xAI Acquires Hotshot, Expanding into AI Video Generation Amid Industry Commoditization

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xAI, Elon Musk's artificial intelligence company, has acquired Hotshot, a startup specializing in AI-powered video generation tools similar to OpenAI's Sora technology. Hotshot had developed three video foundation models and secured funding from notable investors including Alexis Ohanian and SV Angel before closing its platform on March 14.

The acquisition signals xAI's strategic move into the AI video generation space, aligning with Musk's previous hints about a forthcoming "Grok Video" model expected in the coming months.

Foundation Models Becoming Commoditized

This expansion comes as the AI industry witnesses increasing commoditization of foundation models, with competitive advantages diminishing. Recent launches underscore this trend, including Deepseek and Chinese tech giant Baidu's new AI models, ERNIE 4.5 and ERNIE X1, which offer similar capabilities to market leaders at substantially lower development and operating costs.

Baidu claims its ERNIE 4.5 model operates at just 1% of the cost of OpenAI's GPT-4.5, highlighting the dramatic price compression in the market.

Microsoft CEO Satya Nadella recently acknowledged this shift, stating,

"I do believe the models are getting commoditized. OpenAI is not a model company, it's a product company."

Revenue Growth vs. Model Parity

While Musk has been praised for achieving comparable capabilities with Grok 3 at a fraction of OpenAI's investment—supporting the argument that AI models may be among the fastest depreciating assets in modern business—this perspective misses a couple of dynamics.

OpenAI has burnt an estimated $5-10 billion in developing 6-7 frontier models over three years. Whilst you can make the argument that Musk has caught up in terms of model capabilities the money OpenAI has spent hasn't been wasted.

Because they’ve been at the frontier for 3 years they've built massive brand awareness, with a massive user base of 400m weekly active users, up from 300 million in December - a 33% growth in just a couple of months.

For context, the entire Twitter product (not xAI) maintains approximately 300 million daily active users and 650 million monthly active users—fewer than OpenAI, despite releasing ChatGPT less than 3 years ago.

Investment-to-Revenue Efficiency

So yes, OpenAI have burnt maybe roughly $6 billion — but it's to generate $6b in ARR. Any venture investor that invests $1 to get $1 of ARR would be ecstatic.

$500K in a pre-seed to get to $500K is a win. $10m series a to get to $10M ARR is a win.

Musk in comparison has spent $44 billion to acquire a userbase similar to OpenAI in the form of twitter and is only generating maybe $100M ARR from Grok (recent reports suggest Twitter’s valuation has rebounded to $44B after the election and convincing major advertisers like Apple & Amazon to return). 

Reasoning Models as Revenue Multipliers

As xAI pursues purchasing models that are getting commoditised OpenAI has found a new unlock for revenue growth.

Reasoning models are this new unlock in a similar way that the iPhone was to mobile phone carriers like AT&T. Where phone plans were cheap beforehand (only selling you minutes and texts for cheap handsets) the iPhone introduced a product that used heavy amounts of internet access. Suddenly the average monthly plan would go from $15 to $50 because you’re selling mobile data instead of minutes and texts. 

OpenAI’s version of this is reasoning. They’re now increasingly gating access to their reasoning models (o1 Pro and Deep Research) behind their $200 / month plan vs what other competitors have which is one consumer subscription plan, typically at $20 per month.