xAI Is Dying
It's about time…
Thanks to SpaceX bailing out — I mean, merging with — xAI, its upcoming IPO is as much about investing in the future of AI, Grok, and the promised terawatts worth of orbital data centres soon to be powering it as it is Musk’s feudal techno slave colonies on the barren red planet. That is the only way the utterly bonkers proposed valuation of $1.75 trillion makes even the slightest bit of sense, and even then, it is still hare-brained. There is just one teeny tiny problem with this narrative. xAI, the cornerstone of the speculative value, is rapidly dying before our eyes. So, in no particular order, let’s go through all the different ways it is failing, and what this means for SpaceX.
Lower Users & Low Utilisation
xAI’s main product is the chatbot Grok. But it sucks, as many users find it wildly inaccurate and almost useless. So, while it does appear to do well in benchmarks, that means nothing as its real-world performance is dire. There is a reason it hasn’t threatened the market share of OpenAI or Anthropic. Indeed, it seems Grok’s main value proposition as a ‘nudifyer’ tool for creepy perverts (more on that in a minute).
This is reflected in the numbers. Forbes recently reported that Grok’s weekly users dropped a whopping 10% from March to April, and the Grok app fell from 2nd place globally in January to 5th place by April, behind Claude and Gemini. In other words, no one is using xAI main product.
Which is a bit of a problem for Musk, as he built a giant, multi-billion-dollar data centre called Colossus to run Grok. However, The Information recently reported that xAI’s utilisation rate was just 11%, way below the typical 40% of its rivals. In other words, so few people are using Grok that this eye-waveringly expensive data centre is mostly sitting idle.
There are two problems with this.
Firstly, Musk’s plan to deploy multiple terawatts of orbital AI data centres to power xAI is a load-bearing promise for SpaceX’s speculative value, and is hinged on the notion that xAI would require a biblical amount of computing power to meet demand. The fact that even xAI’s comparatively small data centres (most likely less than a GW) are already a massive oversupply totally undermines that narrative, and in part, the speculative value it holds up.
But also, xAI went into a vast amount of debt to build these data centres, reportedly around $17.5 billion! That means this oversupply will be a massive drain on xAI’s books, as the huge amount of largely unnecessary debt eats away at its balance sheet. From a business management point of view, this is catastrophic.
The Anthropic Deal
But don’t fear, Elon has a solution! Kind of…
He has rented the entirety of xAI’s 300 MW Colossus 1 data centre to Anthropic. This works out great for Anthropic, which is massively struggling to meet demand with constant outages, as its user base has exploded in recent months, and it doesn’t have enough compute on hand to deal with it. This deal should help solve that. It also means that this data centre will be fully used, and bring in some cash to help cover the debt costs xAI took on to build it.
But let’s not forget that Anthropic is a direct competitor to xAI. Indeed, just a few months ago, Musk was saying Anthropic was “misanthropic and evil.” Handing over this data centre to Anthropic will directly impact xAI’s bottom line, as it will strengthen Anthropic, which in turn will take xAI users. Don’t forget that an xAI user is likely far more profitable to xAI than an Anthropic user using their data centres via this deal, thanks to vertical integration and lack of a middleman.
As such, this deal is not really a solution, as in the long run, it will likely harm xAI more than it will help them. As such, it is more of an admission of just how desperate xAI is.
The Cursor Deal
But this isn’t the first deal like this, Musk has done. In fact, he has kind of double-booked himself.
