Microsoft responds to OpenAI inquiry, clarifies lack of ownership stake and distinguishes itself from Google and DeepMind.
Microsoft Corp.’s $13 billion investment in OpenAI is under scrutiny by global regulators, who are being presented with a straightforward argument by the software giant. Microsoft asserts that since it does not possess a conventional stake in the popular startup, it cannot be deemed as having control over it.
When Microsoft negotiated an additional $10 billion investment in OpenAI in January, it chose an unusual arrangement, people familiar with the matter said at the time. Instead of buying part of the state-of-the-art artificial intelligence lab, it struck a deal to receive nearly half of OpenAI’s financial return until the investment is repaid up to a predetermined cap, one of the people said. The unusual structure was invented because OpenAI is a non-profit company operating within a non-profit organization.
It’s not clear that regulators see the difference. Britain’s Competition and Markets Authority said on Friday it was gathering information from stakeholders to determine whether a collaboration between the two companies threatens competition in the UK at Google’s artificial intelligence research lab Deepmind. The U.S. Federal Trade Commission is also investigating the nature of Microsoft’s investment in OpenAI and whether it may violate antitrust laws, according to a person familiar with the matter.
The inquiries are preliminary and the agency has not opened a formal investigation, according to the person, who declined to be named due to the confidential nature of the matter.
Microsoft did not report the deal to the agency because an investment in OpenAI does not imply control of the company under U.S. law, the person said. OpenAI is a non-profit, and corporate acquisitions are not disclosed under US merger law, regardless of value. Agency officials analyze the situation and evaluate its alternatives.
“While the details of our agreement are confidential, it is important to note that Microsoft does not own any part of OpenAI and is simply entitled to a share of the profits,” a Microsoft spokesperson said in a statement. Earlier on Friday, Microsoft president Brad Smith said that “the only thing that has changed is that Microsoft now has a silent observer on the OpenAI board.” He described its relationship with OpenAI as “very different” to Google’s outright acquisition of DeepMind in the UK.
“Our partnership with Microsoft allows us to continue our research and develop safe and useful AI tools for everyone, while remaining independent and competitive. Their non-voting observer status does not give them any governance or oversight power over OpenAI’s operations,” an OpenAI spokesperson said in a statement.
From the beginning, Microsoft and OpenAI made efforts to fly the independence of the two companies. Microsoft hoped to reassure investors and customers that it was not overly dependent on a single partner. OpenAI didn’t want employees, customers and other investors to think it was just an outpost of Microsoft in Redmond, Washington. This careful positioning backfired last month with the firing of OpenAI CEO Sam Altman and the startup’s near-collapse.
The Altman imbroglio demonstrated both Microsoft’s lack of control and its influence. Microsoft received only a minute’s notice that OpenAI’s board was going to announce Altman’s ouster, and its executives have not been consulted on the decision. Still, Microsoft CEO Satya Nadella, along with other investors, played a key role in forcing the board to reverse its decision. At one point, Microsoft said it would hire Altman and his OpenAI colleagues to form a new Microsoft AI unit.
After Altman was reinstated as CEO, Microsoft executives considered the wisdom of joining OpenAI’s board, people familiar with the matter said at the time. On the other hand, managers feared that a board seat or an observer seat might attract the attention of regulators. On the other hand, Microsoft wanted to keep a closer eye on its partner and protect its investments – this is a necessity despite the risks.
Ultimately, Microsoft could face a regulatory headache. European regulatory authorities are also paying attention, according to a spokesperson for the European Commission. In order for the transaction to be notified to the Commission in accordance with the EU Merger Regulation, it must involve a permanent change of control. Although this deal has not been officially announced, the commission had been monitoring the situation even before the management turmoil, the spokesman said.
Last month, Germany’s competition authority announced that it would not subject Microsoft’s OpenAI investment to a merger review. But the regulator said they were only delaying because OpenAI had no significant business in Germany. After reviewing the deal and talking to the companies, the regulator found that the investment would give Microsoft a “significant competitive advantage” over the AI company, which may require a future review if OpenAI expands its operations in Germany.
The partnership raises competition concerns if Microsoft cuts back on its own AI research and development, or if the investment prevents OpenAI from working with the tech giant’s rivals, Bloomberg Intelligence antitrust analyst Jennifer Rie said. Antitrust watchdogs may also be concerned about Microsoft’s government watchdog, which would give Microsoft more information about OpenAI’s plans, even if it has no rights to influence decisions.
