ARTIFICIAL INTELLIGENCER-The fallout from the OpenAI-Hugging Face hack

By Kenrick Cai

July 29 (Reuters) - New revelations have been surfacing about the AI agent that breached an OpenAI testing environment to hack into AI library Hugging Face.

My colleagues Raphael Satter, Deepa Seetharaman and I exclusively reported last week that the hacking spree had been going on for days before OpenAI even realized its agent was behind the hack.

On Tuesday, Hugging Face published a detailed technical timeline that alluded to the agent having broken into misconfigured infrastructure hosted by an unnamed third-party provider. OpenAI published an update on its investigation, finding that the agent broke into four accounts across four separate services.

Reuters confirmed that the third-party provider alluded to by both firms was Modal, a New York-based cloud infrastructure provider. The startup’s CTO told us that the company itself was not hacked, but the agent exploited a customer’s vulnerable code which had been publicly accessible.

In the fallout, support has consolidated around mechanisms to counteract future incidents. Last week, Nvidia, Microsoft and other tech heavyweights made a case to U.S. lawmakers in favor of open-weight models that users can download, run and customize. (Notably, Hugging Face previously detailed that it turned to a Chinese open-weight model to fix the breach, after having been blocked from using proprietary models due to their baked-in guardrails.)

On Tuesday, more than 1,100 employees from top tech firms signed a statement urging the U.S. government to support an international effort to manage the pace of AI development. Many of the signatories work at OpenAI, including chief scientist Jakub Pachocki, chief research officer Mark Chen and co-founder Wojciech Zaremba.

One of the signatories pinpointed the Hugging Face hack as “a clear and undeniable warning sign that we aren’t yet prepared to handle AI systems that demonstrate capabilities beyond those of our smartest people.”

Hugging Face CEO Clement Delangue told Reuters that the shift in discourse around AI development in the aftermath of the hack has left him feeling more optimistic, pointing to support for open-weight models.

“Now that everyone expressed their public support for open weights in America, I hope it will drive more companies to actually share more of their research, models and datasets,” Delangue said.

In this week’s issue, we look at the tech earnings bonanza, and what Google parent Alphabet’s results last week may portend. Scroll on.

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Last week, South Korean firms unveiled a series of AI-related initiatives worth $950 billion — more than half of it coming in the form of a partnership between SK Kynix and Nvidia to build out memory and large-scale AI data centers. Then on Sunday, Nvidia NVDA.O was reported to be in talks to provide some $250 billion in financing guarantees to OpenAI for data centers.

The deals have reignited the discourse around what analysts have called AI “round-tripping” — the same hyperscalers funding top AI model developers, who in turn spend much of that capital on their investors’ cloud infrastructure and chips.

A related and longstanding question may be even more pressing: Can any company generate enough revenue to justify the trillions in infrastructure being built?

During Alphabet’s GOOGL.O earnings last week, executives held off on revealing their revised 2026 capital expenditures plan — a $15 billion increase to as much as $205 billion — until close to the very last minute possible on their earnings call.

The stock, which had initially held flat based on the company's second-quarter performance, suddenly took a downswing, dipping about 3% in extended trading.

“We have increased ​our capacity quite significantly over the past three years,” CFO Anat Ashkenazi said. “The demand still outpaces that investment.”

It’s the same line the company has shared quarter after quarter to justify increasing capital spending for the sake of building out AI infrastructure, but the reception proved different this time around.

It comes even as sales within the cloud division blew past expectations to grow 82%, the best-ever growth rate since Google began breaking out the segment’s revenue in 2020, beating the previous record 63% set one quarter earlier.

That growth has not been enough to make up for the ballooning capex that is putting a dent in free cash flow, which several market insiders pinpointed as the key metric to watch during the upcoming earnings bonanza; Amazon, Meta, Microsoft all report this week.

Indeed, Google burnt $5.9 billion in the second quarter, the first time in more than two decades as a public company that it reported negative free cash flow.

As the tech giants continue to double down on an unprecedented AI buildout, the pressure ratchet from Wall Street could cause the massive spending to come home to roost.

(Reporting by Kenrick Cai, Editing by Rosalba O'Brien)