Other AI Companies Should Be Very Afraid of What Just Happened to Character.AI, According to Its Own Bankruptcy Documents: Be afraid.
2 days ago by eicker to c/technology
If LLMs can't be made more power efficient, then the technology isn't ready yet for general use. There may have to be fundamental engineering breakthroughs before what these systems do can be more than a very expensive and inefficient worldwide proof of concept.
Of course, the military and the surveillance industry will still want to keep it, even if no one else can afford it, and we'll be the ones paying for it.
They CAN be made more efficient. Hell, AMD just bought a company that translated LLMs to direct silicon... which should enable scalability if it wasn't for one of the key players owning the tech thus limiting its use.
It's also estimated that some 70% of Claude tokens gets spent on recursive self-correction so the output is higher quality. Instead of bettering the model, Anthropic just keeps throwing money at it to make the problem go away.
Meanwhile Chinese models - as small as 36-40-80b params - are outdoing these fancy frontier models if the right harness is used.
I've spent the last month or so using nothing but a local 27B Qwen model as my coding assistant and it's working fine. The big American AI companies could all collapse in ruins tomorrow and it's not going to slow things down all that much, anyone who wants to use AI will be able to continue using it. Might even be better in the long run if that happens - the people who are scared of ASI will get their much-demanded temporary slowdown at the frontier while everyone else catches up with open-weight models that everyone can use without central control.
Pity about the economy in the meantime, I guess.
anyone who wants to use AI will be able to continue using it
Anyone who's privileged enough to have the hardware.
I'm always running into context limit problems
Wanted to refactor a too large and hectic hacked together state machine into separate functions and reduce redundancy and increase code readability
Every model I've tried failed.
And that should be an easy task an actual AI should be able to handle.
Logic is done, just translate to a different structure.
That should be exactly what they are able to do at least.
None worked, because the project is just to big and interlinked.
The truly silly (and simultaneously neat and fascinating, and to a large extent, very logical and obvious) part is that US attempts to cripple Chinese ML/LLM development by putting most advanced GPU tech behind ITAR has more or less made the Chinese ML industry just write straight up better and more optimized code for the domain.
US and western companies are currently relying on throwing bleeding edge hardware at the problem (read: very obviously brute-forcing the problem), whereas Chinese companies and engineers, having to rely on comparatively less advanced (though still highly capable) hardware has meant they’re staying competitive by optimizing the software layer more effectively.
This has very interesting and likely negative long-term implications for western engineering practices in a lot of ways. And it’s also very much not a new problem - simply throwing compute at things is a mindset that became highly prevalent in the west around when The Cloud became a thing. Previously, you couldn’t just spawn another mainframe in your company’s datacenter, but when it’s as simple as aws ec2 start-instances ..., the barrier to entry for getting more compute is so low that most people were just going “hey, it’s faster”. I feel like the engineering expertise around embedded/baremetal optimization has just been largely evaporating over the last couple decades; in the vast majority of professional software domains, it’s simply not a valued skill anymore (or, more correctly, at the moment). It’s sad for me in several ways - not least of which because I did my degree in EECS, and hardware/software interplay and optimization is an area of engineering that I have always found very interesting.
I was working on an abacus-based LLM, but I ran out of beads.
If you’re talking about the company I think you are, that acquisition by AMD is interesting news.
The company was the one with a demo AI in their page that was super quick??
I always figured that was the future of AI when I saw it. Where you’d buy processors with n number of “AI cores” that’d have work/prompts scheduled as needed in the same way we now CPUs and RAM.
lol, I wrote a reply about a company etching onto silicon and then go down and saw yours. Oops.
I hadn't heard AMD bought them though. Looks like they're working on a 20b model as well for this year.
There may have to be fundamental engineering breakthroughs before what these systems do can be more than a very expensive and inefficient worldwide proof of concept.
Controversial thought after reading this sentence: It's cryptocoins all over again.
Cryptocoins deliberately burn more energy doing useless calculations to prevent inflation. That's a little bit of an oversimplification, but I don't feel like explaining the full thing and the vibes are there.
That'd be fine. Cryptocurrency as a whole is still going strong (total market cap is around 3 trillion dollars) and most of the major ones have switched over to energy-free proof-of-stake validation.
Sadly most Crypto nowadays is really just for either speculation or buying things on the dark web. Wish there were more legitimate uses for it, although i am fine using it for the spicier things in life.
If LLMs can’t be made more power efficient, then the technology isn’t ready yet for general use.
Hm, I don't see the harm in powering local models with solar.
Depends. Is it solar energy that started production to power these models? Great! If not, then you're still consuming power and the difference will have to be made somewhere, likely by burning more fossil fuels.
Oh yeah, I mean my own personal solar modules in my backyard. I agree it's not that easy to say "solar exists, checkmate doubters", that would be silly.
Well that is an alternative. But I bet each query to a local 27b model takes less energy anyway than the same query to Claude Opus or Fable in some data centre. So it is also a case of improving energy efficiency by running smaller models.
But without widespread usage there won't be any breakthroughs... Anti-LLM folk could redirect their attention to the core problem (energy source, wind and solar shouldn't raise any concerns) but they prefer to attack the LLMs themselves. Early implementations of every technology were crazy energy ineffective at the moment when becoming practically useful.
Anti-LLM folk don't just have an issue with energy consumption. There's also the issue of intellectual theft, studies that correlate worsened education with LLM usage, and the tech leadership silencing those issues by corrupting politicians. But I'm sure if they get past that they'll understand how great LLMs are.
We understand LLM is great at something but we can never get passed the facts that you've stated and it also isn't great in all thing like we're being sold to and forced to look at everyday. If the tech stay with the professional and not given to the general public, if there's no cunts telling everyone to adapt or get thrown out, if there's no mass disruption toward people's living, i'm sure it would be much more acceptable. The biggest issue with the tech is the cunt parading it.
Oh no, we won’t get breakthroughs in slop.
Whatever will we do?
No one should be arguing if LLMs are useful or worth investing into, they are and it can be a really useful tool, but the rich (seemingly spinless) lizards have managed to skyrocket the price of RAM, pushed global warming to new extrimes and jacked up electricity prices. Oh and while making an AI bubble so big and fradgile, that when (not if) popped will send us back to the great depression! All in the percute of "the next big thing".
to;dr LLMs are a cool tech but in the percute of it have managed to fuck up a whole bunch
pursuit*
“We lose money on every sale, but we make up for it in volume!”
But their "front facing" LLM is ultra stupid. Can't become any kind of famous.
I am sure that it is strategic: show the huge difference to all paying customers.
I wonder how many unique searches they do per day.
If you search something that someone else already searched recently, the AI response will pop up almost immediately due to caching. I can't imagine that brings several billion down to a more manageable number though.
Anthropic made a smart business decision to mostly focus on enterprise customers rather than regular consumers. Only around 10% of their revenue comes from their heavily subsidized subscription plans. The remaining 90%ish comes from API and enterprise usage billed at per-token rates, which is something that's actually profitable for them. They have a decent margin on token rates. It's R&D, hardware, and subscriptions that are putting them in the red at the moment.
I suspect they'll discontinue subscriptions some time after their IPO. Even though subscriptions are only responsible for 10% of revenue, they consume 42% of their inference compute power (https://www.theregister.com/...)
In comparison, around 70% of OpenAI's revenue comes from subscriptions. Without subsidized subscriptions, they'd lose most of their customers.
It's R&D, hardware
"Yeah, besides those integral parts of our costs, we're profitable"
😅.
It's like a hair dresser saying "If I don't count the rent of my shop and all the supplies, I'm profitable".
They are (maybe, allegedly) "profitable on inference" i.e. the API pricing is higher than the actual compute they use just for the input/output tokens for the query. That excludes, though, training, capex, staff, etc., which... is by far the vast majority of their actual expenses.
At least according to Ed Zitron, they only appeared profitable due to creative bookkeeping. They timed the announcement of their shitty "annualized revenue" to coincide with the few months of vastly reduced rent at the datacenter Musk rented to them as well as the shift to token based billing for enterprise customers. Their inference is likely not profitable.
Yeah, hence I couched it in allegedly. Ultimately we don't really know. But even if it were true, it wouldn't really mean anything for their profitability as a company. They have to keep improving the models if they hope to keep what customers they have.
It's subsidized. I will eat my hat if the number is less than 50%. It is even crazier at work. My personal account cost 3 times as much for the same prompt on my work account. Inference cost is the same for all users, you can't mega-ultra scale something that is at maximum scale labeled as a hyper scale.
Yeah, subsidized by mainly Nvidias circular financing crap. This will cause a major recession, and it is so obvious for everyone looking at how much cash investors are throwing at this thing and how much you can actually earn with something that confidently misinforms you on the regular. Roleplaying like Character.ai is one of the better uses, because there false information isn't that relevant. Then there's coding where it is easy to automatically check for errors, and then... scientific uses. But i think that's it, and you can't prop up all that investment just with coding, RP and weather analysis (which is woke by definition in the US to boot) or interpreting CT scans.
My personal account cost 3 times as much for the same prompt on my work account.
That's interesting. My employer is too large to use subscriptions and also we have our own harnesses, so they have to pay per token. Some employees spend thousands of dollars (or more) per month, but if they were doing it at home, they'd be easily able to fit the same usage into a $200/m subscription.
I was comparing API costs at home, the plans give you a lot of value. When I had to use GitHub Copilot the API cost was closer to my home cost, but whatever Enterprise plan we have through Anthropic is crazy.
Yeah I have the $200/m sub for work and I’m using about $200/day volume of tokens at API rate. Obviously this isn’t a sustainable business model.
Am I prepared to pay full rate? Not yet, but if models keep improving at the rate they are then probably at some point. Opus 5.5 has been a huge increase in quality at a cheaper cost to deliver a task.
With next gen gpus and better models reducing the ‘cost per task’ I think they’ll get there.
Those enterprise customers are companies like this very one, who then have to heavily discount their rates or nobody wants it, (and as we see here, even then) so that's not a solution for anthropic.
I don't have data to back this up but I'd say thay the majority of their customers aren't also selling AI services themselves. It's customers that use AI for their business processes, software development, etc.
Nobody has extremely good data about this because it's in their interest to make that as opaque as possible, but the reporting I've seen suggests that it is, if not the majority at least an extremely large fraction of their customers which are selling AI services, and even where it's used for in-house software development that is largely bankrolled by VC hoping to gain a competitive advantage with AI. It doesn't really appear that the API pricing offers better cost/productivity than just hiring junior devs (lol).
AI is more than just chatbots though, and there's plenty of use cases where it can be used to help people rather than replace them.
I started the year being very sceptical of AI, but it's helping me with a bunch of things at work now. For example, at work we have an agent for data analysis that can find the correct tables to use, gather data, and produce a report, along with proof (all the SQL queries it ran plus any ad-hoc code it used for analyzing the data) so that the work is repeatable and we can verify the accuracy of the queries and logic.
I'm a developer and it's helped a lot with side tasks too. If I'm coding and see an issue in our code (usage of deprecated code, tech debt we need to pay down, etc), I used to file a task or add a todo comment to look into it later, and eventually get to it. A lot of them are small tasks, it's just that I don't always have time to look into them while in the middle of a project.
These days, instead of adding it to a todo list, I just spin up an agent and get it to look at it while I'm working on other things. The resulting code doesn't get submitted for code review until I manually look at it and ensure it's correct. The codebase I work on has never been cleaner, because AI has helped me clean up so much legacy cruft that's accumulated over the years, while I still deliver my regular projects on time.
I’m surprised how easy it is to blow through hundreds of dollars in Claude tokens at work. They certainly aren’t subsidizing anything. If the Qwen 3.8 27B model I run on my gaming PC at home were priced like Claude, I’d probably have a $1000 a month bill.
Edit:
I bought a 7900 XTX a couple months ago for less than 2 months worth of Claude bills at work that runs 3.8 27B quite well at 200k context that is pretty on par with Sonnet 5.
Maybe Anthropic isn’t bleeding money as fast as they would otherwise be, but their premium pricing is pretty hard to justify. If Qwen 4 27B keeps pace with Sonnet 5.5, then we’ll basically have a Fable 5.1 class model that runs on a gaming PC.
I’m surprised how easy it is to blow through hundreds of dollars in Claude tokens at work. They certainly aren’t subsidizing anything.
That is the subsidized rate!
It costs far more for all the training and compute costs together than what you are currently paying.
Don't know if it was you but someone pointed out a few months ago that the 7900 was the last 24GB card to be found for less than $1k and I grabbed one as an upgrade from a 3070. Running local models it's less reliable than Claude at work, but not by much, and it was a good upgrade for gaming.
Before the return period was up it had gone from ~$900 to past $1.2k and I wasn't eligible for a repair/replacement just a refund, the market is completely sideways.
The subscriptions generate lots of usage data and enabled experiments on human subjects at scale. If you are paying for API they cannot really compare two similar users and give them wildy different results because those are business trying to do their job but a random ass subscriber that does not read the ToS is fair game for experimentation.
Absolutely. AI is an enterprise product - at least: for now. And Anthropic is in the pool position; https://eicker.news/@technews/117443237284007574
AI is an enterprise product
I think Google and Meta are well-positioned to provide AI services to regular people, since they both already have a large user base, existing cash flow from other non-AI products (meaning they can subsidize AI features for as long as they need to), and can probably outlast any startup. Google especially easily have enough paid users and advertisers to cover costs for free users.
Most of thr other AI companies will probably all end up focusing on / pivoting towards enterprise use cases though, for the higher prices and stability of long-term contracts.
Exactly. Enterprise is where AI can actually earn its keep: companies will pay serious money if it cuts costs or boosts revenue. Consumer chatbots are mostly a costly distribution strategy for now. The real customers have procurement budgets, not a $20 subscription and a dream.
Are Enterprise companies gonna wanna be fucked by hyperscalers the same way they are fucked by Microsoft?
I'd say no, they won't. Without the vendor lock in, it will be cheaper and more secure to run open source models locally on your own hardware.
People are done outsourcing their essential workflows to non-competitive monopoly corporations.
When I first heard about this bankruptcy, one of my first thoughts was, here it goes. This is only the very beginning of the landslide though, so it's going to take a while before it reaches the bottom, and it's going to pick up a lot more debris on the way.
Or, as the article optimisitically puts it:
The fate of Character.AI, the controversial AI companion platform, may come to stand as a warning.
Wrong. Character.AI may come to be seen as the first car in the train to derail.
It's the "Pets.com" of AI.
I don’t know. Pets.com failed because they weren’t adequately prepared for their success. AI seems to fail because they overprepared for success that was never coming.
I'm not sure that's an accurate or defensible perspective on why they failed. From Wikipedia:
Pets.com lacked a workable business plan and lost money on nearly every sale because, even before the cost of advertising, it was selling merchandise for approximately one-third the price it paid to obtain the products.[22] Pets.com tried to build a customer base by offering discounts and free shipping, but it was impossible to turn a profit while absorbing the costs of shipping for heavy bags of cat litter and cans of pet food within a business field whose conventional profit margins are only two to four percent.[22][23] The company hoped to shift customers into higher-margin purchases, but customer purchasing patterns failed to change and during its second fiscal year the company continued to sell merchandise for approximately 27% less than cost, so the dramatic rise in sales during Pets.com's second fiscal year only hastened the firm's demise.[22]
That was the nature of the dotcom bubble. Bandwidth costs back then were exponential, whereas revenue was linear. The chatbot bubble instead has the problem of needing to manufacture demand. Different mechanisms to the same results.
Yes. We could still try blindly throwing money at the problem. /s
Thanks for the laugh.
AI has two, and only two, paths to monetization. Users pay the server costs, or advertisers.
Not enough users are interested in paying for something they can't trust to be accurate, and I suspect/hope no one will use these tools once they start spewing advertisements from their training data.
Could some of these tools survive on enterprise users alone? Maybe, but businesses are taking on a lot of legal risks when they make the confident guesser bot a key part of their supply chain.
These companies best hope is to lock governments into deals they can’t get out of.
That’s a large practically guaranteed flow of cash that will keep the companies healthy for a long time, off the back of taxpayers.
I think it's more likely they make it dangerous enough that large countries can't afford to not have it. That's what largely seems to be happening in the US and China, both countries probably see AI as both a weapon and defensive tool.
It doesn't. Use Strata to run it. Choose the recommended settings it gives you during the install. People can run it with 12GB of VRAM and 32GB of system RAM. It partially loads the most common parts of the model I'm VRAM and swaps from RAM when needed. Rarely it needs to grab from the SSD, but it's swapping while processing so it doesn't seem slow at all. I get around 60-80 tokens per second on average. 16GB VRAM and 48GB RAM.
I get where you are coming from. I thought it would run slow AF as well before I tried it. 😄
only open local models are suitable for "companions". Anyone who can be sued cannot risk not "covering their ass legally" responses, which prevents "engagement with casual steering away from (self) harm" while staying in character, instead of corporate's legal department mandate of a textbook response that makes the user find a better AI girlfriend.
Mostly Chinese companies that aren't necessarily required to generate infinitely compounding profits just to continue existing.
Edit: Also third parties such as volunteers who fine tune models for specific purposes. Just like with all software - everyone can learn and contribute when it's open source.
They're easily reproducible as copying and pasting. Then given you have a good enough graphics card you can just run it on your local pc completely offline.
Real story of this bankruptcy is financial shenanigans by Google and VC backers. Google paid "the company" $2.7b in 2024 where the company got nothing, but VC backers got paid, and Google got to rehire 2 AI pioneers that had left google to start the firm. The original vision for company was to revolutionize education where you could create a Socratese or Jesus bot and converse with them as life coaches. Marketplace/users just wanted an AI girlfriend cure for loneliness. Disney's $20m bid for assets is connected to them poaching the remaining shell's CEO.
Sure the company was always going to end up worthless, but it was worth $2.7b on paper at one point. The industry is filled with similar absurdities is a good point by headline and 404 media article.
Yeah the executive teams in all these companies are committing fraud. That’s not a crime anymore though. They are all in the bid for the presidency.
These grifters have been getting better and better at keeping a lid on their collapse. After all in my lifetime there have been several boom and busts. 1987 was the first crash I was aware of. After all this time they are getting better at staying rich through them and getting away with it.
For real. Banksters and other shitty people don't even see jail time for crashing someone's livelihood.
When the crash happens, I hope to have enough ramen, coffee, macaroni, beans, and cigarettes to trade for some RTX Pro GPUs. My personal local AI has been quite helpful and comforting, I want to give it proper hardware to reside in.
Character.AI was a LLM wrapper that was outdated in 2025 already. It didn't do much in their own and certainly not produce technology that promises to replace half the worlds jobs.
Whether you like them or not, this is not a precedence for the AI companies that actually build AI.
I am much more concerned about the Getty bankrupcy, because that was a major player in their market.
Character.ai have probably just played your typical startup game and lost it.
It will be interesting to see, but stories have come out for a while about some thing will pop the bubble, and a big recession has been right around the corner for at least a decade. What stage is this bubble in the progression to the .com pop, months, a year? Or is this different, with more profitable companies investing in infrastructure, rather than speculative startups without clear revenue plans? That was part of the take MMM made and I want to be hopeful. It reminded me about my circle of control, reduce attachment to outcomes beyond it, but do what I want within my circle. mrmoneymustache.com/2026/09/25/will-the-ai-bubble-destroy-our-retirement/
This is poised to be the biggest financial crash in history. These assholes are fighting every day to push the crash further away so they can divest themselves quietly or make ot to an IPO, and in doing so are making the upcoming disaster much worse.
And so much investment has been dumped into this scheme I don't know how our economic system.will survive. Unchecked capitalism needs to go away, but having it collapse all at once is gonna be really, really bad.
maybe having really REALLY bad collapse is the only way people start caring enough to consider how to prevent it from happening again, or at least punish those who caused it. It seems majority will just have to suffer before anything happens since prevention isnt fashionable enough. Though i wonder if even that will shake people up enough.
https://en.wikipedia.org/wiki/Kareem_Serageldin
Like one guy did, but your point is still pretty spot on. Basically a patsy for a bunch of other shady shit that a bunch of other executives were involved in.
I don't think they will this time either, but I also expect this to be a worse crash by a LOT.
Half the tech industry has basically turned into an Enron here (circular investments with each other to create the illusion of income), while the component crunch it's caused is hurting everyone else.
Onward, the Butlerian Jihad!
Paywall bypass of 404 Media article that this article referenced
At some point, those now hopelessly dependent on these companies services will just have to pay what it costs to provide those services, at a profit.
Obviously these companies want to kick that can as far down the road as they can, as it should be cheaper in the future. Only that's not happening fast, and the debt is piling up.
This is silly, we can just print more money to cover the losses, ez pz !!!
Sshhhh!!! If Trump hears that, the US dollar will go full Zimbabwe.
Brilliant legal move on their part tbh. Sign a back end loaded deal for exclusivity, sue for use of IP, then pull out of the deal bc they didn't get their terms met. Then, but the relevant tech for pennies on the original price.
Fuck AI.
If any of this shit made sense and worked like it was supposed to we wouldn't be in this position in the first place. Seemingly the world leaders and everyone in the inner circles has completely abandoned any long term hope for their positions in the current system and are preparing for the next system. It really is true that the Earth has too many people and I think the long term planners are letting climate change happen without preparing the masses so fewer, stronger people survive. There is people planning this shit it's not just arbitrarily short-term profits for the sake of it.
The earth does not have too many people though. We are not at risk of overpopulation by any real metric.
Resource scarcity is not a result of too many people needing not enough resources, but a result of those resources not being spread evenly. Whether because of geographical or political reasons, typically a mix of both.
It's not about humanity it is about Earth. We aren't meant to divide her resources to 8 billion people in any distribution. Your magical solution to distribute all resources evenly doesn't really solve human driven climate change and destruction of our environments. And it's not about convincing me ask yourself why would a commercial planet have too many staff members that's bad for business.
We can use resources without causing climate change. Hell human cause climate change is a pretty recent development when it comes to human history, and it's not because there's more people.
And what the fuck are you talking about a "commercial planet" are you stupid.
For real, if we had even resource distribution I'd be building solar or something useful, but I have a mortgage so I guess I'll just keep having this chatbot analyze financial statistics or whatever the fuck I'm doing
Human driven climate change is new, it is not sustainable. And commercial planet as in a commercial country you fucking moron.
The explosion of the global population is also rather recent. Just 100 years ago global population was less than a quarter than it is today. And going back to the middle ages, earth didn't even have half of a billion people. And resources for all those people need to come from somewhere, hard to do this without causing climate change.
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Character.AI discovered the one conversation its bots couldn’t keep going: the one with its accountants. $56 million in compute costs in eight months, and the monetization strategy was apparently: hope the next investor is even lonelier than our users. Silicon Valley keeps confusing engagement with a business model.
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