Watching OpenAI promote its ads business puts me in something of a nostalgic mood. When I saw OpenAI’s thirsty announcement this week proclaiming a billion-dollar revenue run rate in its advertising business, I had myself something of a chuckle. We’ve seen this movie before – I wrote an early script for it in The Search, which among other things chronicled Google’s rise to a spectacular IPO in 2004. But is it really the same movie? The answer is no – but if you squint, and take a few reasonable liberties with history, it’s clear Altman & Co. are hoping for a sequel.
The Race to A Billion Trillion
For nearly my entire career, the tech industry was obsessed with billions. A tech unicorn is still defined as a startup valued at a billion dollars or more. Within that number lay bragging rights – and promises of massive paydays for LPs, entrepreneurs, and bankers.* But the goalposts have shifted over the past decade. A billion-dollar valuation is yesterday’s news. Now the goal is to hit nine figures in revenue. If a startup is on track to reach that figure and can argue convincingly that it can grow indefinitely into the future, it has the potential to become tech’s newest and most sought after creature: a trillion-dollar “megacap” company.
OpenAI is hoping Wall St. will see in it what it saw in Google in 2004 and Facebook in 2014: An advertising-driven megacap just waiting to be born.
Both Google and Facebook made business history in their stock market debuts. Google’s S-1 announced search as the fastest growing business to ever hit the public markets.** Ten years later, Facebook rode social to the largest tech IPO to date (it raised $16 billion, which sure seemed like a lot back then…).
Now, thanks largely to the AI boom, three companies are rewriting the record books, all within the space of one year. SpaceX has already gone public and holds megacap status. Anthropic hopes to lap it with a multi-trillion dollar IPO later this Fall. But OpenAI, once considered the safest bet of the three, is struggling.
Lapped by Anthropic and facing unprecedented challenges – leadership turnover, AI safety crises, public backlash against data centers, a cratering bond market – OpenAI needs to paint as rosy a picture as possible to reach megacap status. Seen in that light, it’s no wonder the company decided to write a triumphal blog post about the growth of its ads business.
But is OpenAI’s milestone really that impressive? Yes – but with a few caveats. As the chart above illustrates, no matter how you cut it, OpenAI’s first year of advertising revenues are impressive. The company hasn’t provided concrete figures, but hitting a billion-dollar run rate just six months after launch is an undeniably big deal. Based on that, I’ve estimated that OpenAI’s advertising platform will collect half a billion in revenue in its first full year. That’s more than three times Google’s (inflation-adjusted) $169 million in the first year after launching AdWords. And it’s more than six times the (again, inflation-adjusted) $80 million Facebook collected after launching its NewsFeed advertising platform. Remarkable.
But….wait, didn’t OpenAI promise $2.5 billion in ad revenues in its first year? Yup. It also promised $100 billion in year five. Let’s recalibrate and model OpenAI’s revenue based on Google and Facebook’s first five years of platform-based advertising revenue:
Still impressive, but even if OpenAI matches the first five years of Google’s blistering growth, it will fall far short of its original projections – $67 billion short, to be exact.
Now, one could argue that OpenAI may well grow far faster than Google did in its first five years. That would be a truly remarkable feat – but it would require that OpenAI steal significant share from both Google and Facebook. When Google launched AdWords and Facebook launched NewsFeed, they were creating entirely new markets. In 2001, less than five percent of corporate marketing budgets were allocated to digital. When NewsFeed launched in 2006, that figure had risen to a paltry six percent. Over the next decade, both companies benefitted from a once in a lifetime shift from analog to digital channels. Today, digital advertising comprises more than 70 percent of total spend. The transition is over – the winners are now incumbents.
OpenAI is launching an advertising platform into the headwinds of a duopoly that already owns more than 50 percent of digital ad spend. Add in Amazon and Apple, and that figure rises to 63 percent. Those four horsemen – Google, Meta, Apple, and Amazon – have far more data, capital, and experience that their upstart competitor. They’ll fight OpenAI at every turn. And that fight is existential. So while launching out of the gates with a billion-dollar run rate is certainly impressive, I think it’s fair to say that it’ll be …. challenging for OpenAI to grow as quickly as it – or Wall Street – would like it to.
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*And this is why, multiple times during my career as an entrepreneur, banks and VCs wooed my businesses with presentations and financing offers that suspiciously converged on a billion dollars.
**There were faster growing companies by pure topline, but nearly all of them were financial engineering projects or companies with almost no revenue three years prior to IPOs.