Introduction to the AI Deal

It appears that Elon Musk has emerged victorious once again. Microsoft, in collaboration with BlackRock and UAE-based MGX, has announced a partnership with Musk’s artificial intelligence startup, xAI, on a $30 billion project to develop data centers and other infrastructure. This move marks a significant development in the AI sector, with Microsoft, the largest backer of OpenAI, teaming up with one of its rivals.

The Partnership and Its Implications

The relationship between Microsoft and OpenAI has been cooling down, with Microsoft reducing its reliance on the startup and developing its own in-house AI models, including MAI. OpenAI CEO Sam Altman has been critical of Musk, describing him as insecure in a recent interview. However, it’s possible that Altman’s assessment of Musk’s insecurity might be accurate, and insecurity can be a powerful motivator. Gizmodo has reached out to xAI for comment, but Musk’s companies rarely respond to media inquiries.

xAI’s Plans and Criticisms

The details of the new deal with xAI are unclear, including the amount of money Musk’s startup will commit to the data center venture. xAI has raised $12 billion since its founding in 2023, nearly the same amount as OpenAI, and is reportedly looking to raise another $10 billion. The company’s data center in Memphis, dubbed Colossus, is said to be the largest in the world, with over one million GPUs powering the Grok chatbot. However, xAI has faced criticism for using gas turbines to feed its significant power demands, receiving concessions from the city of Memphis, and potentially worsening the city’s smog. Most companies in the space aim to build out nuclear energy to power their demands, which could be a positive step for the green energy transition.

The AI Infrastructure Partnership

Every company in the artificial intelligence space is racing to build out computing infrastructure to stay competitive. Forming partnerships can help spread the costs of these expansive projects. According to Bloomberg, the Microsoft-xAI project will be renamed the AI Infrastructure Partnership (AIP) and focus on infrastructure investments, including energy projects, mostly in the US. Other investors may join the project, with clients, including pensions and insurers, eager for such long-term infrastructure projects.

OpenAI’s Response and the AI Race

OpenAI announced its own $100 billion infrastructure project with Oracle and SoftBank earlier this year, marking a sign of its distancing from Microsoft. Microsoft has been building out its own in-house models, which could be faster and less expensive to run than ChatGPT. The company likely wants to control its own destiny rather than rely on an independent company for its AI models. The whole situation must be satisfying for Musk, who launched xAI out of jealousy of OpenAI’s sudden rise. He co-founded the startup but left after disputes surrounding its direction, only to see the company launch ChatGPT and kickstart a new AI generation.

Musk’s Strategy and the Future of AI

Musk’s close relationship with the Trump administration has aided him significantly, even if it has hurt one leg of his empire, Tesla. X is now privately valued at $44 billion, the exact same price he paid for Twitter in 2022. xAI has had no problems raising funding from sovereign wealth funds and others who want to be close to power. OpenAI’s ChatGPT remains the most popular AI chatbot in use today, with 400 million weekly users and name recognition that none of its competitors enjoy. xAI is banking on its access to real-time posts from X to differentiate Grok as a powerful chatbot, despite the social network being littered with misinformation.

Conclusion

The new deal with Microsoft cements xAI as a legitimate player in the AI race. While it remains a major question how impactful AI chatbots will become, having access to significant compute will help the few survive. Anyone can run a model like DeepSeek, but "agents" that control computers and do work for users will be resource-intensive, and users will go to competitors if their usage is rate-limited by another. Musk gave shares in xAI to investors in his Twitter takeover, as well as preferential access to xAI’s funding rounds, effectively ensuring they would make their money back. The future of AI is uncertain, but one thing is clear: the competition is heating up, and only time will tell who will emerge victorious.