Will AI be the future of advertising?

It might offer some useful tips on what shampoo to buy halfway through a chat about where to go on holiday. Or it could casually mention what brand of TV you should buy next, while you are asking it to summarise a long and dull work memo. Conversations with ChatGPT or other leading artificial intelligence systems could soon be very different. According to reports, OpenAI, the market leader, is looking at including advertising in its output. Others may follow its lead.

It remains to be seen whether that will happen, but it would be quite the turnaround. OpenAI’s founder Sam Altman has previously described advertising as a “last resort” for the company. It had argued that subscription fees would be more than enough to keep it going. Most of its major rivals in the fast-growing AI industry have also steered clear of advertising.

But the AI giants need to do something to earn money. OpenAI, the firm behind ChatGPT, is expected to rack up revenues of $2.7 billion this year; it is also forecast to record heavy losses. One of its main rivals, Anthropic, which runs the Claude AI chatbot, is expected to lose billions of dollars this year as well, according to an analysis by tech site The Information. Many of the smaller start-ups that have been generating lots of excitement among investors may well be losing similar sums.

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This matters. After all, ChatGPT was valued at $157 billion in its latest fund-raising round. Anthropic is expected to be valued at $40 billion next time it raises cash. For those kinds of valuations to be justifiable, the companies will need to start making money at some point. AI bots are hugely expensive to run, requiring pricey chips and lots of energy, and the more users an AI system attracts, the higher the costs escalate.

But advertising is not going to work. An AI bot can’t suddenly start slipping product recommendations into the conversation. The discreet, highly targeted advertisements that powered Google and Facebook won’t work for the chatbots. It is one thing to have a paid result at the top of a search page, or a small advert at the side of the screen while you are on social media. But AI chatbots, as the name suggests, are meant to be far more like having a conversation, except with someone who is far more knowledgeable than you are. You can’t suddenly interrupt that with a commercial.

ChatGPT is targeting $100 billion of annual revenues by 2029, and most of its major rivals are forecasting similarly ambitious numbers. But how? Over the past month, ChatGPT has announced a top-tier subscription package, with access to its most advanced products, for a hefty $200-a-month price tag. There are cheaper packages available with fewer features. But there is not much sign that people are rushing to sign up.

Where’s the business model of AI developers?

Right now, ChatGPT has an estimated 10 million paying subscribers. That is out of around 180 million monthly users. The vast majority of visitors, it seems, are perfectly happy with the free version and use it as a slightly more sophisticated search engine. AI companies could always put up a strict paywall, the way newspaper publishers and streamers such as Netflix have done. But the latter offer unique content. The AI bot scrapes and processes information from elsewhere, and that is not quite so valuable.

The Wall Street rally of the past year has largely been driven by excitement over the potential for AI. The chip maker Nvidia, which supplies the hardware for AI, has been the big winner so far, but many smaller stocks have been caught up in the frenzy. The venture capital firms have been pouring billions into the technology.

It is still early days, but they are all assuming that the AI developers will be as profitable as Google and Facebook turned out to be, creating a lock on the market, and generating billions of dollars in annual revenues. Perhaps they will be proved right. But if they are assuming advertising is the answer they are surely badly mistaken. Very soon, we may realise the technology has no business model to back it up – and all that investment will go up in smoke.

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