In late November last yr, as India faced Australia in the ultimate of the Cricket World Cup, mega-fan Satya Nadella was distracted. He was coping with a piece crisis.
Nadella, who runs $3tn software giant Microsoft, had learned just days earlier that Sam Altman, the chief executive of OpenAI, the start-up through which Microsoft has invested $13bn, had been fired by his board in a surprise coup for not being “consistently candid”.
Caught unawares despite being OpenAI’s largest financial backer, Nadella hurried to repair the disruption. Once reassured Altman had not done anything egregious, he pushed first to rent and later reinstate the entrepreneur, in an try and restore stability on the start-up with which Microsoft’s future was now closely threaded.
In all, it took Microsoft’s leadership 10 days of intense work to repair the fallout from the aborted coup.
For Microsoft and its investors, the incident was a reminder of how central OpenAI had turn out to be to its strategy: the expansion of artificial intelligence. Nadella’s decision to bet on the start-up in July 2019, long before its flagship product ChatGPT became a household name, had created one in all the tech industry’s most successful partnerships.
Not only did it give the software company a head start within the booming marketplace for generative AI, but Microsoft’s share price has greater than tripled for the reason that initial $1bn investment five years ago, allowing it to compete with Apple for the title of world’s most precious company and widen its advantage over arch-rival Google. Speaking in a Financial Times interview early last yr, Nadella said Microsoft and OpenAI had developed a “mutual dependence”.
But within the eight months for the reason that board dispute, the tech giant has worked to execute an AI strategy independent of Altman’s start-up. It has diversified its investments and partnerships in generative AI, built its own smaller, cheaper models, and hired aggressively to develop its consumer AI efforts.
In February, Microsoft announced a multiyear partnership and investment into French AI start-up Mistral; the next month it paid one other peer Inflection — led by Google DeepMind co-founder Mustafa Suleyman — $650mn to license its technology and hire most of its talent; after which in April invested $1.5bn in Abu Dhabi AI group G42.
That same month, it also announced it had built its circle of relatives of generative AI models generally known as Phi-3 — software that’s smaller in size and complexity, and cheaper to run than so-called large language models corresponding to OpenAI’s GPT-4. Microsoft has said its Phi-3 models are getting used by the likes of BlackRock and Epic, and have outperformed GPT-3.5, an earlier version of OpenAI’s model, which ran its chatbot ChatGPT.
As the corporate’s vast spending on AI continues — accounting for much of its $56bn in annual capex — investors and regulators are closely scrutinising the high-profile alliance with OpenAI, and Microsoft’s technique to challenge Google on its home turf: search.
“Before November, I didn’t think they’d a diversification strategy. Satya is one in all the neatest executives and leaders you possibly can ever find within the ecosystem. If after the experience in November he’s fascinated by diversification, I can be fearful,” says Navrina Singh, chief executive of Credo AI, who worked on commercialising AI systems at Microsoft until 2019. “As probably the most priceless corporations on the planet . . . you possibly can’t have your eggs in a single basket. You can’t be blinded by innovation.”
Microsoft’s efforts to expand its AI ecosystem have modified the terms of its relationship with OpenAI, and likewise exposed the failings inside it. “I feel you possibly can see some fractures of trust and once those fractures appear it’s very difficult to cut back or remove them,” Singh adds.
A sales executive at Microsoft says it’s just smart business. “The other partnerships are a safeguard, not only if OpenAI goes down but in case a brand new start-up comes up with something higher,” the person says. “What happens if Mistral, Cohere or Microsoft bring out a greater model, what does Sam have? Huge consumer reach, good researchers, but when one of the best model isn’t GPT4 then who cares?”
Since its leadership crisis, OpenAI has replaced its board almost entirely, although its governance structures remain largely unchanged.
Altman was reinstated as a director in March, following an independent review conducted by a law firm into the events, which concluded that his behaviour “didn’t mandate removal”. In the aftermath, Microsoft was first given, after which withdrew from, an observer seat on the board, amid growing scrutiny by antitrust regulators.
But in recent months, OpenAI has been rocked by internal rows and high-profile resignations. This week, the corporate’s president, former board member and distinguished co-founder Greg Brockman announced a leave of absence until the top of the yr – so as, he later said, to spend time together with his family. Brockman was one in all Altman’s fiercest supporters in the course of the November coup, when he resigned from his role in protest, before rejoining days later. At the time, Nadella offered him a job at Microsoft, alongside Altman.
In May, former chief scientist and co-founder Ilya Sutskever quit to found his own AI company, after playing a number one role within the failed try and oust Altman, for reasons he never elaborated on. The raft of exits mean that nine of the start-up’s 11 co-founders are currently not working there.
Another recent exit, Jan Leike, who led OpenAI’s efforts to steer and control super-powerful AI tools and worked closely with Sutskever, said his differences with the corporate leadership had “reached a breaking point” as “safety culture and processes have taken a back seat to shiny products”.
He and others have gone to work for rival Anthropic, which itself was founded by former OpenAI employees who broke with Altman and the remaining of OpenAI’s leadership in 2021.
According to former Microsoft employees, this is just not the primary time OpenAI has operated in a dysfunctional manner. Sophia Velastegui, former chief AI technology officer for business applications at Microsoft, says that even prior to ChatGPT, a few of the product launches had not been communicated to Microsoft as expected. “OpenAI still operates like a start-up in some ways, so their tolerance for risk is higher than Microsoft’s.”
Altman continues to have powerful supporters in Silicon Valley. LinkedIn co-founder and Microsoft board member Reid Hoffman describes Altman as a “hall of fame entrepreneur” who doesn’t suffer from the identical “messiah complex” as another distinguished founders.
Still, recent departures and changes at OpenAI will leave the tech giant’s leadership more nervous about management maturity on the start-up, and supply a timely reminder that Microsoft can’t be overly depending on anyone third-party technology within the AI vertical.
“Aligning expectations about how and when to speak is a process when a disrupter like OpenAI joins forces with a longtime player like Microsoft,” says Velastegui. “At the top of the day, each corporations are still learning how best to work together.”
While investments in G42 and Mistral weren’t necessarily knee jerk responses to Altman’s ouster, those deals took on more significance as a way of reassuring nervous investors that the tech giant was spreading its bets.
More controversially, the so-called “acqui-hire” of Inflection founder Suleyman and a lot of the start-up’s staff in March set Microsoft on a path to confrontation with its biggest AI partner. The combative former Google DeepMind executive, who left that company having developed a fame as a bully, was put in control of a brand new internal AI unit at Microsoft and tasked with constructing consumer-facing products that will compete with those from Altman’s OpenAI.
According to multiple people within the tech industry, there are already tensions simmering between the ambitious pair.
There will probably be more complications down the road. The US Federal Trade Commission is probing whether the Inflection deal was structured to avoid antitrust laws, essentially gutting the smaller company of talent and software, while avoiding the formal scrutiny a full takeover would have brought. The FTC has also opened an investigation into the OpenAI partnership, leading to Microsoft proactively dropping its board observer seat.
Despite the scrutiny, the Inflection deal has turn out to be a model for other tech giants searching for talent. In June, Amazon hired a lot of the staff at AI-agent start-up Adept and paid $330mn to license its mental property. Last week, Google rehired the founding father of chatbot maker Character.ai and paid greater than $2bn to license its technology and money out existing investors.
The rash of buyouts underlines the trend of power flowing away from the start-ups like OpenAI, which kick-started the AI revolution, back to Big Tech gatekeepers, cementing the hold they’ve had on the sector for many years.
“(OpenAI) stays a powerful partner and we’re pretty confident they’ve solved their internal issues,” says Eric Boyd, corporate vice-president of Microsoft’s Azure AI cloud computing platform, who manages the connection with OpenAI. “At least to me, there has not been a selected strategic shift consequently of what happened.”
Brad Lightcap, OpenAI’s chief operating officer, says: “While we have now evolved from a small start-up to an organization serving the world’s largest corporations, Microsoft stays a vital partner.” Its funds and infrastructure have helped “enable OpenAI to innovate and deliver groundbreaking research and products,” he adds.
But as Altman’s vaulting ambitions grow — from plans to construct trillion-dollar Middle Eastern-financed chip factories to AI-centric smartphones with Japan’s SoftBank — the 2 corporations find themselves increasingly in competition.
In June, Apple said it will integrate ChatGPT into its operating systems, giving the start-up access to its 2.2bn energetic devices world wide. Notably, ChatGPT has not been integrated into Windows in the identical fashion.
OpenAI is hiring rapidly for a sales team to pitch their products to business clients directly, going after the businesses that Microsoft wants for its Azure platform with the identical underlying technology that powers its workplace AI assistant, Copilot.
Boyd insisted that although the 2 corporations collaborated on creating models, “we go to market and approach customers completely independently . . . If customers ask us what the difference is within the offerings, we are likely to point to the ways in which we show up as an organization — OpenAI is a start-up and we’ve been around for many years.”
He suggests that, as a start-up, OpenAI has fewer checks and balances than its established partner. “We have a protracted history of working with enterprises, handling sensitive data . . . We know methods to do privacy and compliance.”
Ultimately, though, even when Microsoft loses a pitch to OpenAI, it still wins — although the reverse is just not true. Azure is OpenAI’s exclusive cloud provider and will probably be paid for whatever computing power it uses, Boyd says. Microsoft can also be agnostic about which AI models are used, as long as they’re accessed through its cloud.
“We have over 1,600 models available through Azure AI . . . the most important thing we wish is people to be constructing and using them on Azure,” he says.
Microsoft has been keen to play up the burgeoning rivalry with its partner in light of escalating antitrust scrutiny. In its 2024 annual report, OpenAI was added to its list of direct competitors in AI, search and promoting. It also flagged that it has “limited ability to manage or influence third parties with whom we have now arrangements, which can impact our ability to grasp the anticipated advantages”.
The difference in strategy between Microsoft and Google is stark. The search giant is attempting to construct a “full stack” of AI in-house, from LLMs and consumer-facing chatbots to hardware corresponding to chips and servers in its cloud business.
The take care of OpenAI signifies that “Microsoft has decided to outsource their AI R&D,” says one Google executive, who asked to stay anonymous. “We are being more cautious.”
He compares the present moment in AI to a scene in Shakespeare’s play Macbeth when a personality asks a trio of witches to “look into the seeds of time” to find out which can grow. “AI appears like asking those witches (to predict the longer term). We’ve seen 100,000 seeds planted and we don’t yet know which can grow.”
Investors are beginning to query the heavy spending on AI by Big Tech, which reached a combined $106bn in the primary six months of 2024. After a historic bull run, the tech-dominated Nasdaq has fallen 13 per cent from its mid-July record peak, helping spark a wider market rout.
Microsoft reported that capex had jumped 80 per cent within the fourth quarter and it had spent $56bn in its financial yr 2024 — about half on infrastructure corresponding to data centres and land, with the rest on chips and server capability. Ben Reitzes, an analyst at Melius Research, says executives’ comments “imply an aggregate figure of no less than $80bn for 2025”.
Some of this spending is driving the ambitions of OpenAI: “We have also increased our investments in the event and deployment of specialized supercomputing systems to speed up OpenAI’s research,” Microsoft said in its annual report.
Still, analysts were impressed by early tangible evidence of a translation of investment into earnings. Chief financial officer Amy Hood predicted a powerful ramp up in AI-related profits within the second half of next yr and Nadella said Azure AI now had 60,000 customers, up greater than 60 per cent from a yr ago.
“Microsoft continues to be the clear beneficiary from Generative AI initiatives, with 46 per cent of chief investment officers citing Microsoft as gaining the most important share of IT spending over the subsequent one and three years,” says Morgan Stanley analyst Keith Weiss, referring to a survey the investment bank conducted. “The number two vendor, Amazon, was cited by just 6 per cent.”
Even because the OpenAI drama was ongoing, Nadella solid himself because the dominant partner in the connection.
“We were very confident in our own ability. If tomorrow OpenAI disappeared, I don’t want any customer of ours to be fearful about it,” he said in a November interview. “We have all the (IP) rights to proceed the innovation . . . We have the people, we have now the compute, we have now the info, we have now all the pieces.”
