Musk's xAI merger with SpaceX poses bigger threat to OpenAI, Anthropic

By Shirin Ghaffary and Carmen Arroyo

 

For much of the past three years, Elon Musk’s xAI has tried to compete against the leading AI labs, including OpenAI, the company he co-founded and later clashed with. The results have been mixed: xAI’s flagship product, the chatbot Grok, has made headlines for antisemetic responses and sexualized images that have overshadowed its technological advances.

 

Now, Musk is attempting to supercharge his efforts to build more powerful AI systems with help from one of his most successful ventures. On Monday, he announced xAI would be merging with SpaceX, creating a combined company valued at $1.25 trillion. The tie-up is poised to help xAI secure more computing power, talent and data, the holy trinity of AI development. 

 

 

Like other AI startups, xAI has been burning through cash — nearly $1 billion a month — on data centers, chips and other investments to build artificial intelligence models. In the process, xAI has racked up $5 billion in corporate debt, a considerable amount for a young startup. Yet the scale of its AI infrastructure buildout is still far smaller than OpenAI, which has committed to spend more than $1.4 trillion on data centers and chips.

 

Musk said SpaceX aims to put data centers in space, a sci-fi-sounding ambition that may help dramatically increase the computing power available for xAI. “In the long term, space-based AI is obviously the only way to scale,” Musk said this week. Regardless of whether and when those projects take flight, SpaceX may also help with xAI’s earthbound computing needs.

 

The rocket maker has a much healthier balance sheet to support such investments and potentially make xAI’s bottom line more palatable to Wall Street. Crucially, the space company is also planning to IPO this year, providing more cash for xAI and likely leapfrogging rivals OpenAI and Anthropic, which are also mulling public offerings. 

 

“This is going to be able to give them a significant amount of capital, probably a lot more capital than they probably could have raised on their own when they’re private,” said Joseph Alagna, founding partner of Buttonwood Funds and a shareholder of SpaceX and xAI.

 

The new merged company will also be “viewed as a space opportunity more than an AI company, at least initially,” said Mark Hackett, chief market strategist at Nationwide Funds Group. “They can tap a lot more investor bases than just AI.”

 

A combined SpaceX-xAI IPO could also undercut OpenAI’s IPO somewhat by siphoning off some of the pent-up demand from public market investors for more exposure to cutting-edge, generative AI bets. At the same time, going public may bolster xAI’s ability to hire and retain talent in a hyper-competitive market where AI researchers can get nine-figure compensation packages.

 

As is typical with Musk’s ventures, xAI has developed a reputation for long hours and burnout. Staffers have long posted online about working more than 30-hour shifts or sleeping in the office. “When you create a corporate environment where employees COMPETE to be the most exhausted, the most sleep-deprived, this takes a toll,” Benjamin De Kraker, a former xAI employee, previously wrote on X. “This is exactly what many xAI workers have done, some posting about how they’re so tired they can barely stay awake to drive home.”

 

However, xAI is competing in a far more crowded market than many Musk companies, certainly in their early years. Three of its 11 founding members (not counting Musk) have left, along with some key executives, including its chief financial officer and general counsel. Mike Liberatore, xAI’s former CFO, joined OpenAI last year after just a few months in the role.

 

The potential for burnout will certainly continue, but now xAI can entice new and existing employees with lucrative stock options in a soon-to-be publicly traded firm. Better still, xAI operates under the umbrella of a widely revered company sending rockets and satellites into space.

 

Finally, SpaceX may provide xAI with a useful pipeline of data. Starlink, SpaceX’s satellite-internet service, recently updated its privacy policy noting it can collect users’ personal information – including financial and location data, as well as any files uploaded via e-mail, and social media – for model-training purposes. Starlink is also able to share that information with any company it merges with, such as xAI.

 

Any new data would be welcome for xAI. Until now, Musk’s X social network has been the primary source of training data for Grok. By contrast, rivals like OpenAI and Alphabet Inc.’s Google havestruck deals to license content from publishers and platforms.

 

With or without SpaceX, Musk’s AI startup still faces considerable challenges, including a controversial brand and growing regulatory scrutiny of Grok over the spread of sexualized images. Ongoing concerns about a possible AI bubble could weigh on his combined firm after it goes public. And there continues to be fierce competition among model makers, not just in the US but also China.

 

Top startups, including OpenAI and Anthropic, have struck close partnerships with larger tech firms to keep at the forefront of the global AI race. Musk’s bet appears to be that he can do the same for xAI within his own business empire.

 

“You can never count Elon out,” Alagna said. “I do think he’s got something up his sleeve.”