Photo Credit: Towfiqu Barbhuiya
Character.ai files for bankruptcy, illustrating the sheer amount of money and resources burned with little gain and numerous lawsuits to show for it. The crash-and-burn could offer a preview for the music industry.
The extreme financial pressures and upside-down economics of artificial intelligence, involving expensive upkeep and equally expensive lawsuits, should make the news of Character.ai’s bankruptcy easily predictable. The circumstances of the company’s failure illustrate precisely what AI critics have been warning about for the past few years: that AI is expensive, resource-intensive, and ripe for legal challenge.
To further complicate matters, Character.ai faced questions over the potential harm to its (mostly young) userbase, and it was facing at least two lawsuits from parents who blamed the platform for their teenage children’s suicides. The company’s attempt to cut costs by degrading its product (so-called “enshittification”) ultimately failed, leading to its bankruptcy filing on Tuesday.
“Character’s impressive technology is expensive to operate,” wrote CEO Colin Adams in the company’s affidavit. “At all times, Character has struggled with profitability, and its operational expenditure has been high.”
You don’t say!
In 2024, Character.ai said it spent $13.8 million each month on AI compute, while its subscription revenue peaked at $2.8 million per month. Revenue from all sources, including ads, peaked at $5.3 million per month. That revelation comes after Character.ai was valued at $1 billion on a $200 million raise, backed by a16z. Google was also rumored to invest in the chatbot creator in 2023.
This year, between January and August, the company spent $56.1 million on its computational costs and was losing “approximately $8-9 million per month,” which it actually cited as a massive improvement over the year prior. Employee salaries and benefits cost $19.7 million during that same period, and Character said many employees quit because they started questioning the company’s long-term viability.
Just last year, Disney sent the company a cease and desist, demanding it stop using its copyright characters without permission. Disney has also reportedly offered Character.ai $20 million to license some of its iconic characters, and the House of Mouse may ultimately be the one to salvage the company’s tech.
As 404 Media points out, the lawsuits and financial strain on the company, while significant, are not unusual for an AI industry that has been the subject of legal questions surrounding the unauthorized use of intellectual property. What sets Character apart from AI giants like OpenAI isn’t just the parents concerned that the company’s chat models influenced the deaths of teens, but that OpenAI, Anthropic, and others have managed to repeatedly get cash injections to keep their operations afloat.
Despite its bankruptcy proceedings, Character.ai says its platform remains up and running. However, it is still unclear how long the company’s operations will continue and who will ultimately take over its technology. Hint: probably Disney.
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