BREAKINGVIEWS-Microsoft-OpenAI deadlock could calm capital mania

By Karen Kwok

LONDON, June 20 (Reuters Breakingviews) - Microsoft MSFT.O boss Satya Nadella nurtured the artificial intelligence arms race. He might accidentally reintroduce some restraint. The technology giant is locked in negotiations over its partnership with cash-burning OpenAI, threatening to walk away unless it gets better terms, the Financial Times reported on Wednesday. A deadlock might help refocus minds.

OpenAI CEO Sam Altman is in a bind. Founded as a non-profit years before the potential of chatbots became clear, the ChatGPT developer has since raised vast sums of capital to keep ahead of its rivals, notching a $300 billion valuation. Its current structure caps returns for outside investors. That needs to change: an up-to $40 billion funding round led by SoftBank 9984.T will be trimmed unless the company is reconstituted.

Doing so requires the blessing of Microsoft, which has poured $13 billion into OpenAI since 2019, as of October 2024. There are four major sticking points in the talks.

First is revenue sharing: OpenAI proposed reducing Microsoft’s contractual cut of its revenue by half to 10%, according to The Information.

Second, cloud exclusivity. OpenAI grew up depending on Microsoft’s cloud unit Azure for computing grunt, with the tech Goliath winning the right to provide future resources. Altman’s Stargate data center project is an attempt at independence, but its partner has only waived its rights for a limited amount of additional processing power.

Then there’s Microsoft’s access to OpenAI’s intellectual property, set to end if Altman’s firm achieves “artificial general intelligence” capable of supplanting humans.

The final issue is how much of a reformed OpenAI Microsoft would own, with talks ranging from 20% to 49%, according to the FT.

Nadella’s team has an advantage, since it can tolerate the status quo. Altman could offer sweeteners like extending Azure’s exclusivity or discounting access to new models. Thing is, either could slow OpenAI’s path to profitability, already assumed to be four years away. Another option is to give Microsoft a new, senior share class with outsized control. Yet that risks upsetting investors key to OpenAI’s future capital needs, particularly SoftBank. A final option: threats. OpenAI has contemplated accusing Microsoft of anticompetitive behavior, the Wall Street Journal reported.

If the impasse cannot be resolved, the accidental outcome could be to introduce some restraint. OpenAI - like rivals xAI or Anthropic - is incinerating cash. If access to capital or its eventual profitability is challenged, it might have to pull back. That might not worry Nadella, who argues that AI models will become commoditized. It may, though, send ripples through the wider market, where investors have rushed into over $120 billion of generative AI startup fundraising since 2023, according to PitchBook. Microsoft may indirectly calm this mania, at least a little.

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CONTEXT NEWS

Microsoft is prepared to abandon its high-stakes negotiations with OpenAI over the future of their alliance, the Financial Times reported on June 18.

The technology giant has considered pausing discussions with the ChatGPT maker if the two sides remain unable to agree on critical issues such as the size of Microsoft's future stake in OpenAI, the report said, citing people familiar with the matter.

OpenAI and Microsoft in a joint statement provided to Breakingviews said: "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."