Breaking news came on 2nd August, 2024 that Character.AI co-founder and CEO Noam Shazeer was returning to Google after leaving the company in 2021 to found the chatbot start-up, along with another co-founder and some members of the research team. Meanwhile, Google was signing a non-exclusive agreement with Character.AI to use its large language model (LLM) technology, where Character.AI would receive more funding as part of the deal. This news has once again raised doubts in the market about the profitability of Character.AI.
Founded in 2021, Character.AI is a start-up focused on the development of conversational AI technology, specifically intelligent virtual characters and chatbots, and aims to create natural and fluid dialogue of virtual characters with advanced natural language processing (NLP) technology and deep learning algorithms. The company has launched a platform, also called Character.AI, which allows users to have conversations with a variety of virtual characters that can be personalized based on the user’s preferences and cover a wide range of application scenarios.
Character.AI has accumulated a huge user base since its release in 2022. According to the company, even before the app’s launch in May 2023, the site was receiving over 200 million visits per month, and it’s worth noting that users spend an average of 29 minutes per visit with the chatbots.
However, given the impressive level of user engagement and stickiness, Character.AI’s revenue has still struggled to cover its considerable expenses. On the cost side, Character.AI had to spend a lot of money on pre-training and post-training models to power the experiences that made Character.AI special, and the ongoing high cost generated by data centers. As of 2023, Character.AI has raised $150 million from investors. On the revenue side, subscription conversion rates are significantly low due to a high proportion of teenage users, over 50%. According to the subscription plan, users can pay EUR 9.99 per month and receive faster responses from the bots, and based on the subscriptions sold, Character.AI expects to generate revenues of $16.7 million in 2024, which means a heavy loss this year.
This is probably why Character.AI has been so desperate for investment and ended up ‘selling’ its core figures and technology. And we can gather some insights from the story of Character.AI as follows:
- The lower the cost, the better. “Over the past two years, however, the landscape has shifted; many more pre-trained models are now available. Given these changes, we see an advantage in making greater use of third-party LLMs alongside our own. This allows us to devote even more resources to post-training and creating new product experiences for our growing user base.” Character AI said in its blog. Had Character AI used third-party technology, the cost would have been much lower and easier to cover.
- Build a good user profile beforehand. Figure out your target customers beforehand and try to cater for those with higher ability and willingness to pay.
- Enrich revenue sources. A single revenue source often means high risk, whereas multiple revenue sources create a portfolio that diversifies and reduces risk. With diversified revenues from advertising and commissions, the collapse of subscription fees alone won’t lead to a disruptive catastrophe.
References:
- Team, C. L. (2024, August 2). Our next phase of growth. Character.AI Blog. https://blog.character.ai/our-next-phase-of-growth/
- Cai, K. (2024, August 2). Google hires top talent from startup Character.AI, signs licensing deal. Reuters. https://www.reuters.com/technology/artificial-intelligence/google-hires-characterai-cofounders-licenses-its-models-information-reports-2024-08-02/
- Heath, A. (2024, August 3). Google hires Character.AI CEO Noam Shazeer and his AI researchers. The Verge. https://www.theverge.com/2024/8/2/24212348/google-hires-character-ai-noam-shazeer
Great insights Weiting! It’s fascinating to observe how Character.Ai development has been doing. The journey of AI reveals several important economic and technological insights. The company’s struggles with profitability despite having a large user base highlight how crucial it is to strike a balance between innovation and long-term financial strategies. The necessity for a strong user profile and a variety of revenue streams is highlighted by the audience’s reliance on teenagers, who are less willing to pay for subscriptions. It sounds like a wise choice to work with Google and maybe reduce expenses by using third-party LLMs. It serves as a warning to startups that having cutting-edge technology by itself is insufficient; you also need to have a clear route to revenue.