‘Building LLMs Is Probably Not Going Be a Brilliant Business’

Cal Paterson:

Large language models (LLMs) like Chat-GPT and Claude.ai are whizzy and cool. A lot of people think that they are going to be The Future. Maybe they are — but that doesn’t mean that building them is going to be a profitable business.

In the 1960s, airlines were The Future. That is why old films have so many swish shots of airports in them. Airlines though, turned out to be an unavoidably rubbish business. I’ve flown on loads of airlines that have gone bust: Monarch, WOW Air, Thomas Cook, Flybmi, Zoom. And those are all busts from before coronavirus - times change but being an airline is always a bad idea.

That’s odd, because other businesses, even ones which seem really stupid, are much more profitable. Selling fizzy drinks is, surprisingly, an amazing business. Perhaps the best. Coca-Cola’s return on equity has rarely fallen below 30% in any given year. That seems very unfair because being an airline is hard work but making Coke is pretty easy. It’s even more galling because Coca-Cola don’t actually make the Coke themselves - that is outsourced to “bottling companies”. They literally just sell it.

This is such a crackerjack essay. Clear, concise, and uncomplicated. I find it hard to argue with. I’ve repeatedly mentioned an internal paper that leaked out of Google last year, titled “We Have No Moat, and Neither Does OpenAI”. The fact that OpenAI has lobbied for stringent AI regulation around the globe suggests that they fear this too — their encouragement of regulation could be explained by seeking a regulatory moat because there is no technical or business model moat to be had.

Paterson, expounding on his comparison to the airline industry, observes that commercials airlines have only two suppliers: Boeing and Airbus. He continues:

LLM makers sometimes imply that their suppliers are cloud companies like Amazon Web Services, Google Cloud, etc. That wouldn’t be so bad because you could shop around and make them compete to cut the huge cost of model training.

Really though, LLM makers have only one true supplier: NVIDIA. NVIDIA make the chips that all models are trained on — regardless of cloud vendor. And that gives NVIDIA colossal, near total pricing power. NVIDIA are more powerful relative to Anthropic or OpenAI than Airbus or Boeing could ever dream of being.

At this moment, there are three companies in the world with market caps in excess of $3 trillion: Apple, Nvidia, and Microsoft. There are only two more with market caps in excess of $2 trillion: Amazon and Google. Engineering, training, and providing LLMs isn’t the business with a moat. The business with a moat is making the cutting-edge computer hardware that trains LLMs, and that belongs to Nvidia.

I have more to say about Paterson’s essay, but I really just want you to read it for now.

★ Friday, 29 November 2024