Sci-Tech

A.I. Start-Ups Face a Rough Financial Reality Check

Published

2 weeks ago

April 29, 2024

Call it the end of the beginning of the A.I. boom.

Since mid-March, the financial pressure on several signature artificial intelligence start-ups has taken a toll. Inflection AI, which raised $1.5 billion but made almost no money, has folded its original business. Stability AI has laid off employees and parted ways with its chief executive. And Anthropic has raced to close the roughly $1.8 billion gap between its modest sales and enormous expenses.

The A.I. revolution, it is becoming clear in Silicon Valley, is going to come with a very big price tag. And the tech companies that have bet their futures on it are scrambling to figure out how to close the gap between those expenses and the profits they hope to make somewhere down the line.

This problem is particularly acute for a group of high-profile start-ups that have raised tens of billions of dollars for the development of generative A.I., the technology behind chatbots such as ChatGPT. Some of them are already figuring out that competing head-on with giants like Google, Microsoft and Meta is going to take billions of dollars — and even that may not be enough.

“You can already see the writing on the wall,” said Ali Ghodsi, chief executive of Databricks, a data warehouse and analysis company that works with A.I. start-ups. “It doesn’t matter how cool it is what you do — does it have business viability?”

While plenty of money has been burned in other tech booms, the expense of building A.I. systems has shocked tech industry veterans. Unlike the iPhone, which kicked off the last technology transition and cost a few hundred million dollars to develop because it largely relied on existing components, generative A.I. models cost billions to create and maintain. The cutting-edge chips they need are expensive and in short supply. And every query of an A.I. system costs far more than a simple Google search.

Investors have poured $330 billion into about 26,000 A.I. and machine-learning start-ups over the past three years, according to PitchBook, which tracks the industry. That’s two-thirds more than the amount they spent funding 20,350 A.I. companies from 2018 through 2020.

The challenges hitting many newer A.I. companies stand in contrast to the early business results at OpenAI, which is backed by $13 billion from Microsoft. The attention it has generated with its ChatGPT system has allowed the company to build a business charging $20 a month for its premium chatbot and offered a way for businesses to build their A.I. services with the technology that drives its chatbot, which is called a large language model. OpenAI pulled in around $1.6 billion in revenue over the last year, but it is unclear how much the company is spending, two people familiar with the company’s business said.

OpenAI did not respond to requests for comment.

But even OpenAI has had challenges broadening sales. Businesses are wary that the A.I. systems can generate inaccurate answers. The technology has also been troubled by questions about whether the data that supported the models infringed on copyrights.

(The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to A.I. systems.)

Many investors point to Microsoft’s rapid sales growth as evidence of A.I.’s business potential. In its most recent quarter, Microsoft reported an estimated $1 billion in sales from A.I. services in cloud computing, up from essentially nothing a year ago, said Brad Reback, an analyst at the investment bank Stifel.

Meta, on the other hand, doesn’t expect to make money for years off its A.I. products, even as it increases its infrastructure spending by up to $10 billion this year alone. “We’re investing to stay at the leading edge of this,” Mark Zuckerberg, Meta’s chief executive, said during a call with analysts last week. “And we’re doing that at the time when we’re also scaling the product before it is making money.”

A.I. start-ups have been challenged by that gap between spending and sales. Anthropic, which has raised more than $7 billion with backing from Amazon and Google, is spending about $2 billion a year but pulling in only about $150 million to $200 million in revenue, said two people familiar with the company’s financials, who requested anonymity because the figures are private.

Like OpenAI, Anthropic has turned to partnerships with large, established tech companies. Its chief executive, Dario Amodei, has been courting customers on Wall Street, and it recently announced that it was working with Accenture, the global consulting company, to create custom chatbots and A.I. systems for companies and government organizations.

Sally Aldous, a spokeswoman for Anthropic, said that thousands of businesses were using the company’s technology and that millions of consumers were using its publicly available chatbot, Claude.

Stability AI, which does image generation, announced last month that its founding chief executive, Emad Mostaque, had resigned, just a week after the resignation of three researchers who were part of the five-person team that built the company’s original technology.

It was on track to generate about $60 million in sales this year against about $96 million in costs from its image generation system, which has been available to customers since 2022, a person familiar with its business said.

Stability AI’s financial position looks better than those of language-model makers like Anthropic because developing image generation systems is less expensive, A.I. investors said. But there’s also less demand to pay for images, so the sales prospects are more uncertain.

Stability AI has been operating without the support of a tech giant. After raising $101 million from venture capitalists in 2022, it needed more funds last fall but was struggling to show investors that it could sell its technology to businesses, said two former employees, who declined to speak publicly because they were not authorized to do so. It raised $50 million from Intel late last year but still faced financial pressure, they said.

As the start-up grew, its sales strategy shifted, these people said. At the same time, it was spending millions a month on computing costs. Some investors pressured Mr. Mostaque to resign, according to an investor, who declined to speak publicly about a personnel issue. This month, after his resignation, Stability AI did layoffs and restructured its business to put the company on “a more sustainable path,” according to a company memo reviewed by The New York Times.

Stability AI declined to comment. Mr. Mostaque declined to discuss his exit.

Inflection AI, a chatbot start-up founded by three A.I. veterans, had raised $1.5 billion from some of the biggest names in tech. But a year after introducing its A.I. personal assistant, it had almost no revenue, according to one investor. The Times reviewed a letter that Inflection had sent to investors saying additional fund-raising was “not the best use of our investors’ money, especially in the context of the current frothy A.I. market.”

In late March, it folded its original business and largely disappeared into Microsoft, the world’s most valuable public company.

Microsoft also helped fund Inflection AI, whose chief executive, Mustafa Suleyman, rose to prominence as one of the founders of DeepMind, a seminal artificial intelligence lab that Google acquired in 2014. Mr. Suleyman founded Inflection AI alongside Karén Simonyan, a key DeepMind researcher, and Reid Hoffman, a leading Silicon Valley venture capitalist who helped found OpenAI and is on Microsoft’s board.

Microsoft and Inflection AI declined to comment.

The company was steeped in talented A.I. researchers who had worked at places like Google and OpenAI.

But almost a year after releasing its A.I. personal assistant, Inflection AI’s revenue was, in the words of one investor, “de minimis.” Essentially zilch. It could not continue to improve its technologies and keep pace with chatbots from the likes of Google and OpenAI unless it continued to raise huge sums of money.

Now Microsoft is swallowing most of its staff, including Mr. Suleyman and Dr. Simonyan.

This is costing Microsoft more than $650 million. But unlike Inflection AI, it can afford to play the long game. It has announced plans for the staff to build an A.I. lab in London, working with the kind of systems the start-ups are hoping will break through.

Erin Griffith contributed reporting.

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Sci-Tech

Netflix and the N.F.L. Sign a Three-Season Deal

Published

2 hours ago

May 15, 2024

Nicole Sperling

Netflix is no longer simply in the “sports-adjacent” business. On Wednesday, the streaming giant announced a three-season deal with the National Football League that will include showing two Christmas Day games on its service this year. It’s the first time Netflix has become partners with a major sports league, and it likely won’t be the last.

The move follows Netflix’s increasingly aggressive push into the business of live events. In the past two weeks, “The Roast of Tom Brady” was its most-watched English-language TV show; a quirky six-day John Mulaney talk show went viral as part of the Netflix Is a Joke live comedy festival in Los Angeles; and the stand-up special “Katt Williams: Woke Foke” was viewed 4.3 million times.

“Last year, we decided to take a big bet on live — tapping into massive fandoms across comedy, reality TV, sports and more,” Bela Bejaria, Netflix’s chief content officer, said in a statement. “There are no live annual events, sports or otherwise, that compare with the audiences N.F.L. football attracts.”

The two Christmas games will pit the Houston Texans against the visiting Baltimore Ravens and the Pittsburgh Steelers against the visiting Kansas City Chiefs (raising the odds for greater viewership with a potential Taylor Swift sighting).

The streaming business has matured in the United States, and though Netflix is the dominant service, it still needs to keep growing. With subscriptions relatively maxed out in America, the growth of other revenue streams has become crucial to the company’s success. Advertising is chief among them.

At a time when more people are dropping their traditional cable subscriptions, live sports remain catnip for advertisers because they are one place where audiences are guaranteed in real time. That is especially true for the N.F.L., which remains a ratings juggernaut.

Last month, Netflix announced that its lower-priced subscription service, which features ads and is roughly a year old, grew 65 percent in the first quarter of the year, and said on Wednesday that it now had 40 million global monthly active users on that plan. Netflix has roughly 270 million overall subscribers worldwide.

“This shows just how serious Netflix is taking advertising, because you don’t do this unless you are fully committed, all in, on how big you think this is going to be,” said Richard Greenfield, media and technology analyst at Lightshed Partners. “This is them putting a stake in the ground saying, ‘We’re here, we’re going to grow much, much bigger in advertising and this is effectively Day 1.’”

Netflix has also committed to so-called sports-adjacent live programming. In January, it reached a multibillion-dollar, 10-year deal for the exclusive rights to stream World Wrestling Entertainment’s flagship weekly wrestling show, “Raw.” And in March it announced that it would stream a boxing match between Mike Tyson and the social media influencer Jake Paul live in July.

While the N.F.L. deal is a first for Netflix, it is a continuance of the league’s streaming strategy.

Amazon began streaming Thursday night games exclusively on its Prime service in 2022. In January, NBCUniversal showed an N.F.L. playoff game on Peacock, the first time in the league’s history that it granted a streaming service exclusive rights to a playoff game. The company paid $100 million for the rights, generated 23 million viewers and called it “the most streamed live event in U.S. history.” (N.F.L. playoff games traditionally lure around 30 million viewers.)

For the past two years, the N.F.L. has broadcast three games on Christmas, challenging the N.B.A.’s stronghold on the winter holiday. As part of this new deal, Netflix will stream at least one game on the holiday in 2025 and 2026.

Roger Goodell, the N.F.L. commissioner, is leaning in on streaming as broadcast television continues to recede in popularity.

“Our fans are on these platforms,” Mr. Goodell told reporters during the week of the Super Bowl. “Our fans want to access them. The technology is extraordinary. You can do things on some of these platforms that you can’t do on the linear platform. For us, it’s part of the future.”

While the Netflix games will be simulcast on broadcast television for free in the competing teams’ cities, Netflix and others are likely to make a bigger investment in the N.F.L. and other sports in years to come. Streaming, for instance, is already playing a role in current negotiations over future rights to show National Basketball Association games.

“This feels like a watershed moment for linear TV,” Mr. Greenfield, the analyst, said. “Getting the king of premium streamers to say we are in the sports business for real is a pretty big deal for television. Because it doesn’t matter what this means now — it just shows you you’ve got another serious bidder for sports rights.”

Emmanuel Morgan contributed reporting from New York.

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Sci-Tech

Smartphones Can Now Last 7 Years. Here’s How to Keep Them Working.

Published

13 hours ago

May 15, 2024

Brian X. Chen

Every smartphone has an expiration date. That day arrives when the software updates stop coming and you start missing out on new apps and security protections. With most phones, this used to happen after about only three years.

But things are finally starting to change. The new number is seven.

I first noticed this shift when I reviewed Google’s $700 Pixel 8 smartphone in October. Google told me that it had committed to provide software updates for the phone for seven years, up from three years for its previous Pixels, because it was the right thing to do.

I was skeptical that this would become a trend. But this year, Samsung, the most profitable Android phone maker, set a similar software timeline for its $800 Galaxy S24 smartphone. Then Google said it would do the same for its $500 Pixel 8A, the budget version of the Pixel 8, which arrived in stores this week.

Both companies said they had expanded their software support to make their phones last longer. This is a change from how companies used to talk about phones. Not long ago, tech giants unveiled new devices that encouraged people to upgrade every two years. But in the last few years, smartphone sales have slowed down worldwide as their improvements have become more marginal. Nowadays, people want their phones to endure.

Samsung and Google, the two most influential Android device makers, are playing catch-up with Apple, which has traditionally provided software updates for iPhones for roughly seven years. These moves will make phones last much longer and give people more flexibility to decide when it’s time to upgrade.

Google said in a statement that it had expanded its software commitment for the Pixel 8A because it wanted customers to feel confident in Pixel phones. And Samsung said it would deliver seven years of software updates, which increase security and reliability, for all its Galaxy flagship phones from now on.

Here’s what to know about why this is happening and what you can do to make your phone last longer.

Why is this happening?

In the past, Android phone makers said the technical process of providing software updates was very complicated, so to stay profitable, they dropped support after a few years. But tech companies are now under intense external pressure to invest in making their devices last longer.

In 2021, the Federal Trade Commission announced that it would ramp up law enforcement against tech companies that made it difficult to fix and maintain their products. That accelerated the “right to repair” movement, a piece of proposed legislation that required companies to provide the parts, tools and software to extend the lives of their products. In the last few years, states including California, New York, Minnesota and Oregon have enacted such legislation.

Google announced its new commitment for smartphones after it was pressured to make a similar move for its laptops. In September, the company agreed to expand software support for its Chromebook to 10 years, up from eight years, in response to a grass-roots campaign that highlighted how short-lived Google laptops were causing budget crunches in schools.

Nathan Proctor, a director at U.S. PIRG, a nonprofit largely funded by small donors that led the Chromebook campaign, said the new standard of seven years of support for smartphones would have a profound effect.

“It’s a huge win for the environment,” he said. “I want to see more of it.”

What else do I need to do?

Software updates are one big part of what keeps a phone working well, but there are other steps to lengthen smartphone lives, similar to maintaining a car. They include:

Replace the phone battery every two years

The lithium-ion batteries in phones have a finite life. After about two years, the amount of charge they can hold diminishes, and it’s wise to replace the battery.

Replacing a smartphone battery isn’t easy, so it’s best to get help from a professional. To find repair shops that service Pixel and Galaxy phones, you can contact Google and Samsung on their websites. You could also look up a reputable shop nearby with a review site like Yelp or Google Reviews. It typically costs about $100 to replace a battery.

For iPhones, customers can schedule a battery replacement appointment at an Apple retail store through the company’s website. But in my experience, repair centers at Apple Stores are a gamble.

I recently booked an appointment to replace my iPhone 14’s battery at the Apple Store in Emeryville, Calif. When I arrived, the employee said the battery was out of stock, and the nearest store that carried it was a 40-minute drive away.

This was frustratingly inefficient — the Apple site should not have let me book an appointment at a store that didn’t have the battery. Apple said in a statement that when a part needed for repair was not available, a retail employee would find the nearest store to complete the repair or order the replacement part and do the repair when the part arrived.

Instead, I booked an appointment at a local repair shop.

Protect it

Smartphones are still mostly made of glass, so to make a phone last seven years, it’s wise to invest in a high-quality case. A screen protector is an extra safeguard, though many won’t enjoy how it distorts the picture quality of the screen. Our sister site that reviews products, Wirecutter, recommends cases from brands like Smartish, Spigen and Mujjo, or cases from the phone makers themselves.

Unless you’re very accident prone, I recommend against buying extended warranties because their costs can exceed the cost of a repair.

Clean it

Smartphones have very few moving parts, so there’s little we have to do to physically maintain them. But most of us neglect cleaning the parts that we rarely look at: charging ports and speaker holes.

Over time, those holes are clogged up with dirt, pocket lint and makeup. That built-up debris can make a phone take longer to charge or a phone call more difficult to hear.

“It’s the belly button lint of cellphones,” said Kyle Wiens, the chief executive of iFixit, a site that publishes instructions and sells parts to repair electronics.

Fortunately, he added, you don’t need a fancy tool. Just use a toothpick to dig out the gunk.

Should this change how I buy phones?

I always recommend buying a product based on the here and now — what it can do for you today, as opposed to what companies say it will do in the future. You should continue to buy a phone based on this principle.

Plenty of people will choose to upgrade sooner for other reasons, like getting a new feature such as a better camera or a longer-lasting battery.

But those who just want to buy a phone that lasts as long as possible should pick one that will be economical to repair when things break. Mr. Wiens said Google’s Pixel phones, whose parts are affordable, fit this criterion. Owners of those phones will now have longer-lasting software to keep up with the hardware.

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