Alphabet’s Google, the largest customer of Scale AI, plans to cut ties with Scale after news broke that rival Meta is taking a 49% stake in the AI data-labeling startup, five sources familiar with the matter told Reuters.

Google had planned to pay Scale AI about $200 million this year for the human-labeled training data that is crucial for developing technology, including the sophisticated AI models that power Gemini, its ChatGPT competitor, one of the sources said.

The search giant already held conversations with several of Scale AI’s rivals this week as it seeks to shift away much of that workload, sources added.

Scale’s loss of significant business comes as Meta takes a big stake in the company, valuing it at $29 billion. Scale was worth $14 billion before the deal. Scale AI intends to keep its business running while its CEO, Alexandr Wang, along with a few employees, move over to Meta. Since its core business is concentrated around a few customers, it could suffer greatly if it loses key customers like Google.

In a statement, a Scale AI spokesperson said its business, which spans work with major companies and governments, remains strong, as it is committed to protecting customer data. The company declined to comment on specifics with Google.

Scale AI raked in $870 million in revenue in 2024, and Google spent some $150 million on Scale AI’s services last year, sources said. Other major tech companies that are customers of Scale’s, including Microsoft, are also backing away. Elon Musk’s xAI is also looking to exit, one of the sources said. OpenAI decided to pull back from Scale several months ago, according to sources familiar with the matter, though it spends far less money than Google. OpenAI’s CFO that the company will continue to work with Scale AI, as one of its many data vendors.

Companies that compete with Meta in developing cutting-edge AI models are concerned that doing business with Scale could expose their research priorities and road map to a rival, five sources said. 

By contracting with Scale AI, customers often share proprietary data as well as prototype products for which Scale’s workers are providing data-labeling services. With Meta now taking a 49% stake, AI companies are concerned that one of their chief rivals could gain knowledge about their business strategy and technical blueprints.

Google, Microsoft and OpenAI declined to comment. xAI did not respond to a request for comment.

Rivals see openings

The bulk of Scale AI’s revenue comes from charging generative AI model makers for providing access to a network of human trainers with specialized knowledge - from historians to scientists, some with doctorate degrees. The humans annotate complex datasets that are used to “post-train” AI models, and as AI models have become smarter, the demand for the sophisticated human-provided examples has surged, and one annotation could cost as much as $100.

Scale also does data-labeling for enterprises like self-driving car companies and the US government, which are likely to stay, according to the sources. But its biggest money-maker is in partnering with generative AI model makers, the sources said.

Google had already sought to diversify its data service providers for more than a year, three of the sources said. But Meta’s moves this week have led Google to seek to move off Scale AI on all its key contracts, the sources added. Because of the way data-labeling contracts are structured, that process could happen quickly, two sources said.

This will provide an opening for Scale AI’s rivals to jump in.

“The Meta-Scale deal marks a turning point,” said Jonathan Siddharth, CEO of Turing, a Scale AI competitor. “Leading AI labs are realizing neutrality is no longer optional, it’s essential.”

Labelbox, another competitor, will “probably generate hundreds of millions of new revenue” by the end of the year from customers fleeing Scale, its CEO, Manu Sharma, told Reuters.

Handshake, a competitor focusing on building a network of PhDs and experts, saw a surge of workload from top AI labs that compete with Meta.

“Our demand has tripled overnight after the news,” said Garrett Lord, CEO at Handshake.

Many AI labs now want to hire in-house data-labelers, which allows their data to remain secure, said Brendan Foody, CEO of Mercor, a startup that in addition to competing directly with Scale AI also builds technology around being able to recruit and vet candidates in an automated way, enabling AI labs to scale up their data labeling operations quickly.

Founded in 2016, Scale AI provides vast amounts of labeled data or curated training data, which is crucial for developing sophisticated tools such as OpenAI’s ChatGPT.

The Meta deal will be a boon for Scale AI’s investors including Accel and Index Ventures, as well as its current and former employees.

As part of the deal, Scale AI’s CEO, Wang, will take a top position leading Meta’s AI efforts. Meta is fighting the perception that it may have fallen behind in the AI race after its initial set of Llama 4 large language models released in April fell short of performance expectations.

Source: Reuters
--Agencies