Speaker 1: Zone Media. Hi, I'm Edzetron, and this is your weekly
Speaker 1: better offline monologue. Precarious. That's the nature of the GENERATIVAI industry,
Speaker 1: and especially open ai. A company that has never made
Speaker 1: a profit, has no pathway to profitability and is contingent
Speaker 1: upon other companies spending tens of billions of dollars on
Speaker 1: new infrastructure to power their models in the future. Throughout
Speaker 1: countless podcasts and newsletters, I've argued that all of these
Speaker 1: factors mean the open AI and by extension, the greater
Speaker 1: GENERATIVEAI industry, will eventually collapse. Open ai is just one
Speaker 1: of a long line of dominoes, and it really only
Speaker 1: takes one to four before the entire thing collapses. But
Speaker 1: by comparison, I haven't really paid nearly as much of
Speaker 1: the attention as I should have to the unusual structure
Speaker 1: of open ai, which I believe will also contribute to
Speaker 1: its downfall. Open ai was initially started as a nonprofit
Speaker 1: intended to further the safe development of artificial intelligence, if
Speaker 1: you believe them, Over time it morphed into an entirely
Speaker 1: different beast, becoming the most valuable startup in history, and
Speaker 1: the startup that has now raised the most capital in
Speaker 1: history sort of, but for legal reasons, it couldn't quite
Speaker 1: walk away from its nonprofit origins, and so we're now
Speaker 1: left with this strange hybrid that consists of a nonprofit
Speaker 1: that owns much of open AI's intellectual property and assets,
Speaker 1: and a for profit business sort of tacked on awkwardly
Speaker 1: at the side. In order to satiate its infinite thirst
Speaker 1: for capital, open Ai must radically restructure the entire organization,
Speaker 1: moving valuable assets and intellectual property from the nonprofit to
Speaker 1: the for profit entity. Their ability to raise money is
Speaker 1: entirely contingent upon this, as generally investors don't plow tens
Speaker 1: of billions of dollars into philanthropic ventures where they will
Speaker 1: never see a return. Indeed, many of open AI's previous
Speaker 1: funding rounds have had caveats that would radically alter the
Speaker 1: terms of their deal if open ai fails to convert
Speaker 1: into a for profit business. Last October, they raised six
Speaker 1: point six billion dollars from a bevy of investors, but
Speaker 1: the deal included a covenant of sorts that should they
Speaker 1: fail to convert into a full profit entity in two years.
Speaker 1: Of October twenty twenty six, the investment would convert into
Speaker 1: a loan. Open Ai would in effect have to return
Speaker 1: the capital to investors and potentially pay a punishing interest rate. Similarly,
Speaker 1: open AI's latest forty billion dollar with soft Bank is
Speaker 1: structured in a way where ten billion of the dollars
Speaker 1: are contingent on open ai becoming a for profit business.
Speaker 1: The point I'm trying to make is that for open Ai,
Speaker 1: this current structure represents an existential threat. In many ways.
Speaker 1: It is more dire than any shortage of compute capacity
Speaker 1: or the fact that they spend billions of dollars more
Speaker 1: than they'll ever make. So they just change structure, right,
Speaker 1: what's the big deal? Well, this is a complex and
Speaker 1: bureaucratic procedure that typically only happens in sectors like healthcare,
Speaker 1: where hospitals are bought out by larger for profit companies.
Speaker 1: I struggle to think of any similar examples in tech,
Speaker 1: and even if those examples exist, they don't involve entities
Speaker 1: of the size in value of open Ai or indeed,
Speaker 1: the prominence. The transformation isn't something that Sam Mortman can
Speaker 1: do unilaterally either. In essence, he needs that the consent
Speaker 1: of regulators and lawmakers in the State of California. We've
Speaker 1: already seen open aiy's moves be challenged but the likes
Speaker 1: of Elon Musk and Mark Zuckerberg, although these efforts did
Speaker 1: not or have yet to amount to much, though there
Speaker 1: is an upcoming trial with Elon mask over this. Part
Speaker 1: of the complexity comes from the very nature of what
Speaker 1: it means to be a nonprofit. Nonprofits enjoy certain tax benefits,
Speaker 1: both from their exemption from taxation to the benefits that
Speaker 1: come when a person makes a charitable donation to a
Speaker 1: non profit. If you give money to the Red Cross
Speaker 1: or a church or whatever, you can write that off
Speaker 1: against your taxes. As a result, open ai is constrained
Speaker 1: by what it can do with the assets that are
Speaker 1: held within the nonprofit. Those assets are supposed to be
Speaker 1: used for the benefit of society, it to serve some
Speaker 1: kind of charitable purpose. Open AI can't just transfer them
Speaker 1: to a for profit entity. Doesn't work like that, nor
Speaker 1: should it, even though they're very much trying to make it.
Speaker 1: Linked to this in the episode Notes, but a recent
Speaker 1: petition against open AI's restructuring alleges that open ai has
Speaker 1: already effectively broken the rules against how nonprofits should operate
Speaker 1: and manage their assets, but the first violation coming in
Speaker 1: twenty nineteen, right at the start of open AI's metamorphosis
Speaker 1: and around the time when it obtained its first billion
Speaker 1: dollars worth of investment from Microsoft. Addressed to the Attorney
Speaker 1: General of California and signed by innumerable figures in California
Speaker 1: and national philanthropy, it articulates a compelling case that open
Speaker 1: ai has already broken the law in several meaningful ways
Speaker 1: and urges the state to take action to prevent a
Speaker 1: further dilution of the open ai charitable mission. It describes
Speaker 1: these violations as and I quote, factually complex but legally simple.
Speaker 1: It claims that the twenty nineteen restructuring which created the
Speaker 1: for profit element involved the wrongful transfer of assets from
Speaker 1: the nonprofit. This is bad in and of itself, but
Speaker 1: as time dragged on the influence and relevance of the
Speaker 1: nonprofit wing over the for profit entity, the effectively ended.
Speaker 1: It gives the example of the November twenty twenty three coups,
Speaker 1: when Sam Altman was fired from the company over alleged
Speaker 1: dishonesty about the safety processes surrounding model development, and also
Speaker 1: a bunch of other stuff like not telling the board
Speaker 1: that chat GPT was coming out anyway. This firing, the
Speaker 1: letter states, came at the behest of the nonprofit directors.
Speaker 1: As we all know. It didn't take sam Altman long
Speaker 1: to return to the helm of open ai and the
Speaker 1: same role that he'd left. Many of the board members
Speaker 1: that had approved distermination left, and though they signed a letter,
Speaker 1: it was very much a they have me my family
Speaker 1: kind of thing, or I should say they have my
Speaker 1: stock units, and they were replaced by those who are
Speaker 1: more aligned for the for profit goals of open Ai.
Speaker 1: The petition also makes the case that open ai is
Speaker 1: renunciation of its commitment to open source research within its
Speaker 1: purpose clause, the thing that defines what a nonprofit is
Speaker 1: for also represented in illegal diversion of assets. Open source
Speaker 1: software benefits whoever uses it, whereas proprietary software, even if
Speaker 1: it's provided for free, there's comparatively fewer benefits to society.
Speaker 1: You can't change your modify or improve a program, and
Speaker 1: you're at the best. You're really at whatever the vendor
Speaker 1: wants to do as far as accessing or using the
Speaker 1: platform or program or whatever it might do. In practice,
Speaker 1: there's little open about open ai. They share little source
Speaker 1: code and don't even provide specifics about the training data
Speaker 1: they use. They're less concerned with public research and now
Speaker 1: shrouds their development in the same cloak of secrecy that
Speaker 1: you would expect from basically any other tech company. Now
Speaker 1: they're claiming they're going to release an open weighted model,
Speaker 1: but it's bullshit. I'm sorry, that's not enough. Now, the
Speaker 1: letter does make some specific demands. It wants the AG
Speaker 1: to investigate what assets were siphoned off from the nonprofit,
Speaker 1: block any conversion until the investigation is completed, and make
Speaker 1: sure that all charitable assets are returned to the nonprofit,
Speaker 1: and indeed to create a truly independent entity separate from
Speaker 1: Sam Morltman and the business interests of open ai, to
Speaker 1: act as a steward for these assets. If this petition
Speaker 1: succeeded in delaying the conversion, open AI's future becomes much
Speaker 1: more uncertain and perhaps may not even be possible. It'll
Speaker 1: make it harder to raise new funds that would only
Speaker 1: increase their cash burners. Open ai will now be to
Speaker 1: start making repayments and investments that were automatically converted into loans.
Speaker 1: Will it succeed, Maybe First, this petition doesn't come from
Speaker 1: arrival with an extra grind against Sam Altman. Like Elon Musk,
Speaker 1: the Black Freedom Fund, the Asian Law Caucus in the
Speaker 1: California Teamster's Public Affairs COUNTSL aren't exactly the natural adversaries
Speaker 1: of Vaultman, unless they, of course, secretly hate people who
Speaker 1: wear Patagolia vests, in which case I retract the entire
Speaker 1: art sentence and also add that I heartily congratulate them
Speaker 1: and agree with them. Moreover, this petition isn't framed about
Speaker 1: tech or AI or AI safety, but rather something far
Speaker 1: more simple. It's about what a nonprofit is and how
Speaker 1: it should be run. And if, as the letters authors argue,
Speaker 1: open AI should be allowed to restructure without being challenged
Speaker 1: or scrutinized, it will set a dangerous precedent that would
Speaker 1: make it harder to protect the charitable mission of nonprofits
Speaker 1: and make them easier for them to be plundered. Like
Speaker 1: I'd argue open AI has, it's a strong case. While
Speaker 1: it's hard to tell if the Attorney General will take
Speaker 1: it on, it could lay the groundwork for open AI's demise,
Speaker 1: and I'm sure some of you would love them well. No,
Speaker 1: I might too.