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)

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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.

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Philpax an hour ago | parent | next [-]

They weren't paying frontier rates. They had frontier-level staff to train their own bespoke, hyper-optimised[0] LLMs until they didn't.

[0]: https://blog.character.ai/optimizing-ai-inference-at-charact...

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delecti an hour ago | parent | prev [-]

> which are known to be ridiculously expensive at 90% margins

Is that known?

	▲	ProblemExplorer 40 minutes ago \| parent [-]
		depends on the person. Known to someone who doesn't trade on a heavily AI indexed market (in 2026 all companies, even Tyson or Chevron is an AI play but not as heavily AI indexed as those say 2 degrees away from Anthropic or OpenAI) - likely not. So if the point you're making is your typical barber doesn't know about this, I am guilty. If you want to do your own research into this, there are a lot of private reports and publications on the topic. If you don't want to spend any money, there is even a recent public analysis using a 92% API gross margin. Anthropic's October 5, 2026 analysis also points to a 92% API gross margin that SemiAnalysis based their report on. OpenAI reported paid-user compute margin reached 70% in October 2025 - a year ago. DeepSeek has similar reports. The frontier labs are comfortably in the fat inference margin territory. Do you have information to the contrary?