The bankruptcy of Character.ai is one of the first dominoes to fall in the long-awaited AI bubble. The circumstances of his bankruptcy are exactly what AI critics said would happen: Character.ai burned through a huge amount of money to run its product, didn’t generate much revenue, and faced huge legal fees after causing harm to its users. Enshittification of its product to try to reduce expenses didn’t work, according to a brief filed Tuesday in bankruptcy court.
Disney would have proposed Character.ai $20 million to license some of its intellectual property; Last year, Disney sent Character.ai a cease and desist letter asking him to stop using his copyrighted characters without permission. In 2023, it was valued at $1 billion after raising $150 million in a funding round led by a16z.
Character.ai is one of the most well-known AI chatbot companies that has become popular in the field of AI companions. The company has faced various legal issues after being sued by the family of one of its users who committed suicide after chatting with a Character.ai chatbot. target of regulators who push for age verification technology due to its popularity among children. In its bankruptcy filing, the company claims that its enormous legal costs contributed to its bankruptcy, but that even without the legal problems, its business was completely unsustainable.
An affidavit filed in bankruptcy court by Character.ai CEO Colin Adams noted simply: “Character’s impressive technology is expensive to operate” and “at all times, Character has struggled to be profitable and its operational expenses have been high.”
The company said that in 2024 it spent $13.8 million per month on AI computing; by 2025, it spent $10 million per month on AI computing. The company’s subscription revenue peaked at $2.8 million per month, but was at times less than $1 million per month. Its revenue from all sources, including advertising, peaked at $5.3 million per month.
The company spent $56.1 million on compute costs between January and August 2026 alone, and by August it was losing “about $8 to $9 million per month,” which it says is a huge improvement over the previous year. The company spent $19.7 million on salaries and benefits during that same eight-month period and many employees resigned because they “began to question the long-term viability of Character,” according to the company.
Character said his finances had improved losing just $8-9 million per month by taking “significant steps to reduce operational costs and improve revenue” by spending less on compute by simplifying its AI model, laying off staff and injecting ads into its chats.
In May, 404 Media wrote that the Character.ai changes are “what AI enshittification looks like,” with tons of ads, usage limits, guardrails, and “lobotomized” models. In the bankruptcy filing, Adams essentially admits that this enshittification was the strategy: “Character has, however, taken significant steps to reduce its operating consumption, including shifting inference workloads to less expensive GPU capacity and open-weight models after training rather than developing proprietary base models. At the same time, Character has reduced its headcount,” he wrote. “Mid-2025, Character launched in-app advertising (…) in early 2026, Character also introduced in-app purchases.”
While the lawsuits against Character are significant, they are also not unusual for an AI industry that is plagued by legal issues related to intellectual property theft. and suggesting self-harm or violence towards their users. In other words, there’s nothing in Character’s bankruptcy filings that can’t be said about many other AI companies that are spending huge amounts of money on computing without having a revenue model that can support them. The difference between Character AI and giants like OpenAI, Anthropic, Meta, and Google is that these other companies have been able to repeatedly get injections of new funds or, in the case of Meta and Google, have been able to subsidize their AI products with revenue from their massive advertising businesses.
The company declared in a blog post that it will continue to operate during the bankruptcy process: “The Character.ai platform remains operational and you can continue to access all services at this time. We are focused on finding the best path forward for our platform and our community.”
As the big players’ frontier models improve and have fewer guardrails, they will also likely continue to eat away at the user base of more niche products like Character.ai. A lot of what you can do on Character.ai, you can also do on ChatGPT or with Meta’s Muse, for example. It’s unclear whether AI giants like OpenAI and Anthropic, or the AI industry in general, have become too big or too important to fail, but Character’s bankruptcy shows that the runway for second-tier players has ended.
Gn bussni
