xAI and Anthropic: A Partnership Redefining Cloud Computing

On Wednesday, xAI and Anthropic announced an unexpected partnership, with Anthropic acquiring the entire computing capacity of xAI's Colossus 1 data center, amounting to approximately 300 MW. This agreement has allowed Anthropic to immediately increase its usage limits, marking a significant event for xAI, likely valued at several billion dollars. This transaction has transformed xAI from a consumer into a computing provider, thereby monetizing one of its most impressive achievements.

Some view this arrangement as a strike against OpenAI amid the ongoing lawsuit. However, Elon Musk explained on X that xAI had already shifted its training to a new data center, Colossus 2, and that owning two centers was unnecessary.

In the short term, this decision seems logical. xAI's current products are primarily focused on Grok, whose usage has declined since the image generation mishaps earlier this year. If xAI's data center expansion far exceeds Grok's needs, the partnership with Anthropic significantly improves the company's financial outlook. This is particularly strategic as the company, now combined with SpaceX, is rapidly heading toward an IPO. More broadly, having Anthropic as a client bolsters the credibility of SpaceX's orbital data center project.

Beyond the immediate benefits, this partnership sends an unusual message about Elon Musk's true priorities. It suggests that xAI's real business might be more focused on building data centers than on training AI models. Unlike other tech giants like Google and Meta, which build data centers for their own training needs, xAI seems to be leaning towards selling this capacity.

Last month, Sundar Pichai admitted during a call that Google Cloud's revenues were lower than they could have been due to capacity constraints. When faced with the choice of renting out its GPUs or using them to develop AI products, Google opted to prioritize its own products. Facebook also faced a similar constraint, setting up a new cloud device to ensure sufficient GPU power for its AI ambitions. As Mark Zuckerberg stated during the announcement of Meta Compute in January, how infrastructure is designed and invested in will become a strategic advantage.

The key word here is "strategic." Both Zuckerberg and Pichai envision a future where AI powers the most popular and lucrative systems in the world. Computing power is not just a means to meet current demand but to build the products of tomorrow. Lacking computing power means missing out on that opportunity.

By focusing on data centers, xAI positions itself more as a neo-cloud company, purchasing GPUs from Nvidia and leasing them to model developers like Anthropic. This business model is complex, subject to pressures from chip suppliers and changing demand cycles. The valuations of most active neo-clouds reflect this reality: xAI was valued at $230 billion during its January funding round, while Coreweave, which oversees a comparable amount of computing power, is worth less than a third of that.

Musk's version of a neo-cloud is more ambitious. Some of the data centers could be located in space by 2035, if all goes as planned. xAI also intends to manufacture its own chips at Terafab, which will reduce some, but not all, of Nvidia's pricing power. However, the fundamental economics of the neo-cloud business remain unchanged.

At the February general meeting, xAI had real ambitions in the software domain. The presentation unveiled the orbital data center project but also hinted at significant coding ambitions, bolstered by the partnership with Cursor, and innovative ideas like using computers to create large-scale digital twins in the Macrohard project. These long-term projects require committed computing resources to succeed. As long as xAI sells large amounts of computing to its competitors, it is hard to believe that such new ambitions have a future.