The business of selling access to AI models is becoming increasingly precarious due to competitive price dumping. Aidan Gomez, CEO of AI provider Cohere, explains that it has become a “zero margin business” as companies like OpenAI, Anthropic, Google, and Cohere face the challenge of offering API access to their AI models. While the demand for this technology is growing rapidly, the margins are tight due to free or heavily discounted offerings from competitors.
One strategy for improving AI models is adding more compute power, which requires significant investment in hardware from companies like Nvidia. However, there is also a race to the bottom in terms of pricing. OpenAI and Google have slashed prices to retain users, while Meta’s open source models are freely available to license. This competition has led to excitement at the application layer, with companies like OpenAI offering subscription services like ChatGPT for $20 a month.
Currently, AI models are not profitable and often result in significant losses. While large tech companies like Microsoft and Google can absorb these losses, startups are at a disadvantage. Cohere is one of the few remaining startups developing cutting-edge AI models, alongside OpenAI, Anthropic, and Mistral. Many other startups in this space have been acquired by cloud providers, leaving behind an unprofitable business model while preserving their technology.
However, becoming a subsidiary of a cloud provider can be risky for startups. Venture capitalists seek a return on their investment, while cloud providers may have different motivations. Gomez warns that it is not good business to make oneself dependent on a cloud provider.
The future of these AI startups is uncertain, as there is no guarantee that innovations in model architecture, data efficiencies, or computing power will result in significant returns. Some startups may not survive long enough to see the potential rewards. The landscape is challenging, but Cohere believes that products could be a viable revenue stream until the AI models become profitable.
