"OpenAI spent $15MM in tokens to solve a problem with a $1MM prize. Standard AI economics here" growing_daniel (Daniel Francis)
Editor’s note: a couple days late; I’ve been building a model on the AI complex, from the perspective of the commodities of compute & tokens.
The meta-takeaway is that you can build a very robust, global dynamic market model, using primary & alternative data sources, w/ corporate finance & econometric logic interwoven, in ~10 days, for very cheap.
The most practical takeaway follows -
STANDARD AI ECONOMICS.
The AI market is a commodity market…
“NVIDIA compute is fungible, durable & highly rentable. It is a productive, revenue-generating asset” - Jensen Huang
…that - in many ways - looks similar to the oil market.
While there are many topics worthy of discussion, Frontier Lab Economics (i.e., the economics of firms like Anthropic & OpenAI), stand out.
In the analogy to the oil market, Frontier Labs are the AI market’s refiners.
For the refining market, a standard economic measure is the crack spread.
Crack spreads don’t vary too widely (and are reasonably healthy at the moment).
Conversely, in the AI market, the Frontier Labs’ current spread - call it the Rack Spread - looks more like buckshot than a distribution:
Standard AI Economics has been & looks to continue to be (with 1, maybe 2 very large exceptions), that Frontier Labs operate at massive, negative gross margins.
That cannot persist indefinitely.
That reality has - and will increasingly - require significant equity funding in the short-to-medium term (hence, IPOs are inbound).
When & how that money slows will likely have profound impacts on both equity & credit markets, as well as token & compute prices.
On the highest level, there are (in both my opinion & the LLMs operating my model) seven other signposts - beyond funding - in the compute & token markets that have the capacity to affect outside equity & credit markets.
Commodity markets are notoriously hard to model - dynamic variables reflexively interact.
That said, there’s never been an easier / faster / cheaper time to do it -
OTHER NEWS.
More on Venezuelan Oil Structuring
Schrodinger’s Strait of Hormuz Continues
If anyone is interested in discussing modelling out the AI / Compute / Token Market, then shoot me an email (doing information exchanges, locally / London, for the time being) -