Transcript
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Fees extra c mintmobile.com run a business and not thinking about podcasting? Think again. More Americans listen to podcasts than ad supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. Learn how podcasting can help your business. Call 844-844-IHeart.
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Hi there, this is Josh Clark from the Stuff you Should Know podcast. If you've been thinking, man alive, I could go for some good true crime podcast episodes, then have we got good news for you.
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Stick.
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Stuff youf Should Know just released a playlist of 12 of our best true crime episodes of all time. There's a shootout in broad daylight, people using axes in really terrible ways. Disappearances, legendary heists, the whole nine yards. So check out the Stuff youf Should Know True crime Playlist on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.
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People called them murderers. Ten years later, they were gods. Today, no one knows their names. A group of maverick surgeons who took on the medical establishment who risked everything to invent open heart surgery. Welcome to the Wild west of American medicine. I'm Chris Pine and this is Cardiac Cowboys. If you like medical dramas, if you like heart pounding thrillers, you will love Cardiac Cowboys. Listen on the iHeartRadio app or wherever you listen to podcasts sponsored by Jasper AI Built for marketers, Co Zone Media. Hello and welcome to Better Offline. I'm of course your host at Zitron. We're in the third episode of our four part series where I give you a comprehensive explanation as to the origins of the AI bubble, the mythology sustaining it, and why it's destined to end really, really badly. Now, if you're jumping in now, please start from the very beginning. The reason why this is a four parter, my first ever, is because I want it to be comprehensive and because this is a very big subject with a lot of moving parts and even more bullshit. A few weeks ago I published a premium newsletter that explained how everybody is losing money on generative AI, in part because the costs of running AI models is increasing, and in part because the software itself doesn't do enough to warrant the costs associated with running them, which are already subsidized and unprofitable model providers. Outside of OpenAI and to a lesser extent Anthropic, nobody seems to be making much revenue, with the most successful company being AnySphere, makers of AI coding tool Cursor, which hit $500 million of annualized so 41.6 million in one month. A few months ago, just before Anthropic and OpenAI jacked up the prices for priority processing on enterprise queries, raising their operating costs as a result. In any case, that's some piss poor revenue for an industry that's meant to be the future of software. Smartwatches are projected to make $32 billion and as I've mentioned in the past, the Magnificent Seven expect to make $35 billion or so in revenue from AI this year, and I think in total when you throw in Core, even all them, it's barely $55 billion in total. Even Anthropic and OpenAI seem a little lethargic, both burning billions of dollars while making by my estimates no more than $2 billion in Anthropic's case this year so far, and $6.626 billion in 2025 so far for OpenAI, despite projections of $5 billion and $13 billion respectively Outside of these two, AI startups are floundering, struggling to stay alive and raising money in several hundred million dollar bursts as their negative gross margin businesses flounder. As I dug into a few months ago, I could find only 12 AI powered companies making more than $8.3 million a month, with two of them slightly improving their revenue. Specifically AI search company Perplexity, which is now here $150 million in AR in or $12.5 million a month, and AI coding startup rePlayer, which has hit the same amount. Both of these companies burn ridiculous amounts of Money. Perplexity burned 164% of its revenue on Amazon Web Services, OpenAI and Anthropic last year, and while Replit hasn't leaked its costs, the information reports its gross margins in July were 23%, which doesn't include the cost of its free users, which you simply have to do with LLMs as free users are capable of costing you a shit ton of money and some of you might say that's how they do IT in software. Well, guess what? Software doesn't usually connect you to a model that can burn, I don't know, 10 cents, 20 cents every time they touch it. Which may not seem like much, but when you're making free dollars on someone and they don't convert, it does. Problematically, your paid users also cost you more than they bring in as well. In fact, every user loses you money in Generative AI because it's impossible to do cost control in a consistent manner. A few months ago I did a piece non anthropic losing money on every single Claude code subscriber. And now I'm going to walk you through a the whole story in a simplified fashion because it's quite important. So Claude code is a coding environment that people used, or I should really say try to use, to build software using generative AI. It's available as part of Anthropic's $20, $100 and $200 a month Claude subscriptions, with the more expensive subscriptions having more generous rate limits. Generally, these subscriptions are all you can eat. You can use them as much as you want until you hit limits, rather than paying for the actual tokens you burn. When I say burn tokens and someone saying I should specify this, I'm describing how these models are traditionally built. In general, you're billed at a dollar per million input tokens, as in user feeding in data and output tokens, the output created so you wouldn't get one token build, so every million you get charged. So for example, Anthropic charges $3 per million input tokens and 6 million per output tokens to use its Claude Sonnet 4 model. And it's about, I think, well, a word before tokens. I should really look that up. It's. It also gets more complex as you get into things like generating code. Nevertheless, CLAUDE code has been quite popular and a user created a program called CC Usage which allowed you to see your token burn. The amount of tokens you were using, you were actually burning using Anthropic's models while using CLAUDE code versus just getting charged a month and not knowing. And many were seeing that they were burning in excess of their monthly spend. To be clear, this is the token price based on Anthropic's own pricing, and thus the cost to Anthropic are likely not identical. So I got a little clever. Using Anthropic's gross profit margins, I chose 55%. And then a few weeks after my article 60% was leaked, I found at least 20 different accounts of people costing anthropic anywhere from 130% to 3,084% of their subscription. There is also now a leaderboard called Vibranc where people compete to see how much they burn with the current leader burning. And I shit you not, $51,291 over the course of a month. Anthropic is, to be clear, the second largest model developer and has some of the best AI talent in the industry. It has a better handle on its infrastructure than anyone outside of big tech and OpenAI, and it still cannot seem to fix this problem, even with weekly rate limits brought in at the end of August. While one could assume that Anthropic is simply letting users run wild, my theory is far simpler. Even the model developers have no real way of limiting user activity, likely due to the architecture of generative AI. I know it sounds insane, but at the most advanced level, even there model providers are still prompting their models and whatever rate limits may be in place appear to at times get completely ignored. And there doesn't seem to be anything they can do to stop it now. Really? Anthropic counts amongst its capitalist apex predators one lone Chinese man who spent $50,000 of their compute in the space of a month fucking around with clawed code. Even if Anthropic was profitable, it isn't and will burn billions of dollars. This year, a customer paying $200 a month ran up 50,000 dol thousand dollars in costs, immediately devouring the margin of any user running the service that day, that week, or even that month. Even if Anthropic's costs are half the published rates, they're not. By the way, one guy amounted to 125 users worth of monthly revenue. This is not a real business. That's a bad business with out of control costs. And it doesn't appear anybody has these costs under control. And faced with the grim reality ahead of them, these companies are trying nasty little tricks on their customers to juice more revenue from them. A few weeks ago, replit, an unprofitable AI coding company, released a product called Agent 3, which promised to be 10 times more autonomous and offer infinitely more possibilities. Testing and fixing its code, constantly improving your application behind the scenes in a reflection loop. Sounds very real. Sounds extremely real. It's so real. But actually it isn't. In reality, this means you'd go and tell the model to build something and it would go and do it. And you'll be shocked to hear that these models can't be relied upon to go and do anything. Please Note that this was launched a few months after Replit raised their prices, shifting to obfuscated effort based pricing that would charge the full scope of the agent's work. And if you're wondering what the fuck that means, so are their customers. Agent 3 has been a disaster. Users found the tasks that previously cost a few dollars were spiraling into the hundreds of dollars with the Register reporting one customer found themselves with a thousand dollar bill after a week and I quote them. I think it's just launch pricing adjustment. Some tasks on new apps ran over an hour and 45 minutes and only charged 4 to $6. Existing app seems to cost most overall. I spent 1k this week alone and they told that to the register. By the way, another user complained that costs skyrocketed without any concrete results and they quote the register here. I typically spent between $100 and $250 a month. I blew through $70 in a night at Agent 3 launch and another editor wrote alleging the new tool also performed some questionable actions. One prompt brute forced its way through authentication, redoing auth and hard resetting a user's password to what it wanted to perform app testing on a form the user wrote. I realize that's nonsensical, but long story short, it did a bunch of shit it wasn't asked to. As I previously reported in late May early June, both OpenAI and Anthropic cranked up the pricing on their enterprise customers, leading Replit and Cursor both shifting their prices upward. This abuse has now trickled down to their customers. Relet has now released an update that lets you choose how autonomous you want Agent 3 to be, which is a tacit admission that you can't trust coding LLMs to build software. REPL DOT's users are still pissed off, complaining that Relet is charging them for an activity when the agent doesn't do anything, a consistent problem I found across Redditors. While Reddit is not the full summation of all users of every company everywhere, it's a fairly good barometer of user sentiment. And man are users pissy. And now here's here's where this is bad. Traditionally, Silicon Valley startups have relied upon the same model of grow really fast and burn a bunch of money, then turn the profit lever. AI does not have a profit lever because the raw costs of providing access to AI models are so high and they're only increasing that the basic economics of how the tech industry sells software don't make sense.