THE ECONOMIST: What is Elon Musk up to? Mega-merger of SpaceX and xAI makes little business sense

Sprawling conglomerates fell out of fashion long ago in America. Elon Musk is giving them new life. On February 2, the world’s richest man announced that SpaceX, which builds rockets and sells satellite broadband, would merge with xAI, a maker of chatbots. (He owns a majority stake in both.) SpaceX investors will get 80 per cent of the new company, valued at $US1.25 trillion ($1.78t) with the remainder going to xAI’s owners. What is Mr Musk up to?

The stated rationale behind the deal is that the companies will work together to launch a fleet of data centres into space, giving xAI a big advantage in the race to develop cutting-edge models while furnishing SpaceX with a new line of business.

Some pundits consider the idea plausible. Putting AI chips into orbit provides access to solar power undiminished by the atmosphere and avoids the tortuous planning processes on land. SpaceX’s constellation of Starlink satellites can then beam the data back down to Earth.

It sounds like the stuff of science fiction, and for a while may remain just that. Putting data centres in orbit presents numerous engineering challenges. It is unclear, for example, whether the hardware they currently use can survive being repeatedly exposed to cosmic rays. Then there is the matter of cost.

Although SpaceX is able to launch things into space for far less than any competitor, doing so is still not cheap. Its new “Starship” launch system, which Mr Musk hopes will bring costs down even further, is behind schedule and has yet to reach orbit.

Meanwhile, to survive the ferocious rivalry with other labs such as Anthropic and OpenAI, xAI urgently needs to secure more computing power.

As with most conglomerates, then, the commercial rationale for stitching the parts together is shaky. The other common reason for bringing disparate businesses together is financial, as divisions that are generating cash can be used to support ones that are not. xAI, like its competitors, is a cash incinerator: it is reportedly burning through nearly $US1b a month.

Revenue from Grok, its chatbot, remains small. X, the social network which xAI acquired last year, does not make anywhere near enough money from subscription fees and ads to fund the AI lab. And the company is still weighed down by the remaining $US12b or so of debt from when Mr Musk acquired Twitter, as X was then known, in 2022.

Mr Musk may thus be eager to use SpaceX, which reportedly generated an operating profit (before depreciation and amortisation) of $US8b last year, to subsidise xAI. It could also give it some of the proceeds from a public listing of SpaceX that is said to be planned for later this year. But that would draw capital investment away from SpaceX’s efforts to get its Starships fully operational.

The merger could also bring another financial risk for SpaceX. Mr Musk’s social network is under investigation in the European Union and Britain over potential breaches of data regulations and for its launch over Christmas of an image generator that was widely used to produce nude deepfakes, including reportedly of children; on February 3 its offices in Paris were raided by French authorities. Mr Musk has denied the company has done anything wrong.

If courts find otherwise, the EU could fine it up to 6 per cent of its global revenue, while Britain could fine it up to 10 per cent. It is unclear whether, following a merger, SpaceX’s revenue might also be included in the calculation.

What is certain is that the tie-up between SpaceX and xAI brings even greater complexity to the web of deals that has been pulled together to keep capital flowing to AI labs.

Google owns 7 per cent of SpaceX, so will now hold a stake in xAI, with which it competes, alongside Anthropic, of which it also owns 14 per cent. Nvidia has invested $US2b in xAI, which the model-maker will use to purchase the chip giant’s AI processors.

Last week Tesla, Mr Musk’s carmaker, declared it, too, had invested $US2b in xAI. So long as investors and magnates keep believing that an AI revolution is nigh, such creative dealmaking will continue.