Well, Casey, we are now in week two of this incredible high-stakes drama that's been playing out between the Pentagon and America's leading AI companies. There's been a lot going on. We now have more clarity on why the deal between Anthropic and the Pentagon fell apart. We also know how this Anthropic supply chain risk designation is actually going into effect and impacting the way that government agencies are responding. And we have been learning this week about how OpenAI's deal with the Pentagon is shaping up. So, lots to discuss here, but first we should make our disclosures. I work at The New York Times, which is suing OpenAI and Microsoft and Perplexity over alleged copyright violations.
And my fiancée works at Anthropic.
Okay, let's start with OpenAI because they are sort of the late arrival into this story, but in some ways the most dramatic. Since Sam Altman announced last Friday that OpenAI had arrived at an agreement with the Pentagon, we have learned a little bit more about that agreement. As a reminder, according to Sam Altman, this agreement did include some prohibitions on domestic mass surveillance and autonomous weapon systems, basically the same two red lines that Anthropic had set out that were causing them so much trouble with the Pentagon. And I think it's fair to say like this provoked one of the biggest backlashes in that company's history. It really did. We've seen it across social media. Many sort of top upvoted posts on OpenAI-related subreddits have been condemning this move. OpenAI has been scrambling to try to rebuild trust. But at the end of the day, Kevin, I think both the Pentagon and OpenAI are saying to the public, you're just going to have to trust us. And the public is saying, well, we don't.
Right. So, there's been a lot of people cancelling their ChatGPT subscriptions and switching over to Claude as a result of all of this. People who don't agree with the Trump administration or the stance that the Pentagon has taken here. And presumably because they're seeing some, you know, some pain in the cancellations department as well as just a general feeling that this narrative is not going well for them. Sam Altman has been doing some damage control. So on Saturday, he hopped on X to talk about this and answer questions about the Pentagon deal. He was joined by two other employees and these questions were sort of the kinds of things you'd expect. You know, people asking what did you guys agree to that Anthropic didn't? Where are your red lines? Who's going to be making the kinds of hard decisions during something like a war about how these models can and can't be used? What about this domestic mass surveillance thing? So I think he answered these questions but really the thing that they did was also to release the language of this contract that had been in dispute, that had been the subject of so much speculation. Well, they released what they called the relevant portion of the contract, but then we would see later commentary from experts in government procurement that said essentially, look, until we see the entire contract, it's just very difficult for us to take at face value the idea that this is the only relevant language here. Right? So they did not release the whole contract, but they did release some relevant language from this contract with the Pentagon in a blog post. Then on Monday, Sam admitted that he made a mistake. He said, 'We shouldn't have rushed to get this out on Friday.' He also added that it looked opportunistic and sloppy. And he also used the phrase opportunistic.
Yes, it was slopportunistic. And it includes the language, quote, 'the department understands this limitation to prohibit deliberate tracking, surveillance or monitoring of US persons or nationals including through the procurement or use of commercially acquired personal or identifiable information.' I found this all slightly confusing. Casey, do you understand what OpenAI has said and the various evolutions of its position on this?
Well, I think the key takeaways here is that they are saying that they have put in some amended language that will prohibit certain uses of their systems by the government. So, for example, they're going to prevent the government from using commercial data that they sort of acquire legally and sort of running that through GPT models for domestic surveillance. I just want to say though that there is always a high risk here for what I would call Jedi mind tricks, Kevin, and for the government because we have seen Democratic and Republican presidents do this, right? Of sort of going to the absolute limit of what the law will allow when it comes to surveillance of Americans. And a way that they'll get around that is by saying, 'Well, we're not doing surveillance, Kevin. We're doing some intelligence gathering.' Right? And so as annoying as it is to fixate on the semantics here, I'm telling you that whether or not you personally are surveilled will come down to semantics, right? And so that's why we're digging in the way we are. So still lots of questions about some of the details here. And I think there's a lot of doubt and concern among some employees of OpenAI that this actually did end up in a place that they're comfortable with.
Boy, is there some of that employee discontent spilled over onto X where you had some employees saying essentially that they didn't trust their leadership either. An employee named Leo Gao, an OpenAI employee, called the contract language window dressing and pointed out that it still seems to give the Pentagon control over when to deploy autonomous weapons and just doesn't do much to address some of the other loopholes. And then maybe more dramatically, Kevin, on Tuesday, Max Schwarzer, who was the post-training lead for OpenAI, a vice president of research at the company, announced that he was leaving. And in his X post, while he was pretty vague, suggested that this was an important time and that he had come to really respect Anthropic's values and so he said he's going over to work there.
Yeah. So, what's your take on how the damage control is going for OpenAI? Do you think they have warded off the most heated criticism or are people still really mad?
I do not think that they have stemmed the tide. They put a lot of effort into changing the narrative here. When I saw that they were doing that X AMA, that they had put up a blog post, that they were quoting at least some of the contract language, I thought these guys are really going for it. That also told me that they were really scared. But here's the thing to remember, Kevin. Most Americans just don't like AI very much. They didn't in the first place. They didn't like it for all the normal reasons of, well, my social media feed is filling up with slop and my manager's telling me I have to use it every day or I'm going to get fired. When you add into that mix, it's potentially also going to be used by your own government to spy against you or maybe kill you with a murderbot. Of course, Americans are going to say, 'Well, this freaking sucks, right?' So, I think this was kind of the strategic miscalculation that Sam Altman made was that at least according to him, he thought he was going to get into this dispute and sort of be able to de-escalate it and sort of come in as the white knight and save the AI industry from the overreach of the US government. And what he found out instead is they're kind of holding the bag of all of the discontent that the Pentagon whipped up with this forced policy change.
Yeah. It's really interesting to me because I think my assumption had been that we were sort of over the era of like worker empowerment in Silicon Valley, right? Like years ago, sort of pre-COVID, we had all these like Google walkouts and all these employee protests over these military contracts. And I think a lot of CEOs and leaders at these companies sort of said we're not doing that again. Like we're not going to give our employees veto power over the deals that we make or the contracts we sign. And it suggests to me what is going on at OpenAI right now that at least for them in their specific case where you do have, you know, this staff of elite technical talent that are not easily replaceable, there aren't that many people who know how to like build and train these models. You actually do need to keep them happy and so those people, maybe only those people, have significant leverage still.
Yeah. Let me make a sort of sweeping generalization, right? Like I think there's sort of like two major camps at OpenAI. One out of the camp that have sort of been there for, you know, let's say three plus years that are the real experts that you just mentioned that have this kind of critical knowledge for how to build next-generation frontier systems that almost nobody else in the world has. And those people tend to just really care a lot about how the technology is used. These are like these are people who joined OpenAI in part because it was a nonprofit, right? And like there is like a solid core of those folks who are still working there. And then there's a group at OpenAI that I'm just going to call the Meta people. Like the people that came over from Meta a little bit more recently that are, you know, maybe a little bit more flexible in what they're willing to see their company do. And I don't think that they're going to raise a big stink about this. The problem if you're OpenAI leadership is you actually need that original core, right? If you're going to build a GPT-6 and 7 that is going to blow everybody's minds, those are the people you're going to need. And so yes, almost everything that we have seen over the past few days of they've tried to do damage control is aimed at those people.
Okay, so that's a little bit of the drama going on at OpenAI. What is happening at Anthropic?
Printing money in two words, I would say. Well, I mean, you know, I wrote this in my newsletter this week, Kevin, but has an American technology company ever had such a good week and such a bad week at the same time?
Well, so on the bad side, obviously they're in a very heated fight with the Pentagon that continues. By the way, it seems like there is still some risk that perhaps the president will try to invoke the Defense Production Act to try to compel Anthropic to make the version of Claude that it does not want to make that would sort of do its bidding. And it seems also that the supply chain designation risk is now official. We learned on Thursday that the Pentagon sent a formal letter to Anthropic. So if nothing else, this is going to result in a long and costly legal battle as Anthropic tries to ensure that American companies can still use it for non-military purposes. Right? So there is actually an existential threat to the company that is buried somewhere inside there and it is by no means over, right? But on the good side, on the good side, Bloomberg reported this week that Anthropic is on track to hit $20 billion in annualized revenue. At the start of 2025, Kevin, they were on pace to earn about $1 billion in annualized revenue. So, this company has 20x'd over the past year. They were on pace to make about $9 billion by the end of 2025. So, it has doubled in barely over two months, which speaks to the rise of Claude Code, right? And the overwhelming adoption of Claude in the enterprise. So in that respect, this really has become maybe the fastest-growing American technology company of all time.
Yeah. And like what's so strange about this sort of dual quantum state right now of Anthropic is like at the same time that they are printing money and people are signing up for Claude and they're switching from ChatGPT and like things appear to be going well for them. At the same time they are also being pulled out of the federal government right forcibly. There was some reporting this week by Reuters that the US State Department has sort of started to comply with this order from President Trump to sort of stop using Anthropic's models. They have switched the model powering their sort of in-house State Department chatbot from Anthropic's models to OpenAI according to this memo seen by Reuters. And furthermore, this Reuters report said that the State Department is going back to GPT-4.1. Now, if you have not been tracking all of the model names and numbers as closely as we have, that is several generations ago. That's like an early 2025 model. And basically what that means is that the average college freshman with a ChatGPT subscription now has access to substantially better AI tools than the Department of State. It's not great for a lot of reasons, Kevin. And one of them, as the blog Lawfare covered this week, is that there appears to be no statutory authority for the president to do what he did. There is not a statute that lets the president just sort of declare that federal agencies cannot use individual software. But because this is just the way the Trump administration works, everyone has just decided to defer to the president.
Yeah. I want to ask you about this other sort of interesting piece of OpenAI's response over the last week, which is that Sam Altman has said multiple times that he wants the Pentagon to extend the same deal to Anthropic that it extended to OpenAI. Do you think that is sincere? What is going on here? Why is Sam Altman saying, 'Hey, if you're making these terms available to us, you should also make them available to other AI companies.' I think that that is the part of Sam that appears to be sincere in saying that he wants to de-escalate this conflict. He does not want the United States government to come in and nationalize the AI companies, at least not right now, right? And so maybe if OpenAI could reach some sort of agreement that would provide at least some protections for Americans and other AI companies would sign on to it, that would just release the pressure on the industry overall. Now, of course, at the same time, it would buy him a lot of cover and all of a sudden people wouldn't be mounting these quit ChatGPT campaigns because Sam could be on X saying, 'Well, you know, Claude's doing the same thing.' Do you think that's real? Like, how big a deal do you think this consumer opposition is? I mean, I, you know, I am somewhat jaded on this point because I can't count the number of times that people have said, you know, oh, we're all going to cancel our subscriptions to this thing or we're going to delete Uber or we're going to, you know, quit Facebook in protest and like it never really seems to have much of an impact. But like, do you think in this case that enough people are mad about this at the consumer level that it could actually impact their business?
Not really. I think you're exactly right. I think that usually these things just tend to blow over in a few days. And I'm sure that OpenAI is counting on that. At the same time though, Kevin, I think back to the lesson that Meta learned, which is that as it had its own series of controversies, by and large, people did not quit Facebook. They did not quit Instagram. But you know what they did do? Just kind of start to hate Meta as a company and develop really low trust in that company. And that winds up hurting Meta in all sorts of ways. And the particular way, by the way, that I think this is going to hurt OpenAI is they're gearing up to go out and build a lot of data centers around this country. And there's already enormous backlash that we are seeing, right? We're starting to see it creep into our politics. And so, if they are not able to sort of reverse the narrative and convince people that AI is going to have like hugely positive outcomes in their lives, I think you're going to see the data center opposition ramp up as a proxy for people's just kind of distrust of that company in general.
Right. It's the visible physical symbol of all of this and for most people the only one that is like anywhere near them. And so I think you're right. It could turn into a political problem for them even if people aren't canceling their ChatGPT subscriptions en masse.
I want to ask you about something else that I've been thinking a lot about this week which is this idea that you mentioned of nationalization. There's been a debate happening on social media about this idea that if we are headed to a world with very powerful AI systems in it, as Dario Amodei calls it, a country of geniuses in a data center, that eventually that will just not be allowed to happen inside a private corporation, that the US government, whether a year or two years or five years from now, at some point will step in and say, hey, you guys built this really cool thing that's really useful and has all these like important geopolitical and national security implications. We're going to just take that now and you work for us now. And I'm curious what you make of that as a possibility because some people who I consider quite serious and credible have been talking about this threat of nationalization for several years now.
Yeah. If you go to the sort of nerdy AI conferences that Kevin and I do, this comes up a lot at the tabletop role-playing games that people do during lunch, right? Is that at some point a government of one or more countries kind of steps in and takes over the AI lab. I understand in this moment that that feels like a kind of sci-fi scenario, right? Like most of the time when you're using ChatGPT, you probably don't think this is a dangerous superweapon and we need to ensure that, you know, this is being controlled by the president. At the same time, we are now at war with Iran. We know that these systems are embedded in the like command and control operations of the military and so to some extent they are already becoming weapons. Right? So if you say to me do I think that once these systems become three, four, five, ten times more powerful the government will want to take an interest in them and potentially oversee their development and deployment. I absolutely believe that will happen. I see no reason why that wouldn't happen. And unfortunately, how that goes, I think, depends a lot on the quality of the government that is overseeing that AI, right? And like what do they want to do with it? Do they want to use it to create opportunity and safety and democracy for all or do they want to, you know, mount an authoritarian takeover of the globe. So if you are a leader at one of these companies and you know that, you know, at least until 2028 we are likely to have sort of the same administration in power, if you believe that the technology is rapidly accelerating such that a year or two years or three years from now we might have something like a superhuman country of geniuses in a data center. What does that mean you should do? I mean one thing that I've been thinking about is like should these companies be doing deals with the government at all? Right? If the lesson of the past couple of weeks is that the federal government is not a trustworthy counterparty in these negotiations and is going to insist on total control and obedience or else they're going to try to nuke your company. Like I think a very rational response from these AI companies will be like, well, we're just not going to make any more deals with you. You're going to have to use some open-source models for your State Department and your military and your Treasury because it's just too risky for us as a business risk. And you can't be trusted with it.
I could see why that may seem somewhat rational to them, but like I don't think that that is the tack that they're going to take. I mean, you even this week after everything that has happened with Anthropic, Dario Amodei is still out there saying we were very close to an agreement with the Pentagon. We liked working with the military. We want to work with the military again, right? So, I think that's very important to note like Dario did not like throw up his middle fingers like on his way out the door. He is still trying to reach some sort of agreement. And I think in part that likely is to avoid the exact sort of scenario that you are describing, right? It's you kind of want to like keep the tigers at bay for just a little while longer at least while you maybe like think through the rest of that scenario, which is admittedly a very difficult one.
Yeah, I've been rereading The Making of the Atomic Bomb this week, which is Dario Amodei's favorite book, and he used to give it to all Anthropic employees, and there's still like a bunch of copies at their headquarters. It's sort of the company book as far as their mission goes. And they see a lot of parallels between what they're building and the Manhattan Project. And so I went back and I've been rereading it. And the piece that struck me from that experience was just right before the bombs were dropped in 1945, there was this point where the scientists got really worried about how their creation was going to be used. And a number of them from the Manhattan Project sort of created these petitions and reports and tried to get them to the government and say like, 'Hey, could you guys like not use this against a city at least as like a first-line act of war?' And the military and the government sort of like pretended to hear them out and then they just went ahead and bombed Japan anyway.
And there was sort of this moment where it was like we hear you. You're the scientists. You're the geniuses who made this all work, but now you're playing in our turf and so we're going to control the technology from here and like thank you for your input. And like I think the comparison between the Manhattan Project and the AI industry is somewhat overstated and I think it breaks down in some key ways. One of which is like that was a government project. You know, the Manhattan Project was paid for by the government. These were government employees. What we're talking about now are private companies that have been developing this thing outside the public sector. So I think there's some important differences, but I do worry that we are headed toward a moment where this stuff just gets so useful to governments and militaries and confers such a decisive advantage to the countries that control it that the US government, no matter kind of who is in power, is just going to say like this thing is too important to be left to the private sector.
Well, I mean, keep in mind that one of the original ideas for OpenAI was that it should be a government-funded project, but Sam Altman and his co-founders just came to the conclusion, correctly by the way, that no government would give them the amount of money they needed to build this technology, right? And, you know, they just sort of quickly came to the conclusion that it was just going to have to be a private enterprise. But, you know, going back to the earliest days, there was thinking among the people that created this technology that the government was going to take an interest in it eventually. Another reason though, Kevin, why I find the current situation so vexing is that you and I both covered President Biden's executive order on AI, which I personally felt like was a pretty gentle way of attempting to regulate the industry. It was sort of like, you know, inform us about your safety testing, please, when you test these new models and sort of, you know, told federal agencies to get ready for this technology. And the howls of protest on the right that said how dare you know this administration come in and try to put these fetters on capitalism. We are going to lose to China because of this sort of nanny state behavior. And then to see those same people come to power and now say we are going to tell you exactly how you are going to build your models, what they are going to do for the military or else we will destroy you. Is just like the whiplash is insane.
Yeah, we didn't like that government trying to control the tech industry, but this government trying to control the tech industry, that's just business as usual. That's fine. Right.
So, I guess my worry, zooming out from all of the stuff that's been going on for the past two weeks, is that we are sort of living through like an early dress rehearsal for what something like nationalization of the AI companies could look and feel like. I don't think it's going to be as sort of cut and dry as like it was during World War II when like the government showed up to a bunch of like steel plants and was like, 'Hey, we run these now.' I think it's going to be kind of this soft nationalization like we've been seeing over the past week where it's like a little pressure to build your models differently. Oh, maybe could you remove some of those safeguards? Oh, maybe this is actually so strategically important that we need to be the people putting the clauses in the constitution of Claude or whatever that dictate how it will behave in these high-stakes situations. And I think that is a more likely direction, but I would not take full sort of like brute-force nationalization off the table entirely. I think there's a decent chance that something like that happens.
Well, maybe we should set up a prediction market for it. Speaking of prediction markets, when we come back, we'll talk about how prediction markets have made it to war. So predictable.
Okay, Casey. So the other big news from the past week is that the United States is now at war in Iran. And one angle that really has been sticking out to me about this is the role that prediction markets are playing in this conflict. Because I think that is something that we truly have not seen before.
Yeah, it seems like every new war brings along some grim new technology. And I would say that prediction markets are maybe grim technology number one for this conflict in Iran.
Yes, it's a grim technology already, even absent the war and now just with the war, it has become even grimmer. And we've talked about prediction markets on the show. We talked about them way back in 2023 when they were sort of this new thing that was like kind of in this legal gray area that wasn't really being done at any scale yet. It was sort of an interesting idea. Now, of course, you cannot walk down a street in a major American city without seeing one and probably multiple ads for prediction markets like Kalshi and Polymarket.
Yeah. The sort of gambling mania that has taken over all media and advertising, you know, from DraftKings to FanDuel, has now extended even further into these prediction markets. So both Polymarket and Kalshi, the two leading prediction markets platforms, took a lot of heat this week on bets they were allowing their users to make on questions related to Iran. So, Kalshi, which is kind of the more regulated US-based prediction markets company, does not allow bets on war or assassination, but it did allow the question 'Ali Khamenei out as supreme leader' basically sort of as a kind of careful proxy for betting on the outcome of a war or a strike on Iran.
Yeah. And out, I suppose, could have, you know, many meetings. You know, perhaps there would be a sort of gentle democratic revolution in Iran. But I'm going to assume that most of the people who were wagering on that one assumed that he was going to be killed in war.
Yeah. So people got really mad at Kalshi for allowing these bets on the fate of the Iranian leader. They also got mad when Kalshi sort of voided this market and said that it was going to reimburse anyone who may have lost money on this. Basically make sure everyone ends up in the black. But people who were supposed to make a bunch of money because they correctly predicted the death of Khamenei were mad that they didn't get paid out their expected winnings. So just a big cluster all around.
And I just want to say if you were one of the traders who did not get your expected winnings from the death of the Ayatollah, I just want to say I don't care and it doesn't matter.
So Polymarket, the other sort of less regulated offshore crypto-based prediction market, was even more permissive. They allowed people to bet on the dates of strikes on Iran and other details related to the war in Iran.
