JANUARY 23, 2023
Microsoft is making a big new investment in OpenAI, the artificial intelligence powerhouse behind ChatGPT, extending a partnership that has the potential to reshape some of its biggest products.
The Redmond-based company describes it as “a multiyear, multibillion dollar investment to accelerate AI breakthroughs to ensure these benefits are broadly shared with the world.”
But Microsoft, which last week announced the layoff of 10,000 employees, isn’t saying exactly how much it’s investing, or how much of OpenAI it will own as a result. Pressed about the lack of disclosure, a Microsoft spokesperson said the deal isn’t financially material to the company’s business.
Bloomberg News, citing a person familiar with the discussions, reported that the investment “totals $10 billion over multiple years.” At that total amount, if it were an outright acquisition, it would rank as the fourth-largest* in Microsoft’s history, ahead of Skype, ZeniMax Media, GitHub, Nokia, aQuantive, and other deals subject to detailed disclosures for the benefit of investors, regulators, and the public.
Microsoft disclosed its initial $1 billion investment in OpenAI in 2019.
The announcement today also revealed, for the first time, that Microsoft made a follow-on investment in OpenAI in 2021. The amount wasn’t disclosed. That investment wasn’t announced at the time, and does not appear to have been previously reported. PitchBook, the authoritative database on private capital investments, showed no record of it.
We’ve asked Microsoft to explain the basis on which it has determined the new investment in OpenAI to be immaterial to its business, allowing the financial details to go without public disclosure under Securities & Exchange Commission rules. We’ve also contacted the SEC for clarification of the threshold for material disclosures to investors.
Semafor on Jan. 9 reported on the talks between Microsoft and OpenAI, saying at the time that the deal could value OpenAI at $29 billion, with the possibility of Microsoft receiving 75% of OpenAI’s profits until it recoups its investment, ending up with a 49% stake in the company. It’s not clear if those terms held in the final deal.
Microsoft is one of many tech companies that have made layoffs in recent weeks and months. CEO Satya Nadella, in a memo last week to employees about the job cuts, said the company “will continue to hire in key strategic areas. He cited AI advances as the driver of “the next major wave of computing.”
San Francisco-based OpenAI has risen to new levels of prominence since Microsoft’s initial investment, with cutting-edge AI tools including Dall-E 2, which can generate images from natural language; and ChatGPT, which provides sophisticated answers and detailed information in response to natural language queries.
At the same time, ChatGPT has raised concern about inaccuracies in some of its answers, demonstrating the potential for AI to be confidently wrong. OpenAI CEO Sam Altman also recently addressed concerns about new wave of plagiarism in schools, saying that AI will require everyone to adapt.
“We adapted to calculators and changed what we tested for in math class, I imagine,” Altman told StrictlyVC’s Connie Loizos. “This is a more extreme version of that, no doubt, but also the benefits of it are more extreme, as well.”
For OpenAI, one of the key benefits of the partnership is access to Microsoft’s technology backbone, including the immense computing resources required to train massive artificial intelligence models.
“Azure’s unique architecture design has been crucial in delivering best-in-class performance and scale for our AI training and inference workloads,” OpenAI says in its post about the new investment. “Microsoft will increase their investment in these systems to accelerate our independent research and Azure will remain the exclusive cloud provider for all OpenAI workloads across our research, API and products.”
For Microsoft, one the key benefits of the partnership is the ability to commercialize OpenAI’s technology, giving the tech giant a potential edge over rivals including Amazon and Google in cloud and AI technology.
Existing integrations of OpenAI technology in Microsoft products include GitHub Copilot, which gives software developers a virtual AI pair programmer to suggest code and functions as they write programs.
Microsoft’s announcement says the agreement “extends our ongoing collaboration across AI supercomputing and research and enables each of us to independently commercialize the resulting advanced AI technologies.” A Microsoft spokesperson clarified that nothing has changed regarding the ability to independently commercialize the technology.
OpenAI was formed as a non-profit in 2016 by Elon Musk, the Tesla and SpaceX CEO; Altman, former president of the Y Combinator startup accelerator; Ilya Sutskever, OpenAI’s chief scientist; and Greg Brockman, the former Stripe CTO. Musk, the SpaceX and Tesla founder, and more recently Twitter owner and CEO, is no longer involved.
In 2019, OpenAI launched a related for-profit (or “capped profit”) company with Altman as CEO.
“In pursuit of our mission to ensure advanced AI benefits all of humanity, OpenAI remains a capped-profit company and is governed by the OpenAI non-profit,” OpenAI wrote in its post this morning. “This structure allows us to raise the capital we need to fulfill our mission without sacrificing our core beliefs about broadly sharing benefits and the need to prioritize safety.”
OpenAI added, “Microsoft shares this vision and our values, and our partnership is instrumental to our progress.”
News of the investment and extended partnership comes in advance of Microsoft’s earnings report Tuesday afternoon for its fiscal 2023 second quarter, ended Dec. 31.
* This ranking of acquisitions includes Microsoft’s pending $69 billion Activision-Blizzard deal. The company is seeking to overcome the Federal Trade Commission’s opposition to complete the Activision acquisition.