Recently, the chatbot company Character.ai filed for bankruptcy, stating that it had tried unsuccessfully to “sustain and improve our business amid significant legal, regulatory, and operational headwinds”. It comes on the back of facing several very public lawsuits, leading some to claim that this is a win for public action, and some that this is the first sign of the AI bubble bursting. Character.ai launched in 2022 and allows users to interact with chatbots based on popular fictional characters or real people. It became very popular with young people.
Character.ai has made headlines for several lawsuits related to children’s safety, due to a teen dying by suicide after developing a dependence on one of the company’s chatbots and other cases of teens developing unhealthy habits as a result of interacting with them). They have also faced accusations of copyright infringement and a lawsuit due to some chatbots “claiming” to be licensed medical professionals.
An article in 404 Media gives the following insights:
- Character.ai reported spending $10 million per month on AI compute in 2025, while revenue peaked at $5.3 million per month. They spent nearly double their revenue on only AI compute, on top of standard expenses like employee salaries and benefits.
- The cost of the various lawsuits against the company only increased the expenses, and may have been the factor that finally pushed them over the bankruptcy cliff.
- The company attempted to save money by laying off employees and deeply enshittifying their product. However, even after putting restrictions on free accounts, using cheaper models, and drastically increasing the number of ads users see, they still were losing $8-$9 million per month.
- Companies such as OpenAI, and Anthropic also have lawsuits against them and questionable finances, but are kept afloat by investors regularly providing them with new money to burn.
However, just because it went bankrupt, doesn’t mean it is entirely going away. In an interesting twist, Disney may have pushed them into declaring bankruptcy. After years of conflict, they struck a deal to hire most of Character.AI’s employees and purchase most of their codebase. It seems likely that they intend to create their own, licensed versions of the chatbots for their characters.
Key takeaways for AI resistance
- Litigation is working. While the extent of the impact of the lawsuits is unclear given the mismatch between compute costs and revenue, it is likely that they hastened the company’s downfall. On top of the financial penalties, the news around the lawsuits caused reputational damage that likely decreased potential revenue.
- The “reverse acquihire” tactics that Disney is using also point to the impact of litigation. It is an attempt to acquire the assets of the company without being responsible for the lawsuits. We must be aware of the tactics used to stifle the impacts of resistance.
- This is yet another indication that the AI business model is not proven. The industry is being propped up by VC capital and circular financing which means that it is far from inevitable.
Image: Jenny Kidd & Synthetic Pasts / https://betterimagesofai.org / https://creativecommons.org/licenses/by/4.0/