Space is a vacuum. i.e. The lack-of-a-thing that makes a thermos great at keeping your drink hot. A satellite is, if nothing else, a fantastic thermos. A data center in space would necessarily rely completely on cooling by radiation, unlike a terrestrial data center that can make use of convection and conduction. You can't just pipe heat out into the atmosphere or build a heat exchanger. You can't exchange heat with vacuum. You can only radiate heat into it.
Heat is going to limit the compute that can be done in a satellite data centre and radiative cooling solutions are going to massively increase weight. It makes far more sense to build data centers in the arctic.
Musk is up to something here. This could be another hyperloop (i.e. A distracting promise meant to sabotage competition). It could be a legal dodge. It could be a power grab. What it will not be is a useful source of computing power. Anyone who takes this venture seriously is probably going to be burned.
I keep seeing that term, but if it does not mean "AI arms race" or "AI surveillance race", what does it mean?
Those are the only explanations that I have found, and neither is any race that I would like to see anyone win.
But when they say, "Win the AI race," they mean, "Build the machine god first." Make of this what you will.