The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, May 7 (Reuters Breakingviews) - Elon Musk’s xAI does many things. It doesn’t necessarily do them well. Valued at $250 billion in its February merger with rocket-maker SpaceX, the unit owns second-tier social network X and trains behind-the-curve language models. An agreement with Anthropic, announced Wednesday, adds another mediocre skill, that of data center middleman. What xAI does have, however, is a patina of Musk magic, and the idea that this collection of middling assets is highly valuable because they will someday float in space. It’s an increasingly out-of-this-world pitch to investors in the enterprise’s forthcoming initial public offering.

While financials were undisclosed, the deal casts further doubt on Musk’s dreams of competing with leading model-makers. Sure, xAI is only handing over unused capacity at its Colossus 1 data center project, while a sequel server farm is slated to eventually be over six times as large. But chatbot Grok lags rivals on key benchmarks, while Meta Platforms META.O is resurgent as a new outside challenger, powered by over $100 billion in promised spending this year.

The fact that xAI has so much spare capacity speaks to its struggles. The popularity of Anthropic’s Claude models leaves boss Dario Amodei with the opposite problem: a critical shortage of infrastructure. He stands to gain 300 megawatts’ worth of computing power through the agreement. Such a huge block of chips and energy is exceedingly difficult to obtain all at once and ready to go.

Tying up also helps xAI, since underused chips gathering dust are a depreciating sunk cost generating little revenue. Yet becoming a server merchant is a well-trodden path, one with a questionable future. Giant rivals like Microsoft MSFT.O have economies of scale, and provide related services for higher rates. Middlemen like CoreWeave CRWV.O are a better comparison. High component prices and fierce competitions pinch their valuations. CoreWeave had 850 megawatts of capacity in the fourth quarter, but its market capitalization is only a quarter of xAI’s February valuation.

This might seem troubling for a unit that accounts for a big chunk of SpaceX’s envisioned $1.8 trillion public valuation, which it has justified by pointing to a massive AI market. The way to solve the discrepancy: Musk’s trademark big promises. Anthropic said it “expressed interest” in partnering with SpaceX to build data centers in space, which would theoretically leverage unique rocket capabilities.

Yet talk is cheap, and space-based data centers are not. The price to bring an object to orbit would need to fall dramatically for electricity costs to compete with terrestrial solar, and that neglects cooling in a vacuum or radiation hardening. Ultimately, only public-market investors can decide whether Musk has crossed the final frontier of technological fancy.

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CONTEXT NEWS

Anthropic said on May 6 it had signed an agreement to use all of the computing capacity at SpaceX’s Colossus 1 data center. Anthropic will use computing capacity from Elon Musk’s Tennessee facility to loosen usage limits for programming tool Claude Code and the Claude API.

SpaceX’s xAI unit has built 300 megawatts of computing capacity at Colossus 1. A related data center, called Colossus 2, plans to eventually have about 2 gigawatts of capacity.

Anthropic has signed a series of deals to increase its computing capacity, including a 5 gigawatt agreement with Amazon.com, as well as a similarly-sized agreement with Google and Broadcom, among others.

Anthropic also said it has expressed interest in partnering with SpaceX to develop gigawatts’ worth of orbital artificial intelligence computing capacity.