By Anna Tong, Kenrick Cai and Krystal Hu

SAN FRANCISCO (Reuters) -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 said on Friday 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.