xAI's Anthropic Deal: What's the Catch?

A significant partnership has been announced between Anthropic and xAI, with Anthropic acquiring the entirety of the compute capacity at xAI’s Colossus 1 data center located in Tennessee.

This development was a central topic on a recent episode of TechCrunch’s Equity podcast, where Kirsten Korosec, Sean O’Kane, and Anthony Ha delved into the potential ramifications for xAI’s parent company, SpaceX. The discussion specifically addressed the deal’s implications as SpaceX prepares for its public offering and reportedly plans to integrate xAI, effectively dissolving it as a distinct organizational entity.

Kirsten Korosec endeavored to present "a positive view" on the collaboration, acknowledging it as a new revenue stream for xAI. However, she also highlighted that this move implies xAI is not actively engaged in training its own advanced frontier AI models. This, she suggested, makes it challenging for the company to maintain its image as a "forward-looking, innovative" enterprise.

Sean O’Kane offered a more skeptical perspective, questioning, "Why be positive when you can be cynical?" He characterized the deal as "a major heat check before the IPO." While transitioning into a "neocloud" model—renting out compute resources—might constitute "a more believable business in the near term," he argued it is less likely to generate enthusiasm among long-term external investors. Furthermore, he noted the environmental lawsuit xAI is currently facing concerning its Colossus 1 facility.

Sean O’Kane elaborated on the surprise nature of the deal, occurring while public attention was directed elsewhere, potentially towards "a major trial." He explained that SpaceX, through its now-dissolving AI subsidiary xAI, has entered an agreement with Anthropic, effectively transferring all compute resources at the Colossus 1 data center in Memphis, Tennessee. This arrangement is set to support Anthropic’s expanding enterprise-focused AI products, for which the company has reportedly been seeking additional compute power, making this deal an "escape valve" for their needs.

For xAI and SpaceX, this positions them as a "neocloud" provider in the immediate future. Sean suggested this was a necessary step to utilize the substantial compute infrastructure they had built, particularly given that Grok, xAI’s primary AI model, has not gained widespread adoption as "the new hot consumer chat bot" outside of the X platform.

Kirsten Korosec further clarified the concept of a "neocloud" for listeners unfamiliar with the term. She explained it refers to the business model of acquiring GPUs from manufacturers like Nvidia and then renting out that compute capacity to other entities, rather than utilizing it for one’s own internal AI model training. She referenced a point made by their AI editor, Russell Brandom, who noted that while many companies are building data centers, they generally prioritize using their compute for internal AI model development over renting it out. This, she asserted, "suggests that maybe xAI isn’t doing so much on the AI model training side."

Anthony Ha concurred, noting that Grok is not widely considered "super cutting edge" and has even been associated with "unpleasant, if not downright illegal, content." He highlighted that Grok is not typically relied upon for "work-critical tasks," especially within the realm of enterprise AI. This raises the fundamental question of how xAI intends to generate revenue, with the sale of infrastructure now appearing to be a primary method.

Kirsten Korosec reiterated that one could adopt "a positive view" of the situation, acknowledging that xAI has successfully identified a way to monetize its assets. However, she cautioned that if a company, such as SpaceX-slash-xAI, aims to project an image as a "forward-looking, innovative company," it becomes "tougher to sell" that narrative when its primary activity involves merely renting out GPUs rather than employing them for groundbreaking innovation.

Sean O’Kane doubled down on his cynical outlook, stating, "Why be positive when you can be cynical?" He firmly believes this deal serves as "a major heat check before the IPO that we’re about to see get rammed into the markets with SpaceX." He recalled reports indicating that xAI employees were "using other models" internally, rather than Grok, which reportedly triggered a significant internal shakeup. This upheaval, he explained, led to "all the co-founders leaving other than Elon Musk," with Musk purportedly stating he was "starting from scratch on xAI," despite the substantial investment—"SpaceX paid $250 billion for it"—in the lead-up to this mega-IPO.

Sean added that Musk now intends to "dissolve xAI as a separate entity" within SpaceX, rebranding the entire initiative as "SpaceXAI," a move he likened to Musk’s history of "ruin[ing] a brand that has some value to it — see Twitter." While this "neocloud" approach might represent "a more believable business in the near term" and potentially appear "more attractive to investors come IPO time" due to its perceived reliability, Sean cautioned that it is "not the kind of business that’s going to draw the same — at least, in a normal environment — outside investment that we’re seeing go into all the frontier labs." He concluded by identifying this as "one of the biggest tension points we’ve seen develop during this IPO process."