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OpenAI and Microsoft's Billion-Dollar Showdown: A Power Struggle Over Profitability, AGI, and Cloud Computing

Industry dynamics 2024-12-27 08:27:01 Source:

OpenAI and Microsoft's Billion-Dollar Showdown: A Power Struggle Over Profitability, AGI, and Cloud ComputingNews broke on December 27th that Sam Altman, co-founder and CEO of OpenAI, is attempting to transform the AI development firm from a non-profit into a for-profit entity. This is proving to be no easy feat, as he faces significant challenges from its major investor, Microsoft

OpenAI and Microsoft's Billion-Dollar Showdown: A Power Struggle Over Profitability, AGI, and Cloud Computing

News broke on December 27th that Sam Altman, co-founder and CEO of OpenAI, is attempting to transform the AI development firm from a non-profit into a for-profit entity. This is proving to be no easy feat, as he faces significant challenges from its major investor, Microsoft. Microsoft has pledged over $13 billion to OpenAI, giving it considerable sway over the company's future direction.

Since October, OpenAI and Microsoft have been engaged in tense negotiations regarding OpenAI's potential restructuring. Four key issues are at the heart of the negotiations: Microsoft's equity stake in the future for-profit entity; Microsoft's continued role as OpenAI's exclusive cloud provider; the length of time Microsoft can utilize OpenAI's intellectual property in its products; and whether Microsoft will continue to receive a 20% revenue share from OpenAI.

Currently, a nine-member non-profit board (including Altman) oversees OpenAI's for-profit operations. However, the stability of this governance structure has been questioned. A year ago, the board abruptly removed Altman, alleging misrepresentation. Four days later, Altman was reinstated following an agreement with the board, which subsequently underwent changes. Since then, OpenAI's for-profit investors, alongside Altman, have pushed for a complete separation from the non-profit. Altman argues that becoming a for-profit company will create clearer structure, with shareholders holding explicit equity rather than simply future profit shares.

Fueling these negotiations is OpenAI's explosive growth and ambitious product development plans. From server chips and web browsers to humanoid robots, OpenAI plans a massive expansion. Projected revenue is $4 billion for 2023 and a staggering $100 billion by 2029. This rapid growth is making the 20% revenue share in Microsoft's contract and the reliance on Microsoft servers increasingly untenable. Altman frankly acknowledged in a December meeting: "There are some disagreements and challenges between us and Microsoft, that's clear."

While the finalization of negotiations remains uncertain, both parties are working to expedite the process. If OpenAI fails to complete the transformation within two years, recent investors will have the right to reclaim their funds with a 9% interest rate, potentially totaling $7.2 billion. However, given OpenAI's rapid growth, whether these investors will choose to do so remains an open question. Meanwhile, company leadership has indicated a desire to repurchase some employee shares post-transformation, further highlighting the importance of the transition. Both OpenAI and Microsoft spokespeople declined to comment on the matter.

OpenAI and Microsoft

Beyond the Microsoft negotiations, Altman faces a legal challenge from Elon Musk. The OpenAI co-founder has filed a lawsuit attempting to block the for-profit transformation, arguing it deviates from the original intention of developing AI "for the benefit of all humanity." Musk's suit has garnered support from OpenAI competitors like Meta, who also oppose the transformation on legal grounds. However, similar transformations are not uncommon among non-profits, and the legality remains to be determined by the courts.

The definition and achievement of Artificial General Intelligence (AGI) are also focal points of the negotiations. Under the OpenAI-Microsoft contract, if OpenAI successfully develops AGI (which OpenAI publicly defines as AI surpassing human capabilities in most economically valuable work), the company can terminate the agreement. However, the ambiguous definition of AGI has raised questions about whether OpenAI is nearing that level.

In a December meeting, Altman stated: I think we'll get to artificial general intelligence sooner than most of the world expects, and its actual impact may be less than people imagine. He also revealed that he and the OpenAI team believe current AI chips possess the potential to achieve AGI. This has fueled speculation that OpenAI might attempt to extricate itself from its obligations to Microsoft by declaring AGI achieved. But insiders reveal that Amy Hood, Microsoft's CFO, has assured company shareholders that under the terms of the latest agreement between the two companies, Microsoft has the right to use all technology developed by OpenAI for the duration of the agreement (expected to last until 2030).

The $100 billion profit target adds further complexity. According to internal documents provided by OpenAI to investors, Microsoft and OpenAI reached an undisclosed agreement last year stipulating that the achievement of AGI is contingent upon OpenAI developing a system generating approximately $100 billion in total profit for the earliest investors, including Microsoft. However, these documents contain ambiguities, stating that the "declaration of reaching AGI level" is subject to the OpenAI board's "reasonable discretion." Disagreements may persist between Microsoft and OpenAI regarding the current technology's capacity for large-scale profitability. OpenAI states it has capped potential investor profits to balance shareholder returns with ethical and societal goals of advancing AI for humanity's benefit. Previously, OpenAI discussed raising the annual profit cap by 20% with Microsoft. Reportedly, Microsoft's maximum potential profit is capped at $930 billion. Should this cap be raised, the actual profitability target for AGI could approach $1.2 trillion, incorporating profit shares payable to other investors (like YCombinator and Khosla Ventures). Despite the ambitious target, these profits are not expected in the near term. OpenAI is currently losing billions of dollars annually and is not projected to turn its first annual profit until 2029.

Whether the for-profit transformation will influence the definition of AGI remains unresolved. Some Microsoft executives hope that even after a declaration of achieving AGI, continued negotiations will secure access to OpenAI's technology.

OpenAI and Microsoft

Another major point of contention between OpenAI and Microsoft lies in their cloud computing partnership. Under their agreement, Microsoft is not only OpenAI's exclusive cloud server provider but also the sole entity authorized to resell OpenAI models to cloud customers. However, OpenAI claims Microsoft is struggling to meet its massive server resource demands. Some OpenAI executives believe allowing other cloud providers like Amazon and Google to also resell OpenAI models would boost sales. Microsoft CEO Satya Nadella acknowledged the difficulty in keeping pace with OpenAI's growth, stating that the two companies need to find "balance" in their collaboration. Whether Microsoft will concede on its exclusive cloud partnership remains uncertain. But OpenAI has begun circumventing agreement limitations, seeking cloud server access without direct Microsoft involvement. For example, in Abilene, Texas, OpenAI is negotiating directly with other vendors, including Oracle, aiming to secure AI server access by mid-next year.

Furthermore, OpenAI may receive support from Microsoft's competitors to reduce its dependence. Google has petitioned US regulators to review and potentially break up the Microsoft-OpenAI cloud computing deal on antitrust grounds.

Following OpenAI's restructuring, the original non-profit is expected to retain at least a 25% stake in the for-profit entity, representing a book value of around $40 billion. Microsoft is also projected to hold a similar or larger percentage. Upon completing the transformation, OpenAI plans to establish a new board of directors for the non-profit, separate from the current board managing its affairs. Successfully transitioning to a for-profit entity would make it easier for OpenAI to pursue an Initial Public Offering (IPO). However, OpenAI has consistently allowed investors, current, and former employees to sell shares, and plans to continue this policy in the future.

The OpenAI-Microsoft negotiations affect not only OpenAI's future but also the landscape of the AI industry. The outcome of this billion-dollar power struggle will have profound implications for the application and development of AI technology. This clash over profitability, the definition of AGI, and exclusive cloud computing agreements will undoubtedly continue to captivate global attention.

Tag: and OpenAI Microsoft Billion-Dollar Showdown Power Struggle Over Profitability


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