OpenAI is facing significant financial, ethical, and competitive challenges as it transitions to a for-profit entity, jeopardizing its ambitious IPO and the broader AI market.
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Open AAI has not been having a great
year. As it completes its metamorphosis
from a nonprofit organization operating
for the good of humanity to a
shareholder focused company gearing up
for one of the biggest IPOs in history,
it has come up against some uh teething
problems. It is facing legal challenges
over the fair use of intellectual
property, legal challenges over its
governance, legal challenges over the
safe use of its tools, talent churn
amongst its top developers, and now
significant reputational damage amongst
effectively all of its stakeholders. All
of this wasn't helped by its willingness
to embrace what many see as war
profitering, further straying away from
their original stated goal in order to
chase revenue wherever it can find it.
because well I mean fully autonomous AI
killbots and mass surveillance systems
don't really sound like they are
improving the future of humanity. In
response to this over just the last
weeks some of even the most staunch AI
optimists have spoken out against the
decisions this company has been making.
But anyway, all of this is on top of the
biggest and most immediate problem of
all, which is that OpenAI is simply
burning billions of dollars every month
on top of trillions of dollars in future
spending commitments with no clear
answer for how it's going to get that
money. Now, maybe this would all be okay
if it was still the undisputed leader in
this world changing technology. But in
the last 3 years, several other models
from better funded companies have come
along and either matched or exceeded
OpenAI's capabilities. It's now unclear
if the early pioneers of this technology
have spent hundreds of billions of
dollars developing systems that can now
be effectively replicated by random
Swedish men in their bedroom. It's also
becoming less clear exactly how
worldchanging this technology really is
going to be in the first place, putting
more question marks over the company's
future. For now, its investors are
doubling down. Just last week, Amazon,
who is theoretically a competitor,
Nvidia, a supplier, and the ever
reliable Soft Bank, announced a record
investment of $110 billion in additional
funding, which will keep the GPUs on for
another few months. But this lifeline
has in turn presented another potential
issue that would almost sound absurd if
it wasn't for a growing pool of people
raising the alarm bells over it. OpenAI
alongside some other big names have now
become so valuable in private markets
that if they do all go public this year,
their collective waiting could
legitimately break the stock market.
>> Open AAI, as you rightly pointed out,
had talked about almost $1.4 trillion in investments.
investments.
>> Google, Amazon, Microsoft, Nvidia,
they're all kind of backing everyone
right now to lift up the wider AI market.
market.
>> Open AI declaring code red as the AI
race intensifies. and Google threatens
to unseat the industry's early leader.
>> These US big tech corporations are
fear-mongering about China.
>> That raises a lot of questions about how
AI employees feel about this.
>> Workers using AI are more productive.
They're also more burned out than ever before.
before.
>> Brad, if you want to sell your shares,
I'll find you a buyer.
Now, despite how it may appear from the
outside, the business leaders and
investment managers pouring hundreds of
billions of dollars into Open AI are
fully aware of the questions and
criticisms people have about the
business. It's not like every single
person on the internet has seen
something that the CEO of Microsoft or
Nvidia somehow didn't get the memo for.
They are all capable of doing the basic
arithmetic that concludes that a lot of
these numbers don't really make a lot of
sense, but they are still betting on it
anyway. By the business fundamentals
alone, yeah, it doesn't look great. But
to these mega investors, the case for
OpenAI can continue to be justified so
long as four things remain true. Now,
unfortunately for them, out of those
four variables, there are only three
that the company can really control. It
has to maintain extremely strong user
growth, preferably amongst users that
are actually willing to pay money for
the service. It has to demonstrate that
those customers will actually stick
around to be profited off of. And it has
to remain a viable contender for the
longot bed of developing genuinely
worldchanging super intelligence. If the
company can show investors that a large
group of people are willing to pay a
recurring subscription fee for their
services, it is a good indication that
there may be a path to profitability in
the future. Even if they are losing a
lot of money at the moment for every
customer they serve, even those in the
top subscription tiers. If they can
fully capture that market, they can
basically try to do what every tech
company ever has done through a gradual
process of inshitification. The game
plan is simple. They start out with a
really useful and cost-effective
service. get people used to using it,
drive out all competition, and once they
have done that, they can raise prices,
cut costs, and integrate other revenue
streams like ads to profit off the user
base they have cornered. For technology
in particular, this is a very effective
strategy to build companies because the
marginal cost of every additional user
is effectively zero. So, the benefit of
being the sole player in the market is
enormous. A company like OpenAI also has
an advantage here because over time the
cost to deliver the same service should
come down naturally as technology
improves. It may not feel like it at the
moment, especially if you have tried to
build a computer recently, but the cost
of the hardware and overhead needed to
run AI is coming down extremely quickly.
Tokens are the basic building blocks of
AI generated content, so it's easiest to
track them as a point of comparison.
According to data from the AI index
report prepared by Epic AI when Chad GPT
first launched in late 2022, the cost to
produce a million tokens was around $11.
In early 2025, that cost had come all
the way down to just 9 with some models
from competitors running even cheaper.
Now, that is the most recent data that
has been reliably reported on. But the
trend is that since very early
generative models, the cost per token
has been having 2.7 times over every
single year. The only reason why
spending has increased so much overall
is because OpenAI and its competitors
are spending a lot on training larger,
more capable models. And we are just
using a lot more of these tokens
overall. The data is hard to collect,
but according to the tracking platform
Open Router, the number of tokens
consumed rose by over 38 times over a
12-month period ending late last year.
This is all to say that even if AI
remains nothing more than a little handy
tool, the demand for those tools is
rising and the cost to deliver them is
falling just as quickly. Additionally,
the CEOs are betting that once a
powerful enough model is developed, they
won't need to keep investing the
enormous amounts of money they have been
in the early development stage. That
means if one of these businesses can
corner the market, they could make a lot
of money with something as simple as a
subscription model or yes, even
advertising. If an OpenAI subscription
becomes as ubiquitous as a Netflix
subscription, then that alone could
justify the value of these investments
because Netflix by comparison does not
have the luxury of movies becoming 27
times cheaper to produce every year.
This is not even considering the revenue
that could come from commercial or
government clients. But well, yeah, we
will get to that soon. This is also
ignoring the longshot bet that OpenAI
is, or at least was the front runner for
developing some kind of super
intelligence with capabilities worth
tens of trillions of dollars. A lot of
real experts on this topic have pointed
out that this kind of scenario is
extremely unlikely to happen. But even
if there is only a 1 in 1,000 chance if
that investment could pay out 10,000
times over, it's still a good bet.
Especially if the backup plan is merely
becoming one of the most valuable SAS
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so behind the scenes, some of the
optimistic outcomes for these variables
has not been panning out too well for
OpenAI. And of course, a lot of those
challenges were brought to the surface
last week. If you are not up to speed,
the brief summary is that Anthropic, the
company behind Claude and OpenAI's chief
rival, pushed back against the
Department of War over using their
technology for fully autonomous armed
drones and mass surveillance. Now, we
are already a long way beyond Asimov's
three laws of robotics here. But many
people were still willing to give credit
to Anthropic for doing what you might
reasonably consider to be the bare
minimum, especially when they were put
under significant pressure from the
government. Now, all of that public good
was very quickly turned into animosity
when just a few hours later, OpenAI
turned around and signed a similar deal
with the Pentagon, effectively
announcing that they were willing to
forgo these extremely basic AI safety
guardrails if it meant that they could
secure a lucrative government contract.
Now, I respect your time, and I know
most of you are probably already up to
speed on this, but if you do want more
details, I will leave a link to some
articles in the description, as well as
some great detailed commentary done by
Mr. Gizzy Hands himself. Now, the whole
situation is very interesting and
frankly terrifying from the ethics side
of the AI debate, but it has also been
quite revealing from the business side
as well. Following this episode, a lot
of people are actively boycotting
OpenAI's products and considering
alternatives with the biggest winner so
far being Anthropic itself. This
undermines the narrative of continual
user growth and it highlights that
people are not really that attached to
any particular brand of AI. For the past
two years, OpenAI in particular has been
able to command an investment premium in
part because it was the first thing that
people thought of when it came to large
language models. It was the Google,
Coca-Cola, Band-Aid, Clorox, and Velcro
of AI tools. To a lot of average people,
chat GPT was just the way to use AI. It
was also assumed that once people got
used to using a particular model, it
would be very hard to get them to
switch, which in turn would make it
easier to generate profit through higher
fees and a cheaper service. This whole
killer robots episode may not
single-handedly destroy open AI, but it
has been a very visible demonstration
that people are happy to switch if they
see a reason to. Competitors have
capitalized on this by releasing tools
to make this switch between models as
seamless as possible, even for users who
had a lot of custom trained data built
up with OpenAI. This has hit two of the
three stories that OpenAI needed to keep
going in order to maintain investor
interest. And it also hit this last one
as well. The race to secure talent in
the AI space has become somewhat
ludicrous with pay packets into the tens
of millions of dollars a year. But
companies are hoping that these salaries
will be worth it if it improves their
chances of making a general
intelligence. The blowback over these
ethical decisions will make it harder
for OpenAI to attract these high-end
researchers and it will also make it
more likely that the ones they currently
have will look for opportunities with
competitors. Now, of course, some of
these people may not really care about
what their AI is doing as long as the
paychecks come in, but with
multi-million dollar signing bonuses
being thrown around, at the very least,
these ethical concerns are a great
excuse to jump ship. Big investors care
about these talent movements because the
more these people move around, the more
the institutional knowledge gets spread
around. If a highly skilled developer
spends 2 years at OpenAI and then moves
to Enthropic, they are going to bring
with them some level of knowhow about
how to develop similar capabilities. Now
obviously these people will be under
very strict non-disclosure contracts but
even without copying anything directly
these programs are ultimately the
product of the people who designed them
and a whole lot of stolen intellectual
property but we don't talk about that
part out loud. These knowledge leaks
make it more likely that AI will just
become a commodity that any somewhat
competent business can create rather
than a centralized product that people
need to pay for the privilege of using.
Now, this isn't exactly unprecedented in
the world of technology either. For all
of the emphasis that is put on being a
pioneer in a new field, it rarely if
ever guarantees business success. Nobody
uses Alta Vista, Blackberry, MySpace, or
Skype anymore, despite them all at one
time being the cutting edge of their
respective fields. Now, for a company
like Google, Meta, Microsoft, Amazon, or
even XAI, this isn't as big a deal. If
AI does become a universally accessible
commodity, then all of the money they
have spent building their own
capabilities may have been a waste. But
at least the cost cutting made possible
by this technology could still help
their core business functions. This is
in part why companies like Google and
Amazon are developing their own AI
products while simultaneously investing
in their own competition. However, for a
company like OpenAI, if they can't
monetize the technology itself, they are
in big trouble, especially since they
have made some of the most significant
upfront investments to develop this
whole industry in the first place. An
analogy that has been thrown around is
that they are like a cheetah that has
used a lot of resources to hunt down
this new technology. And now that they
have, the bigger, slower predators can
come along and steal the rewards without
having to use as much energy of their
own. Now, of course, the other major
tech companies have invested a lot of
money into pursuing this technology, but
it was largely money that they already
had, and they have other profit centers
to keep this going, even if investors
get cold feet, which brings up that one
big variable they can't control. The big
investors can keep justifying the money
they spend on Open AI so long as their
investors see the potential for the
technology, or at the very least see the
opportunity for the hype to generate
some kind of a return on their
investment as they sell their stake off
to the next person in line. Investor
enthusiasm around AI is already waning
and market conditions alongside higher
interest rates aren't helping either.
But the ultimate light at the end of the
tunnel for a lot of these early
investors as well as the employees paid
in company stock is to take the company
public so that they can cash out their
positions to the general public. Now, so
far the company has only teased the idea
of an IPO with no formal plans actively
submitted. But it is still worth
considering how such a move might play
out because whether you like it or not,
it's probably going to affect you. In
any scenario, an initial public offering
brings a lot of additional scrutiny onto
a company as its financials and
operations are thoroughly picked apart
in the due diligence process. This has
been the undoing of several hyped
companies in the past, most famously
WeWork, a business built on bold
promises that didn't quite live up to
the optimism of the eccentric founder,
also backed by major investments from
SoftBank. Now, honestly, this is
probably a bit unfair. Open AAI is at
the very least a real technology
company, not an office subletter that
pretends to be a technology company, but
it will still present a hurdle for a
slightly different reason. Going public
means that the company leadership will
be subject to a lot more regulation
about the stories they are allowed to
tell. Alman, in particular, has gained a
bit of a reputation for making big
promises about the financial potentials
of his businesses, including those that
he ran before OpenAI. This kind of
messaging will need to be picked a lot
more carefully in the run-up to a
listing and after the company is public.
Now, I know what you might be thinking.
A lot of public company CEOs have made a
mockery of these regulations, and
enforcement by bodies like the SEC has
effectively amounted to a slap on the
wrist with a wet noodle. But for such an
important business, it's not impossible
that enforcement action could be used
against them punitively if they don't
play along. I mean, it literally
happened just last week. So yeah, OpenAI
has made promises that financially
cannot afford to keep for technology
that is no longer special, being offered
to users that are moving to competitors
and talent that is being spread around
to higher biders that come with less
reputational baggage. As these problems
have caught up with the company, it has
tried things that are looking
increasingly desperate in order to keep
the numbers moving in the right
direction. Goonbots, integrated
advertising, and questionable military
contracts may have introduced additional
revenue streams, but they made all of
these fundamental challenges even worse.
It sounds bad, but I guess we should
talk about how this company might uh
break the stock market. So, despite all
of these problems, OpenAI could still
easily be the largest IPO in history.
After the most recent $110 billion
investment, the company claimed a pre-
money valuation of $730 billion, which
already makes it one of the most
valuable companies in the world,
slotting right in between JP Morgan,
Chase, and Exxon. Now, not all shares
would be made instantly available on the
market on the first day, but even
assuming an extremely conservative 5% of
the company's shares, it would still be
close to $40 billion in float, topping
even Sadia Ramco's IPO, which was a
state oil company and not really a fair
comparison. As a closer comparison, when
Facebook went public in 2012, it put up
15% of its stock to raise an
inflationadjusted $22 billion. A similar
offering from OpenAI would be five times
that. Now, the market is obviously a lot
bigger today than it was 14 years ago,
but the majority of net share purchases
are now done by companies themselves
buying their own stock. An IPO this big
would represent a significant share of
the actual new investment into the
market, theoretically meaning that there
would be less investor dollars for
everything else. Now, that might be a
problem for the market, not open AAI,
but at the same time, there are other
big IPOs rumored from SpaceX and
potentially even Enthropic.
Collectively, these companies could
raise more money this year than the last
decade of IPO activity combined. That
cash has to come from somewhere. And the
fear is that the market just won't be
able to bear this much supply in such a
short period of time. According to the
Z1 accounts of financial activity, the
$450 billion that just these companies
could look to raise would be more than
the net buying activity seen in US
markets in a lot of years. And that's
ignoring every single other company that
people might want to invest in. If
OpenAI can't raise this cash, it will
put more question marks over its future
and proposed spending commitments. The
sheer size of these potential new public
companies is also raising another
concern, which is that large indexes
that track the stock market will have to
readjust to include them. Index funds
from companies like Vanguard, Black
Rockck, and State Street automatically
adjust their holdings to weight their
indexes proportionally to the value of
the companies within that index. The
most valuable companies in the world
today all started out as relatively
small cap stocks that just kept on
growing, giving these indexes time to
weigh them more heavily as they
gradually grew. If these three IPOs all
go ahead at their proposed values, they
would instantly jump close to the top of
these indexes, which could force these
large asset managers to sell down a lot
of other companies in order to correctly
weight their indexes to reflect the
market. Now, not to get too nerdy, but
if only 10% of these companies are
actively sold on the market, then most
indexes are float adjusted, meaning that
only 10% of the company would be counted
towards overall holdings. But even this
could present a major shakeup in a short
period of time. My good friend Ben Felix
actually spoke directly to Vanguard's
global head of investment implementation
in a podcast he did last year. So, if
you want to get really nerdy, they go
into a lot of the technical details
about how this could play out, and I
will leave a link to that in the
description below. Now, nobody really
knows exactly how these challenges will
play out, including the company
themselves. But unfortunately, the trend
is towards a majority of this risk being
dumped onto public investors or just the
public in general. If these companies
fail, they could bring down the market
with them. But if they succeed, it will
likely be because they were used to
displace a large share of the workforce.
If the uh optimistic outcome is a
majority of human work becoming
redundant, go and watch this video next
to find out why these very same tech
bros want you to have as many children
as possible. And don't forget to like
and subscribe to keep on learning how
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