OpenAI has turned the tech industry upside down in just a few months. The launch of ChatGPT has dazzled college students and tech CEOs alike and set off a new "race" in the tech sector, according to Microsoft (MSFT 1.82%) CEO Satya Nadella. Indeed, his company, which has invested $13 billion in OpenAI, and Alphabet (GOOG 9.96%) (GOOGL 10.22%) are already battling for supremacy in generative AI.
However, the emergence of ChatGPT and other AI chatbots has also sparked a new round of concerns at the potentially negative consequences of artificial intelligence, which is fast surpassing human capabilities in a broad range of subjects. CEOs including OpenAI's Sam Altman have asked for artificial intelligence to be regulated, and a petition from the Future of Life Institute signed by academics and even Tesla CEO Elon Musk called for a six-month "pause" in generative AI development.
Now, OpenAI is getting its first serious pushback from regulators because the Federal Trade Commission (FTC) has opened an investigation into the AI start-up. In a 20-page letter, the agency said it's examining OpenAI's security practices, including how it trains its models, what kind of data it uses, and whether it violates privacy rules.
The investigation is being spearheaded by FTC Chair Lina Khan, who has promised to be more vigilant in policing tech companies, including emerging industries like AI. Khan's FTC recently sued Amazon over deceptive customer practices in its Prime membership program.
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What it means for investors
The news of the investigation hasn't rattled stocks in any meaningful way, but it's clear that excitement around artificial intelligence is a major reason why the stock market is soaring this year. Big tech stocks have jumped broadly. Shares of Nvidia (NVDA 6.18%), the leading AI chipmaker, have tripled this year, vaulting the company's market capitalization into the trillion-dollar club.
The FTC doesn't have the power to stop the AI boom in its tracks, but it could tame the breakneck pace of investment in the industry, depending on what it finds in its investigation. The FTC's chief concern seems to be that OpenAI's models are using individuals' "sensitive information," as Khan told a House committee last week.
Typically, if an FTC investigation yields a penalty, it comes in the form of a fine. The biggest fine in the commission's history came in 2019, when Meta Platforms (META 0.43%) (then known as Facebook) had to pay $5 billion for privacy violations stemming from the Cambridge Analytica scandal. Meta made changes as part of its settlement with the FTC, but they've had little discernible negative effect on the company's business given its advertising segment continues to generate high margins.
The worst possible outcome
Based on the FTC's history, the worst-case scenario as far as a penalty is concerned for OpenAI would be a fine in the multibillion-dollar range. Considering that OpenAI has Microsoft's backing and the tech giant has built its AI strategy on top of OpenAI's technology, a fine alone is unlikely to significantly derail OpenAI's progress.
The greater concern is that the FTC could implement new rules on privacy and require costly audits and controls from generative AI companies like OpenAI to make sure they are complying with all applicable regulations. If those rules are strict enough, it could dissuade investment in the technology, or at least cool it off, and it could also bring down the sky-high valuations for AI stocks like Nvidia and C3.ai (AI 3.02%). Running models like ChatGPT is already costly due to the cloud computing infrastructure required, and additional regulatory costs could narrow the path to profitability for these kinds of generative AI chatbots.
Additionally, any FTC action could set a precedent for governments in other parts of the world. Europe has consistently taken a more aggressive stance on privacy in the tech sector. ChatGPT was even banned from Italy in March over issues like collecting personal data before OpenAI made the requested changes and got the chatbot restored.
For now, the investigation shouldn't alter your approach to AI stocks, but it deserves some attention. Generative AI has heralded a brave new world in technology, and regulators are likely to impose some kind of guardrails sooner or later, especially since tech leaders have demanded regulation.
