xAI pivots to neocloud model with Anthropic compute deal

Anthropic and xAI announced a partnership this week, with Anthropic buying all the compute capacity at xAI’s Colossus 1 data center in Memphis, Tennessee. Under the agreement, Anthropic is taking over the processing power at the facility to support its enterprise-focused AI products.

The partnership suggests that xAI is pivoting to a “neocloud” business model—a strategy of buying graphics processing units (GPUs) from manufacturers like Nvidia to rent out compute capacity, rather than using that processing power to train its own frontier AI models (advanced AI systems). On TechCrunch’s Equity podcast, hosts Kirsten Korosec, Sean O’Kane, and Anthony Ha discussed the implications of this shift. Korosec noted that while most companies building out data centers prioritize using compute for their own internal AI model training, xAI’s decision to rent its capacity suggests it is not focusing on training its own models. This shift comes as xAI’s own chatbot, Grok, struggles with limited adoption. Grok has faced criticism, with Ha noting that the chatbot is not only that it’s known for some pretty unpleasant, if not downright illegal, content, but also that it is not widely used for work-critical tasks. Additionally, O’Kane noted there has been reporting that xAI’s own employees were using other models instead of Grok internally, prompting internal disruptions.

The deal arrives as SpaceX prepares for a potential initial public offering (IPO). According to TechCrunch, SpaceX apparently plans to imminently dissolve xAI as a separate organization, despite SpaceX having paid $250 billion for the subsidiary. Sean O’Kane described the transaction as “a major heat check before the IPO.” O’Kane noted that while becoming a neocloud might offer a more believable business in the near term, it is less likely to generate the same level of long-term excitement among outside investors. The restructuring follows a period of transition for xAI, during which Elon Musk reportedly began rebuilding the organization from scratch, with plans to integrate it directly into SpaceX. O’Kane compared the branding challenges of this transition to Musk’s previous management of Twitter.

Beyond the strategic pivot, xAI continues to face local hurdles. The company is currently dealing with an environmental lawsuit that xAI is facing over Colossus 1 in Tennessee, adding regulatory and legal complications to its data center asset.

Why it matters

The deal indicates that xAI is struggling to train its own frontier AI models and is pivoting to a ‘neocloud’ business model, which may be a more reliable, if less ambitious, path to revenue ahead of a SpaceX IPO.