Microsoft and OpenAI forged a close bond. Why it's now too big to last.
Once tied at the hip, Microsoft and OpenAI increasingly look like rivals seeking an amicable divorce. But like all separations, it could get messy, and this past week OpenAI indicated it's willing to get down in the mud.
When Microsoft and OpenAI first got together in 2019, the most powerful artificial intelligence in the world was literally playing games. AlphaGo from Google's DeepMind lab was the first machine to beat human Go champions, but that's all it did. AI as we know it now was still in its research phase.
Venture capital's focus was on cloud and cryptocurrency start-ups, but Microsoft saw something in the nonprofit AI lab called OpenAI, which had just come off a bruising leadership battle that saw Sam Altman prevail over Elon Musk. Without Musk's billions of dollars, OpenAI changed to a bespoke structure in which a for-profit AI lab is controlled by a nonprofit board. Investors' returns were capped at 100 times their stake.
The reorganization cleared the way for Microsoft to invest $1 billion in OpenAI in 2019. Those funds fueled the release of ChatGPT in November 2022—the spark to the AI prairie fire that is still spreading. Soon thereafter, Microsoft invested another $10 billion, which supported OpenAI's rapid expansion. Since then, the bills have added up, given the high cost of scaling AI.
At first the two companies were symbiotic. All of OpenAI's AI computing is done on Microsoft's Azure cloud. Microsoft has access to all of OpenAI's intellectual property, including its catalog of models that underpin a range of AI services Microsoft offers with its Copilot products. When the OpenAI nonprofit board ousted Altman in a November 2023 coup, Microsoft CEO Satya Nadella backed Altman, a key endorsement that helped restore his post.
But the partnership that made so much sense from 2019 to 2023 has now made each company too dependent on the other. OpenAI has large ambitions, and Sam Altman believes it will need unprecedented computing power to get there, more than Microsoft can provide. He would also like more control over the data-center buildout. Altman's company also has increasingly go-it alone ambitions—it says subscriptions and licenses to ChatGPT are on track to bring in $10 billion a year.
For its part, Microsoft now relies on OpenAI as both a major customer and supplier. That's the kind of concentration risk that should make Microsoft executives nervous.
'OpenAI has become a significant new competitor in the technology industry," Microsoft President Brad Smith said in a February 2024 blog post. This was the first public indication that the relationship may not have been as cozy as some supposed. Microsoft began working on its own AI models that year, and in October 2024, it declined to participate in a $6.6 billion OpenAI funding round.
In January, Microsoft and OpenAI modified their agreement so that Microsoft would no longer be OpenAI's exclusive cloud provider, but would retain right-of-first-refusal for all new business. Microsoft hasn't been exercising that right to any large degree—OpenAI subsequently signed new cloud deals with CoreWeave and Alphabet's Google Cloud, two Microsoft competitors.
The same January day as the deal modification, Altman stood in the Oval Office with President Donald Trump, Oracle Chairman Larry Ellison, and SoftBank Group CEO Masa Son to announce Project Stargate, an ambitious plan to raise $500 billion for a massive cluster of AI data centers controlled by Altman. The partnership and high-profile event made clear that OpenAI had new friends and had moved beyond its Microsoft reliance.
The partnership on display in the Oval Office led to a $40 billion March funding round, led by SoftBank. But it came with a string attached: $20 billion of it is contingent on OpenAI doing another reorganization into a public-benefit corporation by the end of the year, which would give SoftBank and other new investors more conventional investor rights.
But there are key hurdles in the way of that restructuring and the $20 billion, including a lawsuit from Elon Musk and regulatory approvals from California, Delaware, and the federal government. But the biggest obstruction is that Microsoft has a large stake in the current OpenAI. To convert corporate structures, OpenAI will have to negotiate new terms, and in a ticking-clock scenario like this, Microsoft has all the leverage, which grows each day.
According to The Wall Street Journal, negotiations are getting testy. The main point of contention is how much of the new OpenAI Microsoft will own. But there is also the matter of OpenAI's acquisition of an advanced AI coding tool, Windsurf. Under their current arrangement, Microsoft has access to all of OpenAI's IP, and that would include Windsurf. But OpenAI doesn't want this, because Microsoft has its own coding assistant, GitHub Copilot, and this puts the companies on another axis of competition.
In a joint statement, Microsoft and OpenAI told Barron's: 'We have a long-term, productive partnership that has delivered amazing AI tools for everyone. Talks are ongoing and we are optimistic we will continue to build together for years to come."
According to the Journal, OpenAI thinks it could deter Microsoft from dragging out negotiations by keeping open the possibility of publicly accusing Microsoft of antitrust violations and lobbying the White House to open an investigation. Since the Stargate announcement, Altman has had a close relationship with Trump. In this regard, the Journal article is a message from OpenAI: We aren't powerless here.
This is how the divorce could get ugly. Microsoft could slow-walk the talks, and as the end of the year approaches, the pressure would grow on OpenAI to settle, or lose $20 billion in funding. OpenAI, meanwhile, could start pushing on its White House levers to encourage some type of Microsoft investigation—what the WSJ called its 'nuclear option." But like any nuclear exchange, no one would emerge victorious. Microsoft would be tarred, and OpenAI would still miss its $20 billion deadline.
Since the launch of ChatGPT, AI in the U.S. has been dominated by the Microsoft-OpenAI alliance. The now inevitable breakup has everyone scrambling to fill the void.
Write to Adam Levine at adam.levine@barrons.com
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