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Media. Media. Hi, I'm Ed

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Zitron, and this is your

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weekly Better Offline monologue. Precarious.

0:39

That's the nature of the

0:41

generative AI industry, and especially

0:44

open AI, a company that

0:46

has never made a profit, has

0:48

no pathway to profitability, and is

0:50

contingent upon other companies spending tens

0:52

of billions of dollars on new

0:54

infrastructure to power their models in

0:57

the future. Throughout countless podcasts and

0:59

newsletters, I have argued that all

1:01

of these factors mean that Open

1:03

AI and by extension, the greater

1:05

generative AI industry will eventually collapse.

1:08

Open AI is just one of

1:10

a long line of dominoes, and

1:12

it really only takes one to

1:14

fall before the entire thing collapses.

1:16

But by comparison, I haven't really paid nearly

1:19

as much of the attention as I should

1:21

have to the unusual structure of Open AI,

1:23

which I believe will also contribute to its

1:25

downfall. Open AI was initially started as

1:27

a non-profit intended to further the safe

1:30

development of artificial intelligence, if you believe

1:32

them. Over time it morphed into an

1:34

entirely different beast, becoming the most valuable

1:37

startup in history, and the startup that

1:39

has now raised the most capital in

1:41

history, sort of. But for legal reasons,

1:43

it couldn't quite walk away from its

1:46

non-profit origins. And so we're now left

1:48

with this strange hybrid that consists of

1:50

a non-profit that owns much of open

1:52

AIs intellectual property and assets, and a

1:55

for-profit business sort of tacked on awkwardly

1:57

at the side. In order to

1:59

satiate its infinite thirst... for capital,

2:01

Open AI must radically restructure the

2:03

entire organization, moving valuable assets and

2:05

intellectual property from the non-profit to

2:07

the for-profit entity. Their ability to

2:09

raise money is entirely contingent upon

2:11

this, as generally investors don't plow

2:13

tens of billions of dollars into

2:15

philanthropic ventures where they will never

2:17

see a return. Indeed, many of

2:19

Open AI's previous funding rounds have

2:21

had caveats that would radically alter the

2:23

terms of their deal if Open

2:25

AI fails to convert into a

2:27

for-profit business. Last October they raised

2:29

$6.6 billion from a bevy of

2:31

investors, but the deal included a

2:33

covenant of sorts that should they

2:35

fail to convert into a for-profit

2:37

entity in two years, so October

2:39

2026, the investment would convert into

2:41

a loan. Open AI would in

2:43

effect have to return the capital

2:45

to investors and potentially pay a

2:47

punishing interest rate. Similarly, Open AI's latest

2:50

$40 billion with Soft Bank is structured

2:52

in a way where $10 billion of

2:54

the dollars are contingent on Open AI

2:56

becoming a for-profit business. The point I'm

2:58

trying to make is that for Open

3:00

AI, this current structure represents an existential

3:02

threat. In many ways, it is more

3:04

dire than any shortage of compute capacity,

3:06

or the fact that they spend billions

3:09

of dollars more than they'll ever make.

3:11

So they just change structure, right? What's

3:13

the big deal? Well, this is a

3:15

complex and bureaucratic procedure that typically only

3:17

happens in sectors like healthcare, where hospitals

3:19

are bought out by larger for-profit companies.

3:21

I struggle to think of any similar

3:23

examples in tech, and even if those

3:25

examples exist, they don't involve entities of

3:27

the size and value of open AI,

3:30

or indeed the prominence. The transformation isn't

3:32

something that Sam Maltman can do unilaterally

3:34

either. In essence, he needs to be

3:36

the consent of regulators and lawmakers in

3:38

the state of California. We've already seen

3:40

open AIs moves be challenged by the

3:42

likes of Elon Musk and Mark Zuckerberg,

3:44

although these efforts did not or have

3:46

yet to amount to much, though there

3:48

is an upcoming trial with Elon Musk

3:51

over this. Part of the complexity comes

3:53

from the very nature of what it

3:55

means to be a non-profit. Non-profits enjoy

3:57

certain tax benefits. both from their exemption,

3:59

from taxation, to the benefits that come

4:01

when a person makes a charitable donation

4:03

to a non-profit. If you give money

4:05

to like the Red Cross or a

4:07

church or whatever, you can write that

4:10

off against your taxes. As a result,

4:12

Open AI is constrained by what it

4:14

can do with the assets that are

4:16

held within the non-profit. Those assets are

4:18

supposed to be used for the benefit

4:20

of society to serve some kind of

4:22

charitable purpose. Open AI can't just transfer

4:24

them to a for-profit entity. Doesn't work

4:26

like that nor should it. Even though

4:28

they're trying to make trying to make

4:31

it. Now a link to this in

4:33

the episode notes, but a recent petition

4:35

against OpenAis restructuring alleges that OpenAi has

4:37

already effectively broken the rules against how

4:39

non-profits should operate and manage their assets,

4:41

with the first violation coming in 2019,

4:43

right at the start of OpenAis Metamorphosis,

4:45

and around the time when it obtained

4:47

its first billion dollars worth of investment

4:49

from Microsoft. Addressed to the Attorney General

4:52

of California and signed by innumerable figures

4:54

in California and national philanthropy, it articulates

4:56

a compelling case that open AI has

4:58

already broken the law in several meaningful

5:00

ways and urges the state to take

5:02

action to prevent a further dilution of

5:04

the open AI charitable mission. It describes

5:06

these violations as, and I quote, factually

5:08

complex but legally simple. It claims that

5:10

the 2019 restructuring, which created the for-profit

5:13

element, involved the wrongful transfer of assets

5:15

from the non-profit. This is bad in

5:17

and of itself, but has time dragged

5:19

on the influence and relevance of the

5:21

non-profit wing over the for-profit entity, effectively

5:23

ended. It gives the example of the

5:25

November 2023 coup, when Sam Alton was

5:27

fired from the company over alleged dishonesty

5:29

about the safety processes surrounding model development,

5:31

and also a bunch of other stuff

5:34

like not telling the board that chat

5:36

GPT was coming out. Anyway, this firing,

5:38

the letter states, came at the behest

5:40

of the non-profit directors. As we all

5:42

know, it didn't take Sam Altman long

5:44

to return to the helm of Open

5:46

AI in the same role that he

5:48

left. Many of the board members that

5:50

had approved determination left, and though they

5:53

signed a letter, it was very much

5:55

a, they have my family kind of

5:57

thing, or I should say, they have

5:59

my stock units. were replaced by those

6:01

who were more aligned for the for-profit

6:03

goals of open AI. The petition also

6:05

makes the case that open AI's renunciation

6:07

of its commitment to open source research

6:09

within its purpose clause, the thing that

6:11

defines what a non-profit is for, also

6:14

represented an illegal diversion of assets. Open

6:16

source software benefits, whoever uses it, whereas

6:18

proprietary software, even if it's provided for

6:20

free, has comparatively fewer benefits to society.

6:22

You can't change your modifier or improve

6:24

a program and you're at the best.

6:26

You're really at the, whatever the vendor

6:28

wants to do as far as accessing

6:30

or using the platform or program or

6:32

whatever it might do. In practice, there's

6:35

little open about open AI. They share

6:37

little source code and don't even provide

6:39

specifics about the training data they use.

6:41

They're less concerned with public research and

6:43

now shrouds their development in the same

6:45

cloak of secrecy that you would expect

6:47

from basically any other tech company. Now

6:49

they're claiming they're going to release an

6:51

open... Waited model, but it's bullshit. I'm

6:53

sorry that's that's not enough Now the

6:56

letter does make some specific demands It

6:58

wants the AG to investigate what assets

7:00

were siphoned off from the nonprofit Block

7:02

any conversion until the investigation is completed

7:04

and make sure that all charitable assets

7:06

are returned to the nonprofit and indeed

7:08

to create a truly independent entity Separate

7:10

from Sam Orman and the business interest

7:12

of open AI to act as a

7:14

steward for these assets If this petition

7:17

succeeded in delaying the conversion Open AI's

7:19

future becomes much more uncertain and perhaps

7:21

may not even be possible. It'll make

7:23

it harder to raise new funds that

7:25

will only increase their cash burners. Open

7:27

AI will now be forced to start

7:29

making repayments and investments that were automatically

7:31

converted into loans. Will it succeed? Maybe.

7:33

First, this petition doesn't come from a

7:36

rival with an extra grind against Sam

7:38

Altman like Elon Musk. the Black Freedom

7:40

Fund, the Asian Law Caucus, and the

7:42

California Teamsters Public Affairs Council aren't exactly

7:44

the natural adversaries of Waltman. Unless they,

7:46

of course, secretly hate people who wear

7:48

Patagote of S, in which case they

7:50

retract the entire last sentence and also

7:52

add that I heartily congratulate them and

7:54

agree with them. Moreover, this petition isn't

7:57

framed about... or AI or AI safety,

7:59

but rather something far more simple. It's

8:01

about what a non-profit is and how

8:03

it should be run. And if, as

8:05

the letters authors argue, open AI should

8:07

be allowed to restructure without being challenged

8:09

or scrutinize, it will set a dangerous

8:11

precedent that would make it harder to

8:13

protect the charitable mission of non-profits and

8:15

make them easier for them to be

8:18

plundered, like I'd argue open AI has.

8:20

It's a strong case, and while it's

8:22

hard to tell if the Attorney General

8:24

will take it on, it could lay

8:26

the groundwork for open AI's demise. And

8:28

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