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AI's economics don't make sense

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Re: AI's economics don't make sense

#171

Post by BosunoB »

csande17 wrote: post #95
BosunoB wrote: post #77

All subscription models are subsidized by users who don't use much. The fact that somebody on a $20 sub might get $50 in value isn't crazy if there are 3 people who only get $10 in value. This isn't some sign that the model is broken, it's the intended outcome. Also, I didn't read this whole thing, but I have yet to see Zitron respond to the strongest AI financials claim, which is that the models themselves are profi…

Zitron has responded to that claim here: https://www.wheresyoured.at/ai-is-really-weird/#does-anthrop... The TL;DR is that Dario likes to talk about imaginary/hypothetical companies a lot in interviews, and those companies' financials don't have a direct basis in reality.

Thanks for the link. There's not much of an argument here from Ed, though, besides that it's an unusual way to view or report margins.

But it's not that unusual, right? If I build a house this year and sell it next year, the house might still be profitable even if next year I'm building 3 more houses, so the company as a whole is still in the red on an annual basis.

I mean, I'm not a financial expert but that doesn't seem all that unusual to me.

Re: AI's economics don't make sense

#172

Post by Balinares »

joshjob42 wrote: post #10

There's a few major problems with the article. The most obvious is that frontier labs are not charging remotely close to the cost of tokens; afaik most estimate north of 80% profit margins. As a reference, providers are profitably providing Kimi K2.6 for $4/1Mtok out. Is that as good as Opus? No, but it's probably at least Sonnet level, so that's ~4x cheaper than Sonnet while still being profitable to serve on the ma…

> providers are profitably providing Kimi K2.6 for $4/1Mtok out.

Do you perchance have a source for this? Is the profitability assessment comprehensive, including hardware amortization? I've found it hard to track down actual hard numbers for the cost of inference.

Re: AI's economics don't make sense

#173

Post by mike_hearn »

jcgrillo wrote: post #142
mrandish wrote: post #115

Earlier quoted context omitted.

I've only read a few of his pieces here and there and had just assumed he was an AI skeptic, so I never thought his position was LLMs would never be good for anything at any price. That's a pretty extreme thing for any serious person to have ever claimed. Frankly, it seems more like a straw man exaggeration of AI skepticism. I consider myself to generally be an AI skeptic, but to me that means skepticism about: 1) Ne…

But are there any viable AI products ? That's, I think, the root of his claim that it won't ever be good for anything. So far I have yet to hear of a really good, successful AI product. Coding tools arguably kind of work, but that's a pretty small addressable market, and it's still quite unclear whether any of them are viable long-term commercial bets. If you can get good results with Qwen 3.6-27B and Opencode what g…

What are you defining as good and successful?? ChatGPT has 800M+ WAU, that seems pretty good and successful to me (not financially but they have time).

AI companies aren't selling coding tools. Claude Code is not a coding tool! It's a tool that does coding, which is subtly different. The total addressable market for a coding tool is all developers, which is maybe 25-30M people worldwide, the total addressable market for people who need code written is potentially around a few billion or so, maybe more.

Re: AI's economics don't make sense

#174

Post by csande17 »

BosunoB wrote: post #171
csande17 wrote: post #95

Earlier quoted context omitted.

Zitron has responded to that claim here: https://www.wheresyoured.at/ai-is-really-weird/#does-anthrop... The TL;DR is that Dario likes to talk about imaginary/hypothetical companies a lot in interviews, and those companies' financials don't have a direct basis in reality.

Thanks for the link. There's not much of an argument here from Ed, though, besides that it's an unusual way to view or report margins. But it's not that unusual, right? If I build a house this year and sell it next year, the house might still be profitable even if next year I'm building 3 more houses, so the company as a whole is still in the red on an annual basis. I mean, I'm not a financial expert but that doesn't…

The first part of the argument is just noticing that Dario is carefully avoiding making factual claims about Anthropic. Like, if the bank asked you if your construction company was profitable, would it be acceptable to respond: "Well, hypothetically, if a construction company sold houses for more than it cost to build them, that company could be considered profitable. It is possible to imagine a stylized model of a construction company that is theoretically profitable."? If the real, non-hypothetical company that Dario runs has financial results which support this argument, he should probably say them more often.

The second prong of the argument is basically that, when you invest in Anthropic, you can't just invest in one model and then collect the profits from that model. You're investing in a whole company in the hopes that they can be profitable overall; at some point they'll need to stop spending so much money on training and give it back to the investors instead. Zitron argues that this isn't going to happen because training is actually something that companies need to do to retain customers at all. An analogy here might be the fact that Microsoft has to spend a certain amount of "R&D" budget fixing security vulnerabilities in Windows Server just to retain their current customer base; if attackers found out about a serious security hole but Microsoft didn't fix it, everyone would need to stop using Windows Server. LLM companies do the same kind of thing to fix "jailbreaks" and other unexpected model behaviors.

The third prong of the argument is that, in general, there's a long history of companies using creative accounting to try and make themselves look profitable and then collapsing because they're not actually profitable. For example, WeWork's "community-adjusted EBIDTA" figured claimed the company was profitable using very similar arguments to Dario, and then the company went bankrupt. If you're already cooking the numbers, you have almost arbitrary flexibility to report whatever "margins" you want by excluding some of your costs from the calculation.

Re: AI's economics don't make sense

#175

Post by mike_hearn »

Yizahi wrote: post #146
GardenLetter27 wrote: post #49

Earlier quoted context omitted.

The price of everything will go down. That is the beauty of the free market.

In the absolutely free market price will go up a lot in the end. Because only one monopoly will exist by that time and it will jack up prices to the maximum tolerable level. And that level can be surprisingly high, because in every human activity there will be few willing to spend crazy amounts of money for practically anything they perceive valuable.

This kind of argument relies on odd definitions of "truly free" that boil down to anarchism, which isn't what anyone who advocates for a free market means.

Re: AI's economics don't make sense

#176

Post by Yizahi »

mike_hearn wrote: post #175
Yizahi wrote: post #146

Earlier quoted context omitted.

In the absolutely free market price will go up a lot in the end. Because only one monopoly will exist by that time and it will jack up prices to the maximum tolerable level. And that level can be surprisingly high, because in every human activity there will be few willing to spend crazy amounts of money for practically anything they perceive valuable.

This kind of argument relies on odd definitions of "truly free" that boil down to anarchism, which isn't what anyone who advocates for a free market means.

So what does free market mean then?

Re: AI's economics don't make sense

#177

Post by vidarh »

ToucanLoucan wrote: post #36
vidarh wrote: post #26

Earlier quoted context omitted.

By your numbers, it'd be $120/day per developer * 5 million = $600m per day , not per year. Of course people don't work every day, but even with European-level holidays that number is off by a factor of 240 or so.

Quite right, honestly not sure how I fucked that up so bad but I'll own it. Okay so all we need is every coder + 0.6 million more or so in the United States, subscribed to this for 8 hours a day, and the business model can work. That still feels incredibly optimistic given how split the community at large seems to be about how good this tech is, and it assumes all those developers also all work for firms large enough…

My fiancees company has no developers, yet everyone has a paid subscription to LLMs. Certainly not $15/hour, and I don't think it's likely they'll ever pay that for everyone, but I don't find it hard to picture the aggregate cost of subscriptions on a global basis to far exceed $600m/day between far more people on subscriptions cheaper than $15/hour but more expensive than today, and companies ending up paying far more than $15/hour averaged over their developers for additional use. E.g. I already run agents 24/7 just for me. I couldn't yet justify $15/hour, but the amounts I'm spending is steadily increasing as I manage to squeeze returns from more and more things.

Sure, it's back of napkin math, and I also think that several of the companies we see today won't survive and/or will only survive due to consolidation, but I also think the spend is going to be immense.

With respect to the datacentres, I expect we'll see inference costs crash over the coming years - we're only seeing the beginning of what dedicated ASICs will do to inference, and what work to make models more efficient will do to the need for the very largest models, and while that might drive down the spend on individual subscriptions, I think it will drive up the total spend dramatically as cheaper models become capable enough to put them "everywhere".

But, yeah, ultimately we're guessing. I'm happy to put my guesses on the record, though, and look forward to look back and see how wrong I got it in a couple of years.

Re: AI's economics don't make sense

#178

Post by mike_hearn »

Yizahi wrote: post #176
mike_hearn wrote: post #175

Earlier quoted context omitted.

This kind of argument relies on odd definitions of "truly free" that boil down to anarchism, which isn't what anyone who advocates for a free market means.

So what does free market mean then?

To me at least, it means a market in which the basic rules of commerce are enforced but beyond that the government doesn't micromanage. For example, contracts are enforced, there's some basic truth in advertising laws, there's a trustworthy currency available, and all the other basics of civilization like "your competitor isn't allowed to murder you".

It's obviously a fuzzy scale.

In a free market like that it's not guaranteed that everything ends in monopoly. Actually mostly it won't. Monopolies that do occur are due to high costs of entry and are usually temporary.

Re: AI's economics don't make sense

#179

Post by maplethorpe »

margalabargala wrote: post #152
maplethorpe wrote: post #147

Earlier quoted context omitted.

Can you summarise? I only reached your comment after scrolling past all the others and I still don't have the answer. Is the new data that models are more useful for coding than they once were?

That sounds like a reading comprehension skill issue? In which case I don't see why me summarizing would move the needle. But if it helps, no, the data being discussed is surrounding the economics of running inference and R&D, nothing to do with the utility of models for coding.

Yours is the first from the top to mention this. You might want to consider the physical location of your comment before telling people to read the thread. We could do without the rudeness, too.

Re: AI's economics don't make sense

#180

Post by Yizahi »

mike_hearn wrote: post #178
Yizahi wrote: post #176

Earlier quoted context omitted.

So what does free market mean then?

To me at least, it means a market in which the basic rules of commerce are enforced but beyond that the government doesn't micromanage. For example, contracts are enforced, there's some basic truth in advertising laws, there's a trustworthy currency available, and all the other basics of civilization like "your competitor isn't allowed to murder you". It's obviously a fuzzy scale. In a free market like that it's not…

In the market you have described we will inevitably end with a monopoly in everything, simply because you didn't mention anything preventing that. To avoid monopoly a much more micromanaging government is required. At minimum we would need a specialized bureaucracy department investigating monopolies, an advanced legislative and judicial systems enforcing such laws, a lot of regulation regarding common social good (e.g. you can't just undercut competitors by selling poisonous shit, and you can't just bribe law enforcement to do the same), we would need an overreaching borders/customs/tariffs to block companies from countries not concerned about selling poisonous shit to undercut foreign competitors. And the list goes on.

Basically free market advocates fail to see more that a single step in the complex web of dependencies, which tries to prevent neo-feudal monopolization of everything by unchecked, unelected and being above most laws and taxes, robber barons.

I dislike unnecessary bureaucracy and excessive government control as much as anyone, I was born in the authoritarian USSR after all and I do study history. But I fear neo-feudalism even more. I certainly have zero self-delusions about being in a "ruling class" in that potential free market dystopia.

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