DeepSeek’s ‘theoretical’ profit margins are just that

DeepSeek’s hypothetical financial snapshot of profit margins will remain just that.

By Catherine Thorbecke 

The Chinese artificial intelligence startup that rocked global markets earlier this year with its low-cost and high-performance AI models has outlined a potential path to major profitability. The transparency is laudable — even if the operating word is “potential.”

Over the weekend, DeepSeek shared an eye-popping “theoretical” cost-profit margin of 545%. The revelation came as the closing update in the company’s weeklong show that gave the world an exceedingly rare look under the hood of an AI firm. On Saturday, it published a blogpost outlining its potential profit margins when looking at a 24-hour period of inferencing costs (essentially, the computing power and related real-time operating expenses) compared to user requests for its two latest models, V3 and R1.

DeepSeek claimed that if all of these sales were billed at R1’s pricing, it could achieve a significant “theoretical” revenue while still charging significantly less than competitors. The figures come with some major caveats, which the company acknowledges. “Actual revenue is substantially lower,” because only a smaller subset of services are monetized (its app and web version remain free), it offers significant off-peak discounts, and its pricing for the V3 model is lower than for the R1. It also doesn’t seem to account for other costs, including research and development or training. In other words, this all makes its calculations highly “theoretical.”

Still, it comes at a time when global investors remain skeptical about how Silicon Valley’s sky-high spending on AI will eventually pay off. DeepSeek’s granular level of transparency stands in stark contrast to its US peers. It offers perhaps a glimmer of hope that generative AI has a path to profitability. But breaking down DeepSeek’s report reveals some existential questions about whether this can be achievable any time soon from China to Silicon Valley.

For starters, the cheap cost of deploying DeepSeek’s models has been a key driver of widespread adoption. If the company did charge all of its user requests at the higher R1 pricing, it would likely be receiving significantly fewer of them.

Competition is mounting in the global AI industry, but the pressure is especially fierce in China’s hyper-competitive market. The domestic race to woo consumers has increasingly compelled companies to offer their services for free. Last month, tech giant Baidu Inc. announced it was making its Ernie AI chatbot free to use in a bid to regain momentum. The ubiquity of no-cost AI tools in China is driving companies to slash prices while also providing little incentive for consumers to cough up money for paid services or subscriptions.

The reality is that as AI tools are increasingly being turned into commodities, people aren’t seeing much of a difference in the advantages of higher-price options. Some of this is reflective of China’s broader economic uncertainty, but local consumers have also long shown a reluctance to pay for software services even before the AI race kicked off. It will take some time for the competition to simmer down, if it ever does, in order for Chinese AI companies to truly be able to make money.

The price wars and monetization struggles playing out in China could have global implications. ChatGPT was once a standout in the chatbot market, but that is far from the case now. And despite all the money companies like OpenAI are spending, a track to sustainable profitability is looking less guaranteed as competition and market pressures drive down the prices that consumers are willing to pay.

DeepSeek, however, has always been in a unique position. The startup was spun out of a hedge fund, giving it some immunity to Big Tech companies’ shareholder obligations. In a rare interview last July with Chinese tech news outlet 36Kr, founder Liang Wenfeng emphasised that the firm’s industry-upending innovations were the explicit result of a choice to focus on research and not the pursuit of short-term profits.

But it’s only a matter of time before reality bites. DeepSeek’s blitz of transparency over the past week is likely part of an attempt to shake suspicions about its Chinese origin and penetrate overseas markets, where consumers, at least for now, are more willing to pay for AI tools. It’s not clear if this will be enough, but it should put Silicon Valley on notice that its pricing isn’t competitive.

Ultimately, companies that want to make money off AI have to do a much better job explaining why customers should pay for these services. Until then, DeepSeek’s hypothetical financial snapshot of profit margins will remain just that.

Credit: Bloomberg