BREAKINGVIEWS-OpenAI’s midair plane-building hits absurd extreme

By Jonathan Guilford

NEW YORK, May 21 (Reuters Breakingviews) - Already trying to build a plane while in freefall, Sam Altman decided to increase the degree of difficulty. The OpenAI CEO plans to buy iPhone designer Jony Ive’s startup, io, at a $6.5 billion valuation, with dreams of inventing the must-have gadget for the machine-learning age. Considering the many complicated challenges the ChatGPT maker already faces, taking on another of this scale amounts to folly.

OpenAI, valued at $300 billion after raising $40 billion privately from SoftBank 9984.T and others in March, understands the importance of user experience. It did not invent all the technology behind its groundbreaking chatbot. By putting it on a simple website, however, Altman attracted 100 million users more quickly than any software product ever had before. Paying $118 million per employee, judging by a Bloomberg report, for Ive’s fledgling operation aims to build on that success.

It also adds cost to an already incredibly expensive endeavor. Microsoft MSFT.O, Alphabet GOOGL.O, Amazon.com AMZN.O and Meta Platforms META.O are racing ahead, with plans to spend $320 billion this year alone to build data centers, buy chips and procure other tools needed to develop and optimize artificial intelligence.

OpenAI is burning through cash to keep up, projecting profitability only once revenue reaches $125 billion, or nearly 10 times more than this year. To reward the immense risk taken by its backers, OpenAI sought to convert into a fully for-profit entity and dispense with its nonprofit overseer. Broad pushback quashed the plan, however, and the company is now grappling with how to craft a corporate governance structure that will keep its many stakeholders happy.

Altman’s rivals already generate plenty of profit and have longstanding control systems in place. Google’s developer conference this week showcased AI products once reserved exclusively for science fiction. Some features depend on a handset, laptop or glasses. Much like the dominant smartphone operating systems run by duopolists Apple AAPL.O and Google, these elements stand between OpenAI and its customers.

Getting around these gatekeepers will be difficult. Consumer electronics is a winner-takes-most market, as Apple has proven by capturing a massive share of handset revenue, and growing to a meaningful size involves a globe-spanning, head-spinning array of suppliers. Making something novel also requires immersion in the field: the iPod resulted from the chance discovery of an oddball Toshiba hard drive.

OpenAI has none of this knowhow embedded, and it’s embarking on a hardware project just as such manufacturing gets driven out of China, where the requisite expense and labor skills have been optimized. Altman is flying high now, but he has taken on too much to defy gravity for long.

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CONTEXT NEWS

ChatGPT-maker OpenAI said on May 21 that it had agreed to acquire io, a startup created by Jony Ive, Apple’s former chief design officer.

Under terms of the deal, OpenAI will pay $5 billion in equity, after previously taking a 23% stake in io in late 2024, for a total valuation of $6.5 billion, Bloomberg reported.