Character.ai's Bankruptcy Documents Show the Economics of AI Don't Work

toomuchtodo

Sort of. Big fan of 404media usually, but they need to "look through the bubble" to understand this can and likely will be replicated on device when local models and inference catch up, which they will eventually (Apple Intelligence, Hermes, OpenClaw, etc). Slap iCloud and Google Storage sync on the app, and you've got your own character bots in your device ecosystem.

armcat

There are a tonne of AI companion apps out there now, lot of them focused on nsfw, it's going to be interesting to see if character.ai is an isolated case, or if it's a domino effect.

coloneltcb

I think it's more nuanced than that. Yes, it's true that the economics are horrible. But it's also true that consumer startups are hard. And then when you tack on legal fees and product changes due to policy concerns, it becomes impossible. Maybe the lesson is that the world isn't ready for a product that targeted minors with fake friends based on existing IP. Maybe it never will be.

NichoPaolucci

> Character.ai’s bankruptcy is the one of the first dominos to fall in the long-foreseen AI bubble. Kind of speculative, and a very bold speculation at that. I don’t have anything else to say, but one company that was obviously mismanaged doesn’t really get my attention.

ripvanwinkle

Character.ai is hardly representative of the AI market. It is at best a tiny sliver. There's coding tools, business process applications and more. Now the AI market likely has some challenges around financing build outs given recent inflation driven interest rates etc. But that's very different from what afflicted character.ai

TheHalfDeafChef

I have been seeing this more and more with “top” tier publications but “Character.ai’s bankruptcy is the one of the first dominos to fall in the long-foreseen AI bubble.” A simple grammatical mistakes like this should have been caught on review/edit phase. Either that or writers are relying too much on AI. (Edit: fixed a grammatical mistake. See?)

cmiles8

The economics of AI are terrible. The exact inverse of what VCs normally say they strive for. It’s capital intensive, doesn’t easily scale without linear costs, is basically a commodity, seemingly has negative cashflow forever, and customers aren’t willing to pay what it actually costs. It’s basically the worst tech business model and yet somehow VCs caught a spell and threw every available penny into the fire. Watching this all unravel is going to be interesting.

bklosky

character.ai is a buyer of tokens, not a producer of tokens. very different businesses

whycome

The economics of AI? That’s like saying “the economics of the internet”.

ProblemExplorer

The conclusion of the article is wrong - that the Economics of AI Don't Work. A better report would have been how the "Economics of AI Wrappers Don't Work". Character.ai was likely paying frontier LLM API rates (which are known to be ridiculously expensive at 90% margins) and then had their own R&D plus lawsuit overhead. Most people can use a $20 Claude or ChatGPT sub to build a completely custom Character.ai. Once Character.ai employed MBA Strategy #3 (aka enshittification), churn killed the company (as it should) --- What doesn't work is attempting to build an AI Wrapper. Those companies had a good run 2022-2025, but with how good both open weights and cheap frontier models have become, AI Wrappers can no longer demand fat margins. I'm sure people will now argue what exactly AI Wrappers are in the comments below, but for now I'm more interested in understanding what the HN hivemind's take is on the topic as a whole.

Philpax

It's a bit silly to write an article like this without mentioning the company was hollowed out by Google in 2024. It is difficult to make a company in a fast-growing sector work when all of your technical staff and leadership are working for Google, and your remaining staff can see the writing on the wall and are checking out.

vehemenz

The headline doesn’t match the story. It is TBD whether the economics of AI actually work or not. A small company (that wasn’t vertically-integrated) going bankrupt doesn’t demonstrate a whole lot, other than that some paths aren’t viable for an AI-based business.

ChrisArchitect

Related: Character.ai has initiated voluntary Chapter 11 bankruptcy https://news.ycombinator.com/item?id=50068036

itissid

For what it's worth Michael Burry is pretty much short on the entire thing. At some point(I think mid 2027) those data centers bankrolled by loans will have to start paying rent to investors who bought those loans. If companies that are basing X% of their future earnings on new AI based products don't pay up a bunch of those data centers are not gonna be re-leased. It's gonna be a problem. An seasoned analyst can take educated guesses as to what that X is: investments made in pure chips by Nvidia/AmD vs how much capital investment— not VC — Faang(i.e ones that are just using the chips for building software) are putting into them. The difference between investment devoted to pure DC build out minus what they are spending is a good proxy to understand the overinvestment.

dragonwriter

Does it though? It arguably illustrates how the economics of building custom specialized small sub-frontier LLMs and building an service around them that can easily be replicated by open tools wrapping either frontier LLMs for equal or better quality or personally-controlled open LLMs for privacy doesn't work, especially in a market where privacy is a selling point. But I think that it is dubious whether that is a good proxy for “the economics of AI” broadly. Which I am not saying are good—I just don't think Character.ai has much probative value on the broad question on way or the other.