AI Industry Red & Yellow Flags
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There have been a number of red and yellow flags for AI companies and the AI industry lately. I’m going to run through a few of them here.
OpenAI
Many people use AI chatbots, but the free versions. Getting enough revenue through subscriptions is one way AI companies could cover their enormous costs, but that is looking unlikely. Another option is by inserting ads (as most “publishing” businesses have had to do for ages). However, it’s not clear if that will be enough either, and recent news is definitely not uplifting the industry in that regard.
OpenAI aims to get $100 billion a year from ads. However, that’s far away from the ~$1 billion it’s currently scrapping to earn and the $2.5 billion it has projected for this year. “OpenAI’s Ad Business Is on Pace to Miss Its Own Forecast By 90%, Analyst Says,” the title of an AdWeek article states. A new analysis from Emarketer estimates that OpenAI’s ad revenue is likely to fall short by 90% in 2030.
Furthermore, the analysis estimates that the ceiling for adbot revenue — for the industry as a whole — is $5.41 billion by 2030.
Clearly, with such a vast difference in expectations, someone is going to be much more right than the other. Will it be OpenAI and the rest of the AI chatbot industry? Or will we see an epic bubble bursting in the next few years?
“It all adds up to a difficult question for investors,” Futurism adds. “If the top AI companies — which have burned over $1.6 trillion building AI so far — can’t even hit OpenAI’s meager projection for 2026, what hope do they have of hitting their projections four years from now?
“To hit that number, AdWeek observes, OpenAI needs three miracles to happen all at once. First, advertisers have to abandon decades worth of infrastructure built around search engines and social media and put all their advertising budgets into chatbots. Once that happens, OpenAI has to out-muscle previous ad-sales giants like Google and Meta, while the entire AI-ad market balloons from just a six-figure stream in 2026 to a raging, 12-figure river by 2030.”
Of course, it’s not just about OpenAI either. It’s all of these competing AI chatbot companies that have invested fortunes upon fortunes in an attempt to “win” the AI chatbot war. (And that may be part of the problem for them — there is no monopoly in this industry.)
xAI
Then you’ve got Elon Musk’s xAI.
“Elon Musk’s AI Startup Is a Complete Disaster Behind the Scenes,” Futurism puts in one of its headlines. “The company is constantly playing catch-up with rivals Anthropic, with Musk personally obsessed with having his chatbot Grok match Anthropic’s Claude, Bloomberg reports. And its merger with SpaceX, followed by the latter going public in a historic IPO, led to dozens of employees leaving the company, throwing daily operations into chaos.”
We saw news of xAI’s founders cashing out and leaving. Having read and heard stories for more than a decade of how difficult Elon Musk is to work with, how stupid certain people who have worked with him think him to be, and how unrealistic his demands can be, it was not a huge surprise to see the exodus. But now there’s more reporting on it that makes xAI look even worse than it did. (Side note: xAI is actually rebranded as SpaceXAI now.)
Apparently, like many, Elon Musk has seen Claude as the leader in the industry. According to reports, he has been obsessed with trying to catch up to it. “Reportedly, every time the Anthropic chatbot got an update, Musk demanded that Grok should match it. Numerous projects referenced Claude and some Slack channels were even named after it. Keeping up with Claude had become the startup’s explicit mission.” (I can imagine the joking that must go on behind the scenes about this….) “‘Our near-term goals are to match the performance of Claude,’ Nicolls wrote in a memo to staffers after becoming xAI president, per Bloomberg.”
Unsurprisingly, some employees at the company have reportedly begun to think that Musk doesn’t actually understand AI. That’s a funny take when we know that Elon Musk would likely claim that he knows more than anyone else in the world about AI, or something like that.
“Some began to doubt Musk’s leadership, believing that the centibillionaire, whose success was built on making cars and engineering rockets, was out of his depth.”
I do think Musk has vast knowledge on these two subjects. This is what he’s spent most of his working adult life focused on, and learning about. The problem is that he now assumes he knows more than experts about all kinds of matters he’s learned little about. He jumps to false, ignorant conclusions all the time, but he goes all-in on them. I assume the AI space is something in the middle for him. He has clearly spent a lot more time on the inner workings of this than most people. For sure, he’s in a top percentile in his understanding of AI. However, it would not be surprising at all if he still had many ignorant, crazy ideas about it that people who have truly spent their adult lives exploring AI would have big issues with, and would find shocking.
“xAI cofounders soon gave a clear vote of no confidence in the company’s direction. In February, some began leaving as Musk prepared to merge xAI with SpaceX ahead of its IPO, and soon after the merger was completed, all eleven of xAI’s cofounders had fled the company.”
As we’ve already reported, xAI overbuilt infrastructure so much — far beyond demand for its services warranted — that it eventually had to come to an agreement with Anthropic (the creator of Claude) to sell it use of its data center capacity. How ironic.
According to Bloomberg, xAI is using just 11% of its compute capacity. SpaceX is thus looking to sell compute capacity to Google, AI startup Reflection, and probably others as well as Anthropic.
And here’s a funny tidbit: “xAI also told employees that it would pay them to feed their tax returns to train Grok, but never did.”
Then There’s China …
As with all things tech, it seems that China is rapidly driving costs down and making US AI tech companies freak out.
“A Chinese open-weight AI model called Kimi K3, developed by Beijing-based firm Moonshot AI, has sent a shiver down the spines of AI tech executives. The powerful, 2.8 trillion-parameter model impressed with its competence, igniting a war with far more expensive alternatives being offered by the likes of OpenAI and Anthropic,” Futurism writes.
“Top executives at both companies are sounding alarm, the Wall Street Journal reports, watching as Chinese open-weight models are rapidly catching up to their most powerful proprietary models. As a result, they’re begging the Trump administration to step in and protect them from the influx of cheaper alternatives, which could undermine their increasingly desperate attempts to attract new customers.”
The WSJ article starts off thus: “Silicon Valley and Washington are debating a multibillion-dollar question: Should American companies be able to use Chinese artificial-intelligence models?
“OpenAI and Anthropic executives are sounding the alarm about the rise of cheap AI, particularly powerful new models produced in China, suggesting they will lead to a ‘dystopian’ AI future and present unacceptable security risks without regulation.”
Now Altman is also talking about slashing the costs of its premier AI models. (And remember that section above about its grandiose ad revenue targets.)
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