maybe a few tens of thousands of users (e.g. Kagi) to Google scale serving essentially most of this planet (minus some fire walled countries like Russia and China), is a bit of a journey. So Google rolling out search integration is a big deal. It means they are readying themselves for that scale and will have billions of users exposed to this soon. > Their last funding round in March valued them at 300B. Despite losing 5B last year, they are growing really fast Yes, they are valued based on world+dog needing agentic AIs and subscribing to the extent of tens or hundreds of dollars/month. It's going to outstrip revenue things like MS Office in its prime. 5B loss is peanuts compared to that. If they weren't burning that, their ambition level would be too low. Uber now has a substantial portion of the month. They have about 3-4 billion revenue per month. A lot of cost obviously. But they managed 10B profit last year. And they are not done growing yet. They were overvalued at some point and then they crashed, but they are still there and it's a pretty healthy business at this point and that reflects in their stock price. It's basically valued higher now than at the time of the Softbank investment pre-IPO. Of course a lot of stuff needed to be sorted out for that to happen.