Anthropic tells investors distillation accounts for 5% to 7% of revenue and says it sharply cut that business in the third quarter

Anthropic told investors on Wednesday that revenue from “distillation” accounted for 5% to 7% of its total revenue, and that it had already “substantially” reduced that business in the third quarter. The Financial Times (FT) reported this, citing four people with direct knowledge of the matter; The Information reported the same range.

What is distillation? It means using a more capable model’s answers as training material for your own model. Rival labs send Claude large numbers of queries, collect the responses and feed them into their own models, allowing them to acquire some of Claude’s capabilities at a lower cost.

If it is a form of “learning,” why does it show up in Anthropic’s revenue? Because those queries go through a paid API, with every call billed according to usage. Distillation can easily involve millions or tens of millions of queries; the FT says it “involves significant usage and spending.” In other words, competitors really are paying Anthropic, but they are doing so to train rival models. Anthropic’s commercial terms of service explicitly prohibit using its services to “train competing AI models.”

How much money does 5% to 7% represent? The reports do not specify the period those percentages cover, so any figure is only an estimate. A calculation circulating online uses second-quarter revenue of 115 hundred million US dollars, yielding roughly 5.75 hundred million to 8 hundred million US dollars. This is an extrapolation, not a figure from the reports. The 115 hundred million US dollar figure comes from company documents Bloomberg saw in month 8; the wording was “more than 115 hundred million US dollars.” It was preliminary, and Anthropic has not publicly confirmed it.

The reports also do not identify which companies paid this money. In month 2 of this year, Anthropic named DeepSeek, Moonshot and MiniMax in a post, saying the three used approximately 2.4 ten thousand fake accounts to bypass the restriction that Claude is not available in China, and conducted more than 1600 ten thousand conversations with Claude for distillation.

Voluntarily giving up this revenue has a cost. Anthropic is preparing to go public. The same investor update put its third-quarter revenue at 168 hundred million US dollars, up about 46% from the second quarter. Second-quarter revenue had more than doubled from the first, so growth has already slowed. According to the reports, the company told investors that lower distillation revenue would weigh on this quarter’s figures; the trade-off is making it harder for rivals to catch up by copying Claude’s answers.