xAI Possibly Called Off $10B Cloud Server Deal with Oracle

X Corp. owner Elon Musk seemed to have confirmed calling off negotiations over a proposed $10 billion cloud server agreement between his artificial intelligence (AI) startup xAI Corp. and US computer software giant Oracle Corp.

It was reported earlier that the billionaire entrepreneur’s startup and the Austin, Texas-based company have decided not to expand an existing deal involving xAI renting Nvidia Corp.’s AI graphic processing units (GPUs) from Oracle.

Musk stated on X (formerly Twitter) that choosing not to move forward with the arrangement came as they attempted to reduce their dependence on cloud technology from Oracle, aiming to build their large language model (LLM) training system internally in a bid to outpace rivals.

Musk’s startup is currently working on creating an in-house 100k H100 system for training its AI model Grok 2, which the Tesla Inc. chief executive expects to become the world’s most powerful training cluster.

While talks have ended, a source familiar with the matter said Oracle continues to coordinate with xAI about its infrastructure needs, and the capacity that was the potential agreement’s main subject has been allocated to another client.

Cloud Expansion Troubles, xAI Seeks More Development Freedom

Musk’s decision to create their own infrastructure for training AI stressed cloud service providers’ struggles with expanding infrastructure despite having adequate funds to enable such a move.

Analyst Anurag Rana stated that the challenges might impact more than Oracle, possibly affecting rivals Microsoft Corp. and Amazon Web Services (AWS) Inc. as well, due to the lack of specialized chips and power sources.

Oracle’s Gen2 Cloud is currently contracted to xAI, but the startup’s latest decision signaled a strategic pivot, as Musk sought further freedom for the company to develop its AI training capabilities.

In May, it was reported that xAI was working on a multi-year deal to rent Nvidia AI chips from the software maker as part of the firm’s proposed supercomputer, which Musk intends to launch by the fall of 2025.

Negotiations, however, faced some hurdles, including Musk allegedly seeking to build the supercomputer at a speed that Oracle considered not feasible. There is also reportedly a major issue with xAI’s choice of location, being that it does not have enough power supply.

The startup reached a $24 billion valuation the same month after it raised $6 billion in series B funding, in a bid to compete at an even level with major AI players such as OpenAI Inc. and Alphabet Inc.’s Google LLC.

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