OpenAI has become one of the biggest names in tech today, with a valuation of $157 billion, putting it in the same league as established giants like AT&T, Goldman Sachs, and Uber. Yet, despite this jaw-dropping valuation, the company isn’t profitable. Should this be considered the new norm in the tech world?
Founded in 2015 by a group of innovators including Elon Musk and Sam Altman, OpenAI has since revolutionised artificial intelligence (AI) with its flagship product, ChatGPT. Since its launch in 2022, ChatGPT has amassed a massive user base of 250 million weekly users and 11 million paid subscribers. OpenAI is backed by major investors like Microsoft ($13 billion), Nvidia ($100 million), and SoftBank ($1.5 billion). Despite its immense popularity and major backing, the company faces a significant hurdle: it’s projected to lose $5 billion in 2024.
This raises a key question: Can OpenAI, and similar companies, justify their sky-high valuations when they’re not yet profitable?
OpenAI’s Growth vs Profitability: What’s Really Going On?
OpenAI’s Financials
While OpenAI’s financial losses have been alarming, it’s not the only tech company to face this situation. The company’s $200-per-month Pro subscriptions are meant to help offset its operating costs. However, CEO Sam Altman has admitted that the company isn’t making money from this offering, despite the overwhelming demand for it. OpenAI’s most significant expenses come from the energy costs of powering the supercomputers that run its AI models.
To make matters more complicated, OpenAI is evolving its corporate structure, moving away from its nonprofit status to become a more investor-driven company with potential stock shares. In Altman’s words, “We once again need to raise more capital than we’d imagined.” Investors are willing to buy into OpenAI’s future potential, but how long can this continue before profitability becomes a concern?
The Pricing Dilemma: Will OpenAI Ever Get the Pricing Right?
OpenAI’s CEO revealed that the company experimented with pricing for ChatGPT Plus, trying both $20 and $42 price points. Altman explained that the $42 price tag didn’t resonate with users, so they settled on the lower figure. It’s a reminder that OpenAI doesn’t have the perfect pricing strategy yet, despite its huge customer base.
Altman himself has stated that he’s reluctant to adopt a usage-based pricing model for ChatGPT, despite many customers requesting it. His reasoning is based on a personal dislike of the early days of the internet when users were constrained by data limits—something he doesn’t want for OpenAI’s products. While this decision is understandable from a consumer-centric perspective, as the CEO of an unprofitable company, Altman must consider the financial sustainability of such an approach.
Should OpenAI be taking more rigorous steps in testing their pricing structure, or is this laissez-faire approach an example of the challenges that come with being the first in a new and disruptive market?
Unprofitable Unicorns: Why Is This a Tech Industry Trend?
It’s becoming increasingly common to see highly-valued tech startups like OpenAI remain unprofitable for years. The trend of tech companies being valued based on their disruptive potential rather than short-term profits is nothing new.
Take Lyft, for instance. In 2019, it was valued at $24 billion despite posting no profits. It wasn’t until recently that it started reporting a profit. Uber also struggled for years before becoming profitable. Similarly, Snapchat, despite being valued at $24 billion when it went public in 2017, still hasn’t turned an annual profit. Even Tesla, the electric vehicle giant, took 18 years to report its first profitable year. The key takeaway? These companies were recognised not just for their current financials, but for their long-term potential to reshape their industries.
For investors, the belief is that companies like OpenAI could generate massive returns once they figure out the right business model, as AI continues to evolve. If a company can fundamentally change the way industries operate, then its current losses are seen as a temporary hurdle. In essence, OpenAI might not need to make money today to justify its valuation—it’s all about what it can do tomorrow.
Why OpenAI’s Unprofitability Isn’t an Immediate Red Flag
While many companies in the tech space have taken years to turn a profit, the biggest question for OpenAI is how long it can continue to operate in the red. Investors seem to be betting on OpenAI’s future, which suggests a long-term strategy that banks on disruptive innovation. The AI revolution is underway, and with ChatGPT and other tools, OpenAI is leading the charge.
However, the problem with unprofitable companies is that their losses can eventually catch up with them. Altman’s comments about the pricing structure suggest that OpenAI may not be making the tough decisions needed to make its products financially viable. At some point, investor patience will wear thin unless the company can demonstrate that its current investments will pay off.
The Economic Impact of OpenAI: Automation and Job Losses
Another concern surrounding OpenAI’s growth is the wider impact on the economy. The rise of AI and automation has already started reshaping the job market. According to The World Economic Forum, 41% of companies are planning to downsize their workforces over the next five years, driven by automation. Professions like graphic design, cashiers, and secretarial work are already being displaced by AI, potentially causing significant disruption in traditional industries.
While these advancements could create new opportunities in fields like AI research and development, the short-term disruption could lead to widespread job losses. The question is: can OpenAI balance its growth with a responsible approach to job displacement?
Should We Be Concerned About OpenAI’s Future?
In the case of OpenAI, unprofitability might be something that investors are willing to overlook for now. The company is at the forefront of AI innovation, and its products could revolutionise entire industries. However, the unprofitable business model might not hold forever. If OpenAI cannot find a sustainable path to profitability, it risks losing investor confidence and, ultimately, its valuation.
The future of tech companies like OpenAI is unclear. But one thing is for sure: they need to find ways to make their groundbreaking technology financially sustainable. Until then, OpenAI’s investors are gambling on the promise of innovation over immediate returns.
Photo credit: CNBC
