The Pentagon's negotiations with Anthropic for its Claude AI collapsed, and the Trump administration designated Anthropic a supply-chain risk, which the company plans to challenge in court. Concurrently, OpenAI faced significant user backlash and an executive departure after announcing its own government deal, which boosted Anthropic's Claude app to the top of the App Store charts.
The situation highlights the intense scrutiny and unique challenges AI startups face when pursuing federal contracts, especially with defense departments, due to public familiarity with their brands and ethical debates over lethal applications. This scrutiny is far greater than for traditional defense contractors, whose work typically flies under the public radar.
The main topics covered are the failed Pentagon-Anthropic deal, the subsequent supply-chain risk designation, OpenAI's controversial deal and its fallout, and the broader implications for startups considering federal defense contracts amid public and ethical scrutiny.
In just over a week, negotiations over the Pentagon’s use of Anthropic’s Claude technology fell through, the Trump administration designated Anthropic a supply-chain risk, and the AI company said it would fight that designation in court.
OpenAI, meanwhile, quickly announced a deal of its own, prompting backlash that saw users uninstalling ChatGPT and pushing Anthropic’s Claude to the top of the App Store charts. And at least one OpenAI executive has quit over concerns that the announcement was rushed without appropriate guardrails in place.
On the latest episode of TechCrunch’s Equity podcast, Kirsten Korosec, Sean O’Kane, and I discussed what this means for other startups seeking to work with the federal government, especially the Pentagon, as Kirsten wondered, “Are we going to see a changing of the tune a little bit?”
Sean pointed out that this is an unusual situation in a number of ways, in part because OpenAI and Claude make products that “no one can shut up about.” And crucially, this is a dispute over “how their technologies are being used or not being used to kill people” so it’s naturally going to draw more scrutiny.
Still, Kirsten argued, this is a situation that should “give any startup pause.”
Read a preview of our conversation, edited for length and clarity, below.
Kirsten: I’m wondering if other startups are starting to look at what’s happened with the federal government, specifically the Pentagon and Anthropic, that debate and wrestling match, and [take] pause about whether they want to be going after federal dollars. Are we going to see a changing of the tune a little bit?
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Sean: I wonder about that, too. I think no, to some extent, in the near term, if only because when you really try to think about all the different companies, whether they’re startups or even more established Fortune 500s that do work with the government and in particular with the Department of Defense or the Pentagon, [for] a lot of them, that work flies under the radar.
General Motors makes defense vehicles for the Army and has done [that] for a very long time and has worked on all electric versions of those vehicles and autonomous versions. There’s stuff like that that goes on all the time and it just never really hits the zeitgeist. I think the problem that OpenAI and Anthropic ran into within the last week is like, these are companies that make products that a ton of people use — and also more importantly, [that] no one can shut up about.
So there’s just such a spotlight on them, that naturally highlights their involvement to a level that I think most of the other companies that are contracting with the federal government — and, in particular, any of the war-fighting elements of the federal government — don’t necessarily have to deal with.
The only caveat I’ll add to that is a lot of the heat around this discussion between Anthropic and OpenAI and the Pentagon is very specifically about how their technologies are being used or not being used to kill people, or in parts of the missions that are killing people. It’s not just the attention that’s on them and the familiarity we have with their brands, there is an extra element there that I feel is more abstract when you’re thinking about General Motors as a defense contractor or whatever.
I don’t think we’re going to see, like, Applied Intuition or any of these other companies that have been framing themselves as dual use back off much, just because I don’t see the spotlight on it and there’s just not the sort of shared understanding of what that impact might be.
Anthony: This story is so unique and specific to these companies and personalities in a lot of ways. I mean, there have been a lot of really interesting thought pieces about: What is the role of technology in government? [Of] AI in government? And I think those are all good and worthwhile questions to ask and explore.
I think also, though, that this is a very curious lens through which to examine some of those things because Anthropic and OpenAI are not actually that different in a lot of ways or the stances they’re taking. It’s not like one company is saying, “Hey, I don’t want to work with the government” and one is saying, “Yes, I do.” Or one is saying, “You can do whatever you want.” and [the other is] saying, “No, I want to have restrictions.” Both of them, at least publicly, are saying, “We want restrictions on how our AI gets used.” It just seems like Anthropic is digging in their heels a lot more about: You cannot change the terms in this way.
And then on top of that, there also just seems to be a personality layer where, the CEO of Anthropic and, Emil Michael — who a lot of TechCrunch readers might remember from his Uber days, and is now [chief technology officer for the Department of Defense]. Apparently, they just really don’t like each other. Reportedly.
Sean: Yes, there’s a very big “girls are fighting” element here that we should not overlook.
Kirsten: Yeah, a little bit. There is, but the implications are a little bit stronger than that. Again, to pull back a little bit, what we’re talking about here is the Pentagon and Anthropic coming into a dispute in which Anthropic appears to have lost, although I should say they are still very much being used by the military. They are considered a crucial technology, but OpenAI has kind of stepped in, and this is evolving and will likely change by the time this episode comes out.
The blowback has been interesting for OpenAI, where we’ve seen a lot of uninstalls of ChatGPT I think surged 295% after OpenAI locked in the deal with the Department of Defense.
To me, all of this is noise to the really critical and dangerous thing, which is that the Pentagon was seeking to change existing terms on an existing contract. And that is really important and should give any startup pause because the political machine that’s happening right now, particularly with the DoD, appears to be different. This isn’t normal. Contracts take forever to get baked in at the government level and the fact that they’re seeking to change those terms is a problem.
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