OpenAI's Ad Business Plan

The possibility of OpenAI building an advertising business is becoming more likely. The company is creating an AI companion device, stemming from its acquisition of Jony Ive’s design firm, with intentions to ship 100 million units, according to The Wall Street Journal. Should it succeed, OpenAI could become as widespread as smartphones.

However, projects of this magnitude are expensive, and OpenAI is not yet profitable. The company has informed investors that it does not anticipate profits until 2029 and expects to lose $44 billion in the interim, according to The Wall Street Journal. This is where advertising could be beneficial, as it is a high-margin business capable of covering the costs of scaling both AI and hardware.

With ChatGPT, the GPT Store, and a potential always-on device, OpenAI is developing an ecosystem with user engagement and behavior, which are attractive to advertisers. Despite OpenAI's limited comments on advertising, it is creating an ecosystem that could lend itself to ads.

The appointment of Fidji Simo, formerly of Instacart and Meta, as CEO of applications suggests that advertising may be a key strategy. OpenAI CEO Sam Altman's earlier view of ads as insignificant now appears to be changing, as they could become essential to the business model.

While OpenAI has a subscription service for ChatGPT, only about 4% of its 500 million weekly users are subscribers, according to the company. The remaining 96% could be exposed to advertisements, exchanging their attention for access.

Matt Garbutt, director of AI and creative at Brave Bison, believes that ads in ChatGPT are inevitable and that this development will accelerate the process. He notes that subscriptions alone cannot fund the production of millions of AI companions, and investors expect returns, making ad revenue likely once the hardware reaches scale.

Tech companies often treat advertising as one of many monetization options until financial constraints necessitate it. When a product gains mass adoption, advertising becomes essential, as seen with Netflix, Amazon Prime Video, and Disney+.

This aligns with the freemium model: expand quickly, offer the service for free, and then monetize user attention. Although AI may change targeting methods, the basic principle remains the same: attention is valuable, and ads are the means to monetize it.

Daryl Goodman-Gordon, vp of sales at Squared.io, notes that introducing advertising to ChatGPT raises concerns about user trust and intent. He believes that platforms with clear intent, such as Google Ads, present a greater opportunity. He adds that search is often under-optimized due to automation not keeping up with complexity.

Karsten Weide, principal and chief analyst at W Media Research, explains that establishing a global ad business is complex, involving various regulations, user behaviors, and market maturity levels. This requires significant capital and talent, particularly for a company already spending billions annually. However, success in this area would attract advertisers.

Advertisers are seeking scaled platforms due to the increasing costs, regulations, and opacity of dominant platforms. OpenAI offers a platform with reach, context, and inventory.

Chris Pearce, managing director, search and social specialist at Greenpark, suggests that ChatGPT's conversational nature allows for integrated ad formats that resemble recommendations rather than traditional banners, such as sponsored answers or product placements that match user context.

Altman's previous statements suggest a potential affiliate model, where OpenAI earns a commission when users purchase items through ChatGPT. However, this model may be too limited and not fully utilize OpenAI's ecosystem.

Matt Barash, chief commercial officer at Nova, anticipates native integrations that prioritize user experience and partner quality, along with new ad formats and targeting methods that could transform search practices.

Currently, OpenAI seems to be moving toward an affiliate approach. Recently, OpenAI decided against allowing users to directly shop from ChatGPT search results. The platform now provides personalized recommendations, product details, price comparisons, and reviews with direct links to merchant sites within the ChatGPT interface. These product results are currently earned, not bought.

Nina Goli, head of digital strategy at Modern Citizens, states that ChatGPT's entry into shopping changes the traditional sales funnel. She adds that AI is disrupting how people find and buy products, turning the platform into a conversation rather than a storefront.

OpenAI is venturing into commerce, Perplexity is developing an ad business, and Google is adapting its ad systems for AI. These developments indicate a shift toward AI-driven advertising.