Microsoft’s partnership with OpenAI is on the rocks

Microsoft Chairman and CEO Satya Nadella speaks with OpenAI CEO Sam Altman

(Image credit: JASON REDMOND/AFP via Getty Images)

For six years, the alliance between Microsoft and OpenAI, developer of ChatGPT, has been “one of the most successful partnerships in tech history”, says Berber Jin in The Wall Street Journal. Microsoft’s investment provided funding that fuelled OpenAI’s ascendancy in exchange for early access to OpenAI’s technology and nearly half of any profits. But now the relationship may be on the rocks. The two firms are at loggerheads over OpenAI’s $3 billion acquisition of the coding start-up Windsurf, which competes directly with Microsoft. And negotiations over OpenAI’s conversion into a for-profit company have stalled.

Even before this “behind-the-scenes dogfight”, the relationship between Microsoft and OpenAI was “already fraught”, say Bloomberg’s Brody Ford and Shirin Ghaffary. While it has put $14 billion into OpenAI, Microsoft has also backed rival AI start-ups and begun to construct its own AI models. OpenAI, meanwhile, has signed deals with “rival cloud-computing partners and spent much of the past two years building out a suite of paid subscription products for businesses, schools and individuals”.

Who has the advantage: Microsoft or OpenAI?

Experts believe that Microsoft has the upper hand, given how “crucial” converting to a for-profit entity is for the future of OpenAI, says the Financial Times. This is because most of the other investors who have put money into Sam Altman’s company only did so on the condition that they would be able to convert their equity investment into debt, or even ask for it back, if OpenAI failed to change its status. There are rumours that SoftBank, for instance, could cut its $30 billion investment by $10 billion if the conversion is not completed by the end of the year.

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Still, OpenAI may have a few tricks of its own if Microsoft refuses its offer of a 33% stake in a restructured unit in exchange for foregoing rights to future profits, says Benj Edwads in Ars Technica. One of these is the “nuclear option” of seeking a federal regulatory review of the terms of its contract with Microsoft for potential antitrust law violations. In that case, OpenAI is likely to argue that “Microsoft is using its dominant position in cloud services and contractual leverage to suppress competition”.

OpenAI has several potential “sweeteners”, such as extending Microsoft’s exclusivity to OpenAI’s technology, or discounting access to new models, says Karen Kwok for Breakingviews. It could also give Microsoft a new class of shares that would give it outsized control, although this might be unpopular with other investors.

But if nothing else works, then OpenAI might be forced to scale back plans for developing new products, as it is currently “incinerating cash”. This would in turn “send ripples through the wider market, where investors have rushed into over $120 billion of generative AI start-up fundraising since 2023”. While this might not matter if AI becomes commoditised anyway, it would at least calm AI “mania”.

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