OpenAI’s latest model will change the economics of software

WHEN OpenAI announced a new generative artificial intelligence (AI) model, called o3, a few days before Christmas, it aroused both excitement and scepticism. Excitement from those who expected its reasoning capabilities to be a big step towards superhuman intelligence (some reckoned it would be a bigger deal than OpenAI’s launch of ChatGPT in 2022). Scepticism because OpenAI did not release it to the public and had every incentive to overplay the firm’s pioneering role in AI to curry favour with Donald Trump, the then incoming president.

Yet since then, one point of consensus has emerged. The model, as well as its predecessor, o1 (o2 was skipped because that is the name of a European mobile network), produces better results the more “thinking” it does in response to a prompt. More thinking means more computing power – and a higher cost per query. As a result, a big change is afoot in the economics of the digital economy, which was built on providing cheap services to large numbers of people at low marginal cost, thanks to free distribution on the Internet. Every time models become more expensive to query, the zero-marginal cost era is left further behind.

Investors value OpenAI like a tech darling: it is worth US$157 billion, going by a recent fundraising. They hope that thanks to the success of products like ChatGPT, it will become the next US$1 trillion tech giant. But the higher costs of state-of-the-art models, as well as other pressures from suppliers, distributors and competitors, suggests model-making may not confer the sort of monopoly-like powers enjoyed by the tech giants.