Unusual Ventures reposted this
What will gross margins for foundation model companies look like in the coming years? Cloud providers serve as an illustrative example and the answer is: probably higher than one would expect. With OpenAI’s price drops and significant spend on compute, some may have thought that theirs is a low-margin, high-volume business model. But that’s an incorrect assumption. OpenAI’s gross margin is estimated to be 41% today and expected to grow to 48% next year and 67% in 2028. Microsoft’s OpenAI service is at around 40% today. In 2006, soon after it started, AWS’s gross margin hovered around 47%. In subsequent years through 2014, it was estimated at 48%, 48%, 49%, 49%, 50%, 50.5%, 51%, 53%. This despite more than 40 price drops (presumably to maintain/grow market share in light of competition with an emerging Microsoft Azure and Google Cloud at the time), some of which were over 50% reductions at a time. It’s reasonable to expect a similar trajectory for foundation model companies. Model APIs are analogous to compute instances; different models are equivalent to different instance types. Model API margins will improve as inference gets cheaper the same way cloud servers got cheaper at economies of scale. OpenAI and others will become more sophisticated at managing capacity/utilization and forecasting demand. Eventually, different pricing tiers for model usage could emerge, similar to how cloud providers offer reserved instance and spot pricing. All of these will help improve margins, even in light of aggressive price reductions. Of course, OpenAI and others are also already moving up the stack to offer services built on top of the API just as the cloud providers did on top of EC2. ChatGPT, potential new agents, possible robotics offerings, etc. are just some examples. This further drives them towards a higher margin profile and increases the opportunity for customer lock-in. So while there’s a lot of attention on OpenAI’s top line and “CapEx” for model training, the margins are key and those look quite promising for them and other foundation model companies. Sources: https://lnkd.in/gZgKZHkC https://lnkd.in/gCYEt-2u https://lnkd.in/gqzQRUkH https://lnkd.in/gp5RdcHV