Has OpenAI Become Too Big - and Financially Interconnected - To Fail?

The stock market - and to a great extent, the broader economy - have become dependent on AI. And specifically, two companies: Nvidia and OpenAI. True believers attempt to counteract concerns about concentration and overinvestment by claiming that the real problems are the mental midgets 'who just don't get it' - and are causing underinvestment given the epochal scale of joy and goodness AI portends. That the same arguments were heard before most crashes in history does not dissuade them, possibly because of plans - the greater fool theory - to unload their shares near the top to the unsuspecting. 

Nvidia's ostensibly mutually beneficial loans to its customers like OpenAI have already drawn unfavorable scrutiny. But OpenAI's own web/network of financially interconnected entities is now raising similar questions. This is because OpenAI is unprofitable and is not yet able to show a path to profitability (remember that, you dotcom veterans?). There are also uncomfortable questions being raised about the quality of its signature product - ChatGPT - when compared to competitors like Anthropic's Claude which is emerging as the genAI of choice among professionals who actually use such tools in their work. And the lender of last resort - eg, the US government - is already $30 trillion in debt thanks to the recent round of tax cuts. So yes, the markets are getting restless. JL

Tim Higgins reports in the Wall Street Journal:

OpenAI hasn’t yet turned a profit. Its annual revenue is 2% of Amazon’s sales. Its future is uncertain beyond the hope of ushering in a godlike AI that might help cure cancer and transform work and life as we know it. But what if the hype and hope around Chief Executive Sam Altman’s vision of the AI future fails to materialize? There’s real concern that through many complicated and murky tech deals bolstering OpenAI’s finances, the startup has become too big to fail. Microsoft, which will hold a 27% stake, saw its shares rise on the latest news, pushing its market value past $4 trillion. (Nvidia previously announced plans to invest $100 billion in OpenAI) The linkages between tech behemoths and the stock market’s dependence on them are notable. The lessons of the 2008 financial crisis weren’t just that the banks were too big to fail, they were too interconnected to fail.

Slowly then all at once, OpenAI became something of a juggernaut that’s hard to fully fathom.

It hasn’t yet turned a profit. Its annual revenue is 2% of Amazon.com’s sales. Its future is uncertain beyond the hope of ushering in a godlike artificial intelligence that might help cure cancer and transform work and life as we know it. Still, it is brimming with hope and excitement.

But what if OpenAI fails? 

There’s real concern that through many complicated and murky tech deals aimed at bolstering OpenAI’s finances, the startup has become too big to fail.

Or, put another way, if the hype and hope around Chief Executive Sam Altman’s vision of the AI future fails to materialize, it could create systemic risk to the part of the U.S. economy likely keeping us out of recession.

That’s rarefied air, especially for a startup. Few worried about what would happen if Pets.com failed in the dot-com boom.

We saw in 2008-09 with the bank rescues and the Chrysler and General Motors bailouts what happens in the U.S. when certain companies become too big to fail.

Altman—by design or happenstance—has engineered OpenAI’s rise to a $500 billion valuation just as the Trump administration has embraced its own policies of picking champions in the name of national defense and economic security.

The White House has been very vocal in efforts to protect AI development in the U.S., which is helping fuel what otherwise would be a much slower economy. More than that, some are betting that AI and robotics will be the salve to our nation’s debt troubles. 

“An economy that’s over $30 trillion in debt needs the productivity boost that AI is going to give us,” tech investor David Sacks said on social media years ago before becoming the White House AI czar.

Recent days have brought several reminders of how big and central OpenAI, founded in 2015 as a nonprofit, has become. 

Sen. Bernie Sanders (I., Vt.) said he thought OpenAI and its chatbot, ChatGPT, should be broken up—a remarkable statement considering the company is expected to generate just $13 billion this year.

“We need to take a deep breath and understand that it’s like a meteor coming to this planet—we gotta be prepared to deal with it in all of its complexity,” Sanders told Axios about AI.

 

Vermont Sen. Bernie Sanders says OpenAI and its chatbot, ChatGPT, should be broken up. Tom Williams/CQ Roll Call/Zuma Press

And, after a lengthy effort to reorganize itself, OpenAI announced moves that will allow it to have a simpler corporate structure. This will help it to raise money from private investors and, presumably, become a publicly traded company one day. Already, some are talking about how OpenAI might be the first trillion-dollar initial public offering.

In a blog post Tuesday, OpenAI Chair Bret Taylor marked the moment, declaring: “Built to benefit everyone.”

It’s the kind of altruistic talk Altman is known for as he predicts that superintelligent AI—or AGI—will help cure cancer and save humanity.

“I think AGI is probably necessary for humanity to survive—our problems seem too big to solve…without better tools,” Altman tweeted a few years ago.

Microsoft, which will hold a 27% stake, saw its shares rise on the latest news, pushing its market value past $4 trillion. (Later in the week, Nvidia, which had previously announced plans to invest $100 billion into OpenAI, became the first $5 trillion company.) 

The linkages between these tech behemoths and the stock market’s dependence on them are notable. The lessons of the financial crisis earlier this century weren’t just that the banks were too big to fail, they were too interconnected to fail.

 

The big financial institutions were intertwined by a web of complex financial instruments and vehicles that threatened to bring down the U.S. system as certain players teetered toward collapse. This led the U.S. government to step in with a bailout package as well as take other unusual measures.   

Nobody is saying OpenAI is dabbling in anything like liar loans or subprime mortgages. But the startup is engaging in complex deals with the key tech-industry pillars, the sorts of companies making the guts of the AI computing revolution, such as chips and Ethernet cables.

Microsoft CEO Satya Nadella, in glasses, with OpenAI CEO Sam Altman in San Francisco. Justin Sullivan/Getty Images

Those companies, including Nvidia and Oracle, are partnering with OpenAI, which in turn is committing to make big purchases in coming years as part of its growth ambitions.

Supporters would argue it is just savvy dealmaking. A company like Nvidia, for example, is putting money into a market-making startup while OpenAI is using the lofty value of its private equity to acquire physical assets.

They’re rooting for OpenAI as a once-in-a-generational chance to unseat the winners of the last tech cycles. After all, for some, OpenAI is the next Apple, Facebook, Google and Tesla wrapped up in one. It is akin to a company with limitless potential to disrupt the smartphone market, create its own social-media network, replace the search engine, usher in a robot future and reshape nearly every business and industry.

 

“I think the industry is underrating and underinvesting given the scale,” Microsoft AI CEO Mustafa Suleyman told me the other day during our appearance at a Paley Center for Media event in Menlo Park, Calif. 

Suleyman was sidestepping concerns raised about OpenAI becoming too big to fail. Instead, he painted a more optimistic picture, pointing to how investments in AI have already shown “truly exponential improvement in capabilities” and saying that future spending will “drive incredible improvements in capabilities.” The sort of capabilities, he added, that will upend “basically every industry.” 

To others, however, OpenAI is something akin to tulip mania, the harbinger of the Great Depression, or the next dot-com bubble. Or worse, they see, a jobs killer and mad scientist intent on making Frankenstein.

But that’s counting on OpenAI’s success.