Who pays for the copyright protection that AI companies are offering?
The cost structure of an offering that looks a lot like an insurance business
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The lawsuits are piling up against OpenAI. Companies like Google, OpenAI, and Anthropic have said that they will defend their customers against copyright infringement claims. It’s a good move by them, but there’s a cost to account for here.
On the surface, it looks like AI companies are offering copyright protection for free. "If you get sued for copyright infringement by using our products, we'll cover all the legal costs". This is akin to running an insurance business. But running an insurance business is very different from running a technology business. They will spend more money, take longer to get stuff done, and still do it all inefficiently.
This is like an animal with the head of an antelope and the body of a penguin. I asked ChatGPT to create such an animal and make it work at an insurance company. The above image is what it came up with.
The next question would be the question of insurance premiums. AI companies are offering this protection without asking their customers to pay a monthly premium, so they have no float to work with. How will they cover the legal costs? From their own pockets?
Here are three key items to account for when you run an insurance business:
1. Risk Management: Understanding and managing risks is fundamental. This involves accurate risk assessment and setting appropriate premiums. Large variety of customers will be using these tools for a large number of projects. Covering that giant surface area is an arduous task.
2. Capital Management: You need to have enough capital to cover potential claims and to ensure financial stability. Customers will keep filing claims as they keep getting sued for infractions. If you have to pay out, you need enough capital to handle it and still run your core business.
3. Processing Claims: Providing excellent customer service is an important function both in terms of customer retention and the company's reputation. How would you process claims submitted by customers? How do you know if they are valid? You'll have to invest time/money/resources to assess those claims. It needs to be efficient, fair, and quick.
There are many other factors as well, but these three are critical from a financial perspective.
When AI companies use a real insurance company to do this, they will have to pay a monthly premium to them. And this payment amount goes up with the number of customers using the product since it increases the surface area of risk for the insurance company. More customers using the product would mean there's a higher likelihood of someone getting sued, so the risk is higher. This mean you need to pay a higher monthly premium.
So AI companies need to either price it into their offering by increasing the price of their offerings. Or ask customers to pay a separate monthly "insurance" fee if they want to be covered in case of a lawsuit.
The more likely path is that AI companies will increase the price of their offerings so that they can price in the cost of providing this insurance.
What does it mean for AI startups? The cost of revenue will go up. And now AI companies have to factor in two additional types of costs in their business model:
1. Cost to defend their customers against copyright infringement claims: This will be more like an insurance business.
2. Cost to pay publishers to license their data for training: This will be more like a Spotify-type business where they have to pay the creators. Bigger publishers will get paid by these companies. Smaller publishers might use this platform for distribution and hopefully when they get big, they will get paid.
If you're a founder or an investor who has been thinking about this, I'd love to hear from you. I’m at prateek@moxxie.vc and our fund Moxxie Ventures leads seed rounds.
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