AI Companies Tremble as They Realize It's Easy for Competitors to Steal Their Super-Expensive Work for Pennies on the Dollar

The meteoric rise of Chinese startup DeepSeek has rattled Silicon Valley to its core.

The company demonstrated that it's possible to create top-tier AI at a tiny fraction of the cost of what outfits like OpenAI have been spending. By employing some clever tricks, DeepSeek says it squeezed a groundbreaking amount of performance out of a limited number of already obsolete Nvidia chips.

The news sent a jolt down Wall Street, leading to a massive tech selloff that wiped out over $1 trillion in market capitalization — not to mention almost $100 billion in losses for tech billionaires.

DeepSeek's seemingly competent use of "distillation," which is essentially training an AI on the output of another, has caught the attention of the AI industry, as the Wall Street Journal reports, sending a chill down the spines of tech leaders.

The process effectively allows much smaller entities to rapidly train AI models at a tiny fraction of the cost, an awkward development given the ungodly sums that the likes of OpenAI have been pouring into their models.

"It’s sort of like if you got a couple of hours to interview Einstein and you walk out being almost as knowledgeable as him in physics," data management company Databricks CEO Ali Ghodsi told the WSJ.

Before the emergence of DeepSeek, the modus operandi of AI companies had been to maximize the capabilities of AI models by maximizing the computing power behind them, a mind-bogglingly expensive endeavor that culminated in Trump announcing a half-trillion dollar AI infrastructure deal earlier this month.

But DeepSeek has demonstrated that smaller and more efficient rivals appear to be able to achieve similar — if not better — results.

OpenAI has since attempted to defend itself, suggesting to the Financial Times that DeepSeek may have broken its terms of service through distillation. But as experts quickly pointed out, that's a glaringly hypocritical position to take for the Sam Altman-led company, considering its own success was built on indiscriminately stealing other people's work as well.

Put simply, there's a chance that OpenAI may have completely lost its edge, leading to plenty of soul-searching among investors.

"Is it economically fruitful to be on the cutting edge if it costs eight times as much as the fast follower?" Hanabi Capital general partner Mike Volpi asked the WSJ.

Meanwhile, Anthropic CEO Dario Amodei attempted to underplay DeepSeek's significance. In a blog post, he argued that the startup's AI model "is not a unique breakthrough or something that fundamentally changes the economics" and that it's instead an "expected point on an ongoing cost reduction curve."

Whether Anthropic and its competitors will be able to make good on that promise remains to be seen, especially considering researchers are already hard at work trying to replicate DeepSeek's success.

And that could be even simpler than one might think, at least in part due to DeepSeek open-sourcing its AI models (unlike the misleadingly-named OpenAI).

"The easiest thing to replicate is the distillation process," AI company Hugging Face senior research scientist Lewis Tunstall told the WSJ.

An AI research team from the University of California also claimed this week that it had reproduced the core technologies of one of DeepSeek's flagship AIs for a mere $30.

Instead of issuing a rallying cry to encourage US-based AI companies to keep up, the Trump administration is seemingly looking to place blame on DeepSeek, which bought its Nvidia chips right before the US made their export illegal.

"And there’s substantial evidence that what DeepSeek did here is they distilled the knowledge out of OpenAI models, and I don’t think OpenAI is very happy about this," president Donald Trump's "crypto czar" David Sacks told Fox News earlier this week.

At least the president himself appears to have received the message.

"Instead of spending billions and billions, you'll spend less and you'll come up with hopefully the same solution," Trump said during a GOP event in Florida on Monday.

In short, some much-needed competition is finally here, tearing the rug from under the likes of OpenAI. Justifying spending tens or hundreds of billions of dollars will likely become increasingly difficult, as investors are encouraged by the emergence of far more efficient — and potentially less environmentally harmful — alternatives.

More on generative AI: OpenAI Hit With Wave of Mockery for Crying That Someone Stole Its Work Without Permission to Build a Competing Product