How AI Chat Will Make Money (Outside Of Ads)

Hi Everyone, Regards from sunny New York City, where I’ve returned after a long weekend in Ithaca, NY. I drove upstate for a symposium hosted by my college radio station, WVBR, and got behind the mic on terrestrial radio for the first time in 14 years. It was a blast.

This week, as big tech companies maneuver for their next AI moves, I thought it would be a good time to catch up on the latest in the AI wars. So Nico Grant , a star reporter for The New York Times, joined me and Ranjan Roy to discuss the latest machinations inside Microsoft, Google, and OpenAI.?

In this episode, you’ll hear:?

• How far Microsoft’s ambitions extend for its AI service
• What Google's counterpunch might look like
• The business outlook for these services

You can listen to Nico's dispatch on Apple Podcasts, Spotify, and your podcast app of choice.?

I also took some time to think about the business aspect of this AI wave. I'm skeptical ads will work. So I broke down where else AI chatbot developers could cash in.

Here’s my argument, in this week’s Big Story. What do you think?

How AI Chat Will Make Money (Outside Of Ads)

There’s a certain — very passionate — group of people on the internet who believe AI chatbots should make their money from advertising. I know this because I heard from them this week after I suggested chat would need a different business model. For five days running, my slander of advertising (which I generally like and run in this newsletter) has led to a flood of comments questioning my aptitude and sanity. One person showed me ChatGPT could suggest Taco Bell Crunchwraps as you searched for information on Turkmenistan. Thanks??

For any new technology, it’s always difficult to transpose old business models directly onto the new experience, and AI chat is no different. While it’s possible advertising will play a role in its future, ads represent only a fraction of the opportunity and are poorly suited for the interface. APIs, plugins, data licensing, and subscriptions will likely take precedence and leave ads behind. Here’s why:

Advertising?

Advertising is a good way to make money when you build an audience, and chatbots have done that. ChatGPT took just two months to reach 100 million users. But AI chat works because it feels like a conversation with another being, not a computer, and ads spoil that experience. Steve Jobs, while developing Siri, refused to build thumbs up or down feedback buttons into it because he feared breaking the illusion. Siri has struggled since Jobs’ death, but his intuition was right.?

Speaking with a computer in natural language only to have it pitch you something mid-conversation is unsettling. You probably wouldn’t keep a friend around who did that. And you likely won’t keep bots around who do it, either. Bots could place ads on the side of the conversation instead, changing with the context of the dialogue. But environment matters when you’re having a conversation, and such a move could cheapen it.

AI chatbot developers’ enthusiasm for advertising seems muted so far. Bing has run some advertising within its chatbot, but it’s been limited. Google declined to comment on whether it intends to put ads in Bard. An OpenAI spokesman emailed, “No plans to put ads in ChatGPT.”?

APIs

If Google, Microsoft, and OpenAI rely on ads to make money from their chatbots, the expensive processing power they’d need to operate them would eat into their margin. Getting other companies to pay for the processing power is a better option. So, they’re making it available via APIs to allow anyone to build generative AI experiences, similar to the cloud services model. The trio above built their consumer chatbots, in part, to advertise their APIs.

Plugins?

Instead of paying to access a chatbot’s audience via ads, companies will pay to become part of its experience via plugins. Kayak, for instance, is working with OpenAI on a plugin that helps you find flight information within ChatGPT. Instead of interruptive advertising, plugins will build the web into the chatbots, allowing users to complete tasks within them. One day, the bots might get so good they disintermediate some of their partners. In the meantime, they’ll cash in with plugins.?

Subscriptions

People are willing to pay for faster, better versions of these bots, another key source of revenue. In February, OpenAI introduced its premium ChatGPT Plus subscription, which gets you answers powered by its most powerful model, GPT-4, for $20 per month. Demand for ChatGPT Plus has been so healthy that OpenAI temporarily paused upgrades. Google and Microsoft have experience offering free tools with paid upgrades, and they may not be far behind.?

Data Licensing?

The most concerning potential business model for these companies involves licensing the data they collect when we speak with their bots. Having a conversation with someone gives you a much better understanding of their wants and needs than simply listening to them type a few words into a search bar. This data could be extremely valuable for all sorts of businesses and even creepier than the typical ad tracking on the internet today. Should these companies get into data licensing, it would be a scandal waiting to happen. None have seemed inclined to go this direction… yet.?

Bottom Line

AI Chatbots won’t necessarily go ad-supported simply because many online businesses run on advertising. Ads may factor, but there are enough other natural sources of revenue that advertising may fade into the background as APIs, plugins, and subscriptions take hold. If I’m wrong, I’ll eat my words and, I guess, a Crunchwrap Supreme in Turkmenistan.?