What OpenAI Can Learn From Amazon’s Dot-Com Bubble Struggles

In the dot-com bubble of the late 1990s, the first sign of the “bursting” came when the leaders — like Amazon.com — started missing projections. Flash forward some 26 years, and we learned Monday that OpenAI is missing revenue and user projections, according to the Wall Street Journal.

So the question for the OpenAI community — and the much broader community fueling and feasting on the AI market bubble — is whether OpenAI’s problems are limited to OpenAI… or a sign that this first jaw-dropping era of AI euphoria and growth is coming to an end.

Playing catch-up

The Journal’s story reported that OpenAI “recently missed its own targets for new users and revenue.” Specifically, OpenAI missed its internal goal of reaching 1 billion weekly users (an eighth of the people on the planet) by the end of last year — and still hasn’t reported hitting this milestone. It also missed its revenue targets last year and in the early months of this year, after Google Gemini and Anthropic caught up in terms of capability and began eating into OpenAI’s market share. The company pushed back on the report, but the news still knocked the Nasdaq down a bit, with companies exposed to OpenAI getting the worst of it. But the bigger issue coming out of the Journal report is less about the exact targets and more about the reality that the market is finite and that other AI companies are “catching up” to OpenAI.

When a benchmarking firm announced a few months ago that Google’s Gemini had surpassed OpenAI’s ChatGPT in some performance metrics, I suggested that OpenAI was “in trouble.” My logic was that many of those who remain euphorically bullish about OpenAI despite its almost-trillion-dollar valuation and woozifying cash burn often justify their optimism by saying, “OpenAI is the Google or Amazon of AI.” Maybe it will be. But it’s worth noting three things:

1. The Google of the internet — Google — barely existed during the dot-com bubble. Back then, Yahoo and AOL were the “Googles of the internet.” Everyone thought they would be the “Googles of the internet” forever. Turned out, they weren’t.

2. The Amazon of the internet — Amazon — grew like a bat out of hell in the latter half of the 1990s, and its stock exploded to levels that were, at the time, astonishing. Then growth slowed, and the stock dropped more than 90%. So, even if OpenAI does go on to become “the Amazon of AI,” it may still go through a brutal fight-for-survival period. This period will be painful, and its valuation may collapse.
3. Even as Amazon’s growth slowed and stock tanked, no other company ever “caught up” to Amazon. At its lowest, it was still leaving Barnes & Noble, Walmart, and all other challengers in the dust. OpenAI cannot say the same.

What it means for OpenAI to be the “Amazon of AI”

It’s worth spending a bit more time on this Amazon comparison, because the trajectory of the e-commerce behemoth can give us some perspective on where OpenAI stands now.

Let me take you back to the end of 1999, the last euphoric year of the early internet bubble. Amazon’s stock peaked in early December. Then, the company reported its fourth-quarter earnings in early January 2000. The numbers were “very good but not spectacular,” according to a Merrill Lynch analyst named Henry Blodget, as quoted by Saul Hansell in The New York Times. Specifically, Amazon’s revenue fell short of Wall Street’s “whisper number,” a sort of informal projection among the analysts watching the company. The pace of revenue growth, while still otherworldly, slowed to a mere 157%, and Amazon lost $323 million that quarter, more than expected. (Couch change compared to AI losses, but meaningful in those days.)

There were, of course, excuses. I remember that one of them was that Amazon had bought too much toy inventory for its new toy store. Amazon said it would learn from the experience and get better at inventory management. Amazon did get better, but despite the operational tweaks, that was the top.

The Merrill Lynch analyst, Henry Blodget, should have downgraded the stock and sold his own position. Alas, he didn’t. Instead, he rode it all the way down until it almost went bankrupt a year later. Fortunately, Amazon didn’t go bankrupt. It went on to become “the Amazon of the internet” — one of the few leaders of that era to ever regain and then blow past its bubble high. In so doing, Amazon generated so much shareholder value that it made up for the zeroes in all the other internet bets that many internet investors — including this one — incurred.

Maybe OpenAI will do that.

But maybe we’ve just gotten the reminder that all markets are finite, even in the age of incredible technology like AI. And that, in finite markets, valuation does eventually matter.

At some point, if OpenAI wants to make its shareholders money, it will have to generate, say, $20 billion of annual profit to justify its current ~$1 trillion valuation (which would equate to 50 times earnings). To bring the comparison back, Amazon generated $77 billion in profit last year — more than 30 years after its founding — and only started showing signs of sustainable profit in the early 2000s. So, a long march to big returns is possible.

On the other hand, some of Amazon’s internet 1.0 competitors, like AOL and Yahoo, generate almost no profit these days. Given that OpenAI is expected to burn around $200 billion of cash before it starts generating profits, following the Amazon path will require a major change in the company’s financial trajectory, and missing revenue and user benchmarks is a serious misstep toward that goal.

Even if the troubles are limited to OpenAI, reality will eventually catch up with the euphoric AI economy. When it does, most of the current crop of AI startups will die, and valuations across the sector will compress, as they have in prior innovation bubbles (the internet, railroads, etc.). Then, if past is prologue, a handful of AI companies should survive the Darwinian shakeout and go on to inherit the earth. Does OpenAI’s slowing growth mean the AI shakeout has begun? We’ll see. But the innovation-boom pattern is as old as the hills.

As one of my cynical veteran colleagues back in the internet days was fond of saying: “Many turtles hatch. Few make it to the sea.”

A version of this piece originally ran in Regenerator; it is reprinted here with permission.

Henry Blodget is the cofounder and former CEO of Business Insider. He now writes the Regenerator newsletter and hosts the Solutions podcast.