Expert: Open-source AI models threaten OpenAI’s $7B annual losses

The battle between open-source and closed-source AI models is intensifying, with industry expert Kai-Fu Lee raising serious doubts about OpenAI‘s long-term viability. As foundation models become increasingly commoditized, the fundamental economics of AI development are shifting dramatically, potentially favoring companies with leaner operations and open-source strategies over heavily funded but financially strained closed-source operations like OpenAI.

The big picture: AI scholar and entrepreneur Kai-Fu Lee questioned OpenAI’s sustainability in a Bloomberg Television interview, highlighting the company’s massive annual losses against the rise of efficient open-source competitors.

• “You’re spending $7 billion or $8 billion a year, making a massive loss, and here you have a competitor coming in with an open-source model that’s for free,” Lee said, comparing OpenAI’s financials with those of DeepSeek AI.
• Lee pointed out that DeepSeek likely operates with just 2% of OpenAI’s operating expenses while delivering competitive capabilities.

Why this matters: The economics of AI model development are fundamentally changing as foundation models become commoditized, potentially upending current industry power dynamics.

• Companies investing billions in closed-source models face increasing pressure from more efficient open-source alternatives that offer similar capabilities at a fraction of the cost.
• This shift could significantly alter investment patterns and business strategies across the entire AI industry.

What they’re saying: Lee believes the industry is approaching a turning point where open-source models will ultimately prevail due to their economic advantages.

• “The underlying foundational model is commoditized: it costs a ton of money, and it’s hard to monetize,” Lee stated.
• “It’s becoming clear that open-source will be the winner” because it’s cheaper to make and operate, he added, specifically citing DeepSeek AI’s open-source R1 as an example.

Looking ahead: Despite predicting challenges for companies like OpenAI, Lee foresees multiple survivors in the competitive AI landscape.

• Lee expects China to have three major AI players and the US to have four, though “dozens will want to compete.”
• He characterized the AI industry as “still ultra-competitive” and predicted “frequent releases” of new large language models from “fast-moving companies.”