Microsoft Moves to Protect Its Turf as OpenAI Turns Into Rival

When Microsoft first invested in OpenAI in 2019, it likely didn’t expect that the fledgling artificial intelligence (AI) research lab would become the juggernaut that it is today. That all changed when ChatGPT became a household word in 2022.

But that also means the agreement it first struck with the startup, which was a nonprofit back then, would one day inevitably change.

That is what’s going on today.

The FT is reporting that Microsoft and OpenAI are renegotiating their partnership deal to one in which the software giant would protect its equity stake while ensuring access to future technologies. OpenAI gets more flexibility, with a possible IPO in its future.

“The altering of Microsoft and OpenAI’s partnership to allow for an initial public offering is a big step for the AI pioneer,” Samuel Kerr, global head of equity capital markets at data provider MergerMarket, told PYMNTS. “In this new wave of artificial intelligence investing, there are few more prized IPO candidates than OpenAI.”

While there’s more work for OpenAI to do before an IPO, the AI startup would be a “pure play way to invest in LLM [large language models] innovation on the public markets,” Kerr said, adding that among the private AI leaders, OpenAI “remains one of the most attractive due to ChatGPT.”

“A public listing for OpenAI, and perhaps even listings by its competitors like xAI or Anthropic, would allow retail investors to back new digital champions, give access to new pools of investment capital for future growth and allow for monetization opportunities for early backers,” Kerr said.

Microsoft’s first investment in OpenAI was for $1 billion. In return, Microsoft became OpenAI’s sole cloud provider and would have access to its technologies short of full artificial general intelligence (AGI). This same year, OpenAI created a for-profit subsidiary whose profits are capped.

Microsoft’s investment would become prescient after ChatGPT became the leading AI chatbot in the world. The company would further invest in OpenAI for a reported total of about $13 billion. It also held an equity stake in OpenAI and would share in any profits from the startup.

But the escalating cost of AI model training and infrastructure made OpenAI reconsider its capped-profit structure, since venture capitalists balked at giving billions of dollars if their profits would be limited.

Read more: OpenAI’s New Corporate Structure Sets Up a Tangled Legal Future, Experts Say

A Microsoft Frenemy?

OpenAI wanted to convert itself into a for-profit public benefit corporation (PBC), which doesn’t have a capped profit unit but has a public good mandate; the nonprofit would be an arm of the PBC. Elon Musk, who co-founded OpenAI, sued to stop it from becoming a for-profit company.

Later, after consulting with the attorneys general of California and Delaware as well as civic leaders, OpenAI said it would keep its nonprofit parent and convert the capped profit entity to a PBC.

Musk vowed to continue suing, his attorney has told PYMNTS.

While the corporate structure fight has been going on, OpenAI has become a competitor of Microsoft, rolling out its own consumer applications, developer tools and infrastructure. It’s no longer just a research lab anymore. The hiring of Instacart CEO Fidji Sumo further cemented OpenAI’s commercial focus.

Here are some ways in which Microsoft and OpenAI compete:

ChatGPT competes with Microsoft Copilot.

OpenAI’s API competes with Azure’s OpenAI services platform.

OpenAI is building its own data centers; Microsoft already has a big data center footprint.

OpenAI is signing up enterprise deals with Fortune 500 companies, the same thing that Microsoft is doing.

Roman Eloshvili, CEO of ComplyControl, an AI-powered risk management company, told PYMNTS that it’s not unusual for tech companies to “struggle when trying to balance profit with purpose, but OpenAI’s case may well demonstrate that it’s possible. That you can go big, raise serious funds, and still position yourself as mission-driven.”

If OpenAI succeeds in balancing both, “the ripple effects across the tech industry are going to be significant, helping set new standards for other companies and startups,” Eloshvili said.

For Microsoft, the restructured deal is a trade-off. Giving up equity in exchange for long-term access to OpenAI’s tech secures its future access to cutting-edge AI solutions for many years ahead.

“It ensures that the company has a seat at the table in the rapidly developing AI landscape without needing to outright control OpenAI,” Eloshvili said. “Strategically speaking, it’s a smart move.”

For now, Microsoft is a key holdout to OpenAI’s restructuring plan, according to FT. A critical issue in the negotiations is how much equity Microsoft will receive in the restructured company.

The original contract runs until 2030. Microsoft is willing to give up some equity in exchange for access to any new OpenAI tech beyond 2030.