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A prominent AI company filed for Chapter 11 bankruptcy. Character.AI makes a role-playing app that lets users create custom chatbots. Now they can play it being broke. Here's NPR's John Ruwitch.
JOHN RUWITCH, BYLINE: In an ad on YouTube, Character.AI advertised its platform as a kind of virtual choose-your-own-adventure.
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UNIDENTIFIED NARRATOR: Character.AI is an AI entertainment app where you don't just watch a story happen. You create it.
RUWITCH: And in the ad, a woman creates an animated companion that she can either talk to or text.
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UNIDENTIFIED PERSON: Let me see. We're walking through an enchanted forest.
RUWITCH: People also used Character.AI for companionship and advice. When it filed for bankruptcy last week, the company said it had around 12 million monthly active users who spent, on average, about two hours a day on the platform. But in its five years as a company, it didn't make enough money to cover its costs. It's also been hammered by a flood of lawsuits. It settled five in January, including one in which a mother alleged her teenage son took his own life after using Character.AI. The company declined an interview and referred NPR to an online statement about the bankruptcy filing, which noted significant legal, regulatory and operational headwinds.
Paul Kedrosky is a senior fellow at MIT's Initiative on the Digital Economy.
PAUL KEDROSKY: The term of art is there's a lot of tail risk.
RUWITCH: Tail risk means the possibility of problems, like lawsuits, because AI chatbots are unpredictable. They can give wrong answers or say inappropriate things. Kedrosky says even companies making frontier models or AI on the cutting edge face that risk.
KEDROSKY: It's kind of a precursor to what we should expect to see happen over the next five years as a battalion of liability lawyers come after the frontier-model companies.
RUWITCH: In fact, many of the big AI companies face lawsuits already. So is this bankruptcy a harbinger of bad things to come for the rest of the industry? Eric Goldman is a professor at Santa Clara University who follows the AI world. He says that, in addition to its legal troubles, Character.AI really got hurt by another problem that a lot of AI companies also grapple with. Their talent got poached.
ERIC GOLDMAN: I don't want to say that the lawsuits were irrelevant. But I don't think you could tell the Character.AI story without talking about the overheated labor market for AI expertise.
RUWITCH: Investment has been flooding into AI, and companies have been lavishing money on top AI experts. And two years ago, Google hired Character.AI's founders and dozens of its researchers.
GOLDMAN: The point is that after the key talent left, there just wasn't a lot of economic value remaining.
RUWITCH: Disney has offered $20 million for some of Character.AI's remaining assets. It's a fraction of what the company was once worth. But Character.AI had another problem that some other AI companies don't. It was hobbled by a narrow business model. Other AI companies make chatbots that can do more kinds of things. Matthew Sag is a law professor at Emory University who follows tech.
MATTHEW SAG: There's a limited number of people who want to pay $20 a month to have a sustained personal conversation with an AI character when you can pay $20 a month and have Claude or Chat or whatever take on a million different roles for you.
RUWITCH: Tech historian Margaret O'Mara at the University of Washington says a high-profile bankruptcy like this and the money flooding into AI companies remind her of the dot-com bubble. And that became clear, she says, during the Super Bowl back in February, which was full of ads for AI companies.
MARGARET O'MARA: That was when I was like, oh. This is just like the dot-com bust.
RUWITCH: She remembers back in 2000, when some called the game that year the Dot-com Super Bowl because there were so many ads from companies like Pets.com and Webvan, which were eventually wiped out when the bubble popped.
John Ruwitch, NPR News.
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