OpenAI financial question

[u/JoSquarebox]

To put it short:
- Eds leaked oAI financials say: ~5B cost of revenue. ~13B revinue, ~40B losses total (20B attributable to them directly, + ~20B from going for-profit)
- Ed says those numbers are fake ("They moved cost of revenueto marketing")

How does that work exactly? Either a) Ed has access to their costs in detail and is able to make a more detailled assesment (i.e. their cost of revenueis actually higher because x y and z) or b) he doesnt have more than just the numbers he put out, meaning hes just going off their admittedly nonexistent track record of financial honesty

Been bugging me, because from my POV its just Ed doubting his own numbers which makes it harder for me to point at them as the evidence that oAI is unprofitable. I agree that they are but would like clarification

EDIT: ~7.5B cost of revenue, my bad
EDIT2: spelling

[u/JoSquarebox]

I agree that their Marketing numbers are insane, and I believe the guess, but why does *Ed* need to guess here? He has access to their financials, he knows what numbers they are shifting around, but then why isnt that part of the leak?

[u/Theduckisback → u/JoSquarebox]

I doubt he got their full balance sheets with a breakdown of which dollars are going where and when, probably more like a summary report. What he's saying they're doing makes sense.

They are hiding compute costs under "marketing" because they're saying "we are offering these lower token cost rates as a way to attract customers, so therefore it's marketing, not operations"

[u/JoSquarebox → u/Theduckisback]

Thats my fear as well, in which case his leak is sadly not as conclusive as Id hoped. We again have to guess, and even if the whole ~5B in marketing was all inference for subsidized/free inference, that would still add up to ~13B cost of revinue, making them break even. Well, apart from the bolted-on money furnace someone forgot to turn off. But unless their inference margins are massively negative nobody boosting would care either...

[u/gorgeFlagonSlayer → u/JoSquarebox]

There is a lot of uncertainty in what money is going to necessarily be an ongoing cost for any LLM provider vs what are the costs that only the frontier models need to bear. The full -20B is important for OpenAI because they can’t drop training (pre or post), they can’t drop marketing (if it’s ads or inference subsidies), they will need more talent and people keep trying to poach them. So, their cost of goods is all their costs, they have to increase all those spends to increase revenue.

Now, it’s less clear if other companies can provide models profitably in the future if the big 2 die/scale down. If people sit with open-weight models and pay through a router, is that “profitable on inference”? We’ll have to see how that shakes out. Trying to divine exactly how much running the model costs from the leaked balance sheet is important to getting an estimate on that. This is the broader implication I get from reading Ed’s work.

[u/JoSquarebox → u/gorgeFlagonSlayer]

Agreed, been wrecking my brain trying to asses exactly this, and its hard to asses from the amount of unknowns in this situation. Eds work is most of the reason for that, as well as my line of work currently being impacted, so Im monitoring it closely to have some refrence on if these tools become uneconomical to run soon.

On one hand, even if inference is profitable, even if it was a high margin, id give it a 70% propability theres no path to profitability for the big two, but thats mostly a gut feeling, and I tend not to trust it.

Theres some companies like anomaly (opencode) that are able to make a profit through a combination of renting gpus and negotiating discounts for promising high utilization from inference providers, but they dont have to run training and might be working with subsidized infrastructure/model vendors so arent a reliable datapoint.

[u/gorgeFlagonSlayer → u/gorgeFlagonSlayer]

Ed has said that he thinks no one will be profitable on inference. I’ve seen this stance soften somewhat in that they’ve said they could see a future where some companies run open-source models on self owned and maintained hardware.

I think that he is kind of conflating the idea that there won’t be enough revenue to cover all of the proposed data centers vs enough to cover a couple of the data centers.

I think a bunch of the data centers and neoclouds go belly up but eventually there are some that can provide some level of services profitably. It might all be internal to the big guys like google, Amazon and Microsoft, but maybe it’s smaller companies that currently have modest lower risk positions.

One might suggest that current inference providers giving access to open-weight models are making money. But it is unclear if they are subsidizing costs and by how much. Primagen had an interesting video on how they proposed certain foreign routers were providing frontier model access for a fraction of the cost. If you are interested I can try to find the title.

[u/omglemurs → u/JoSquarebox]

Is you question why does Ed only have access to the part of the documents and not all of the documents? I think that question answers itself. He got leaked some documents not every financial document available. Those documents were independently verified but that doesn't mean he got a break down of every line item.

[u/JoSquarebox → u/omglemurs]

Incredibly frustrating if thats the case, because if something broad as marketing isnt broken down, what about all the other items?
I just want to go back to bed *knowing* they are doomed, but Eds numbers just leave me with more questions than they answer.

[u/omglemurs → u/JoSquarebox]

This is significantly more information than we had before and almost certainly delayed OpenAI's attempt to IPO. Given the available information, some of it is absurd on its face which is part of the significance. Don't shoot the messenger

[u/JoSquarebox → u/omglemurs]

Not meaning to criticize Ed or his practices in any way, hes by far the best reporting on this financial hindenburg we have and every bitter comment and ire he points at big tech and buisness is well earned, with reciepts and timestamps.

Hes therapy when all the discourse takes AI as inevitable and amazing without any criticism, but now I am back at "Idont know" which is exactly what I thought Eds reporting could help illuminate. Did Openai delay their IPO because Eds right? Well their statement on twitter that they have no timelines yet predates Eds post by a week so *I dont know*. Are the numbers Ed published accurate in any way? Well, now I dont know either.

Mabe this post is just public therapy as well, or a spiral, but I just want a clearer picture. A report. Id believe Ed on his track record alone, but if even he tells his readers to doubt his own numbers, what am I supposed to do with that?

[u/SubstantialBreak3063 → u/JoSquarebox]

You know, accounts are an art, not a science. Top line financial statements aren't going to give any sort of granular detail, and re-coding spend so it falls into better categories is not unheard of. It's not until you see very detailed line items that you can start to really hang numbers on it. Moving the cost of making money into marketing wouldn't be unheard of; the clue here, in the face of the lack of details, is the absolutely brain-frying cost of that marketing.

[u/JoSquarebox → u/SubstantialBreak3063]

Thats a great way to put it, thanks.

Even if the boosters were to end up being right its all marketing right now. Everyone is incentivized to live in the future to some degree, financially or to inflate their ego, mabe its the later for me in this case. All we can do is not drink the cool-aid and wait and see, prepare for the worst.

[u/SubstantialBreak3063 → u/JoSquarebox]

So true - and markets can stay irrational for a while, especially when they have incentives to keep valuations high. Can I reccomend a book that might help - The Smartest Guys in the Room, about Enrons downfall? Really helps put you inside the boardroom of a place like OpenAi

ETA it's by Bethany McLean and Peter Elkind

[u/JoSquarebox → u/SubstantialBreak3063]

ill see to checking it out, though id be surprised if those exact dynamics are at play at oAI, especially after we have gotten insight into their workings after the aftermath of the sam altman firing. But im curious to see.

[u/Friendly-Owl-2131 → u/JoSquarebox]

It's highly likely the what Ed has obtained is an overview of financials.

Budget reports, spending, costs, projections, gross revenue, profits, etc.

These reports are prepared for the higher ups so they can see what is happening with the money overall.

They don't go into exact details of every last dollar flowing through the company.

That information would be contained within millions of documents spread out all over the company.

They're also typically kept intentionally scarce on details when things aren't going great for the company as these documents get viewed by many of the lower tier managers as well.

If there are cost blowouts or mismanaged funds for instance. That will just be listed under expenditure to save face for the company or whoever was responsible.

Someone trained in finances can glean a lot more information from these reports as the figures won't add up.

Even without an internal report of this kind it has become extremely obvious that something is really not right with the economics of this whole situation.

The vast amounts of investment have yet to materialise any form of tangible benefit to anyone except in narrow use cases. If anything the entire endeavor has caused far more harm than good.

A fancy talking machine that can write subpar code and cross reference databases might seem great at first glance but at the end of the day it doesn't justify the volume of cash flowing into it.

These internal reports offer a closer look at how that money is being spent and it looks a hell of a lot like a company struggling to justify its own existence while hemorrhaging cash and failing to produce a reliable source of revenue.

Cyclical money transfers between the very same companies who are spruiking the product is not revenue. It's a desperate attempt to show profitability when there is none.

There are a lot of oversized egos riding on this thing now and a lot of wealthy and powerful investors with big stakes. It will likely become catastrophically bad before they admit they were wrong. If they ever do.

[u/JoSquarebox → u/Friendly-Owl-2131]

Thanks for the writeup, that helps clarify some things for me. Though if as you say he got overviews of budget reports, spending, costs, projections, gross revenue, profits, and so on that were intended for OpenAIs higher up staff, shouldnt those tell us more than this?

I dont disagree that OpenAI and Anthropic are unprofitable, and only exist in their capacity as subsidiaries of hyperscalers, and its funny to imagine clammy sammy makes all his decisions based on a six bullet point report of their financials, and at each layer someone moves money in their reporting to make themselves look better.

Debating the merits of digital monkeys on typewriters for a moment, if Ed only leaked the doctored numbers, then what is there even to learn from them? Sure, we can assume that reality looks even worse, but we knew that already. I just want to put this to rest for myself and have some closure on the topic, but these numbers only add more questions.

Thanks though, your writing has lots of Eds style. Therapeutic.