Microsoft and OpenAI's Partnership Shows Signs of Strain Amid Financial Pressures and Strategic Shifts

Microsoft Has an OpenAI Problem

In pure organizational terms, OpenAI is a weird entity. It started as a nonprofit, raising more than $100 million dollars to spend on foundational AI research, before morphing into a "capped profit" corporation governed by a nonprofit and "legally bound" to pursue the nonprofit's mission. In 2015, that mission was " to advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return." In 2024, OpenAI says its "mission is to ensure that artificial general intelligence (AGI) -- by which we mean highly autonomous systems that outperform humans at most economically valuable work -- benefits all of humanity." This was, in hindsight, a pretty good deal for OpenAI, which has burned through billions of dollars building, training, and operating AI models. First, it got to raise a lot of money without normal pressure to pay it back. Then, as a for-profit firm wrapped in a non-profit, it raised huge amounts of money from Microsoft without the risk of control by or absorption into the nearly 50-year-old company. In the process of raising its next round of funding, which values the startup at more than $150 billion, the company has told investors it will transition to a for-profit structure within two years, or they get their money back. If you take Sam Altman at his word, this process wasn't inevitable, but it turned out to be necessary: As OpenAI's research progressed, its leadership realized that its costs would be higher than non-profit funding could possibly support, so it turned to private sector giants. If, like many of OpenAI's co-founders, early researchers, former board members, and high-ranking executives, you're not 100 percent convinced of Sam Altman's candor, you might look back at this sequence of events as opportunistic or strategic. If you're in charge of Microsoft, it would be irresponsible not to at least entertain the possibility that you're being taken for a ride. According to the Wall Street Journal: OpenAI and Microsoft MSFT 0.14%increase; green up pointing triangle are facing off in a high-stakes negotiation over an unprecedented question: How should a nearly $14 billion investment in a nonprofit translate to equity in a for-profit company? Both companies have reportedly hired investment banks to help manage the process, suggesting that this path wasn't fully sketched out in previous agreements. (Oops!) Before the funding round, the firms' relationship has reportedly become strained. "Over the last year, OpenAI has been trying to renegotiate the deal to help it secure more computing power and reduce crushing expenses while Microsoft executives have grown concerned that their A.I. work is too dependent on OpenAI," according to the New York Times. "Mr. Nadella has said privately that Mr. Altman's firing in November shocked and concerned him, according to five people with knowledge of his comments." Microsoft is joining in the latest investment round but not leading it; meanwhile, it's hired staff from OpenAI competitors, hedging its bet on the company and preparing for a world in which it no longer has preferential access to its technology. OpenAI, in addition to broadening its funding and compute sources, is pushing to commercialize its technology on its own, separately from Microsoft. This is the sort of situation companies prepare for, of course: Both sides will have attempted to anticipate, in writing, some of the risks of this unusual partnership. Once again, though, OpenAI might think it has a chance to quite literally alter the terms of its arrangement. From the Times: The contract contains a clause that says that if OpenAI builds artificial general intelligence, or A.G.I. -- roughly speaking, a machine that matches the power of the human brain -- Microsoft loses access to OpenAI's technologies. The clause was meant to ensure that a company like Microsoft did not misuse this machine of the future, but today, OpenAI executives see it as a path to a better contract, according to a person familiar with the company's negotiations. Under the terms of the contract, the OpenAI board could decide when A.G.I. has arrived. One problem with the conversation around AGI is that people disagree on what it means, exactly, for a machine to "match" the human brain, and how to assess such abilities in the first place. This is the subject of lively, good-faith debate in AI research and beyond. Another problem is that some of the people who talk about it most, or at least most visibly, are motivated by other factors: dominating their competitors; attracting investment; supporting a larger narrative about the inevitability of AI and their own success within it. That Microsoft might have agreed to such an AGI loophole could suggest that the company takes the prospect a bit less seriously than its executives tend to indicate -- that it sees human-level intelligence emerging from LLMs as implausible and such a concession as low-risk. Alternatively, it could indicate that the company believed in the durability of OpenAI's non-profit arrangement and that its board would responsibly or at least predictably assess the firm's technology well after Microsoft had made its money back with near AGI; now, of course, the board has been purged and replaced with people loyal to Sam Altman. This brings about the possibility that Microsoft simply misunderstood or underestimated what partner it had in OpenAI. Popular theories about AI risk posit that a sufficiently intelligence machine could eventually find that its priorities don't align with those of the people who created it and might use its human-like, self-improving intelligence to compete with, deceive, or generally cause harm to actual people (depending on who's talking, such theories can sound like reasoned risk assessment or something closer to projection). For now, though, Microsoft seems to be confronting a smaller, more familiar sort of alignment problem, in the form of human Sam Altman, who will emerge from OpenAI's planned restructuring with even greater control over the organization. Having given OpenAI the resources to grow, but also the space to arbitrarily and advantageously redefine itself, it risks turning what was, on paper, in theory, a good investment, into a huge mess. Not to be a doomer about it, but: Maybe they should have known.

Microsoft and OpenAI's close partnership shows signs of fraying

SAN FRANCISCO -- Last fall, Sam Altman, OpenAI's CEO, asked his counterpart at Microsoft, Satya Nadella, if the tech giant would invest billions of dollars in the startup. Microsoft had already pumped $13 billion into OpenAI, and Nadella was initially willing to keep the cash spigot flowing. But after OpenAI's board of directors briefly ousted Altman last November, Nadella and Microsoft reconsidered, according to four people familiar with the talks who spoke on the condition of anonymity. Over the next few months, Microsoft wouldn't budge as OpenAI, which expects to lose $5 billion this year, continued to ask for more money and more computing power to build and run its artificial intelligence systems. Altman once called OpenAI's partnership with Microsoft "the best bromance in tech," but ties between the companies have started to fray. Financial pressure on OpenAI, concern about its stability and disagreements among employees of the two companies have strained their five-year partnership, according to interviews with 19 people familiar with the relationship between the companies. That tension demonstrates a key challenge for AI startups: They are dependent on the world's tech giants for money and computing power because those big companies control the massive cloud computing systems the small outfits need to develop AI. No pairing displays this dynamic better than Microsoft and OpenAI, the maker of the ChatGPT chatbot. When OpenAI got its giant investment from Microsoft, it agreed to an exclusive deal to buy computing power from Microsoft and work closely with the tech giant on new AI. "We're deeply grateful for our partnership with Microsoft; the early big bet they took on us and the vast compute resources they've provided have been essential to our research breakthroughs, benefiting both companies greatly," Altman said in a statement Thursday. "We are excited and committed to pursuing our shared vision and achieving even greater things together far into the future." Over the past year, OpenAI has been trying to renegotiate the deal to help it secure more computing power and reduce crushing expenses while Microsoft executives have grown concerned that their AI work is too dependent on OpenAI. Nadella has said privately that Altman's firing in November shocked and concerned him, according to five people with knowledge of his comments. Since then, Microsoft has started to hedge its bet on OpenAI. "We have continued to invest in OpenAI at many discrete points in the partnership," Scott, Microsoft's chief technology officer, said in a recent interview. "We are certainly the very largest investor of capital in them." But in March, Microsoft paid at least $650 million to hire most of the staff from Inflection, an OpenAI competitor. Inflection's former CEO and co-founder, Mustafa Suleyman, oversees a new Microsoft group that is working to build AI technologies for consumers based on OpenAI software. He is also the point person for Microsoft's long-term effort to build technologies that could replace what the company is getting from OpenAI, according to two people familiar with Microsoft's plans. "Microsoft could be left behind if it is only using OpenAI technologies," said Gil Luria, an analyst at investment bank D.A. Davidson. "It is a real race -- and OpenAI may not win it." Some OpenAI executives and employees, including Altman, are angered that Suleyman is at Microsoft, according to five people familiar with the relationship between the two companies. Suleyman's team is part of a group of Microsoft engineers who work directly with employees at OpenAI. Dozens of Microsoft engineers work on-site at OpenAI's offices in San Francisco and use laptops provided by OpenAI that are set up to maintain the startup's security protocols. Some OpenAI staff recently complained that Suleyman yelled at an OpenAI employee during a recent video call because he thought the startup was not delivering new technology to Microsoft as quickly as it should, according to two people familiar with the call. Others took umbrage after Microsoft's engineers downloaded important OpenAI software without following the protocols the two companies had agreed on, the people said. (The New York Times sued OpenAI and Microsoft in December claiming that they had infringed the Times's copyright in training AI systems.) After Microsoft backed away from the discussions about additional funding, OpenAI was in a bind. It needed more cash to keep its operations going, and its executives chafed at the exclusivity of the contract. Over the past year, the AI company repeatedly tried to negotiate to lower the cost and allow it to buy computing power from other companies, according to seven people familiar with the discussions. In June, Microsoft agreed to an exception in the contract, six people with knowledge of the change said. That allowed OpenAI to sign a roughly $10 billion computing deal with Oracle for additional computing resources, according to two people familiar with the deal. Oracle is providing computers packed with chips suited to building AI, while Microsoft provides the software that drives the hardware. And in recent weeks, OpenAI and Microsoft negotiated a change to a future contract that reduces how much Microsoft will charge the smaller company for computing power, although the exact terms were unclear, according to a person familiar with the change. While it was looking for computer power alternatives, OpenAI also raced to broaden its investors, according to two people familiar with the company's plan. Part of the plan was to secure strategic investments from organizations that could bolster OpenAI's prospects in ways beyond throwing around money. Those organizations included Apple, chipmaker Nvidia, and MGX, a tech investment firm controlled by the United Arab Emirates. Altman and OpenAI had been discussing potential partnerships with Apple for years. In 2022, as OpenAI was developing the technologies that would drive ChatGPT, Altman and Kevin Scott, Microsoft's chief technology officer, met with executives at Apple to explore ways the three companies might work together, according to two people familiar with the meeting. That meeting eventually led Apple to agree to put ChatGPT on the iPhone earlier this year. Nvidia was an important partner because it designed the computer chips that OpenAI needed to build its AI technologies. MGX was part of an ambitious OpenAI effort to build new computer data centers across the globe. Earlier this month, OpenAI closed a $6.6 billion funding round led by Thrive Capital, with additional participation from Nvidia, MGX and others. Apple did not invest, but Microsoft also participated in the funding round. OpenAI expected to spend at least $5.4 billion in computing costs through the end of 2024, according to documents reviewed by The New York Times. That amount was expected to skyrocket over the next five years as OpenAI expanded, soaring to an estimated $37.5 billion in annual computing costs by 2029, the documents showed. It is not clear how much the recent tweaks to the partnership between OpenAI and Microsoft will alter that trajectory, but Microsoft executives were happy with the changes, according to a person familiar with the company's strategy. The tech giant can continue to benefit from OpenAI's improving technologies, while the startup continues to pay the tech giant for substantial amounts of computing power. Still, OpenAI employees complain that Microsoft is not providing enough computing power, according to three people familiar with the relationship. And some have complained that if another company beat it to the creation of AI that matches the human brain, Microsoft will be to blame because it hasn't given OpenAI the computing power it needs, according to two people familiar with the complaints. Oddly, that could be the key to getting out from under its contract with Microsoft. The contract contains a clause that says that if OpenAI builds artificial general intelligence, or AGI -- roughly speaking, a machine that matches the power of the human brain -- Microsoft loses access to OpenAI's technologies. The clause was meant to ensure a company like Microsoft did not misuse this machine of the future, but today, OpenAI executives see it as a path to a better contract, according to a person familiar with the company's negotiations. Under the terms of the contract, the OpenAI board could decide when AGI has arrived. At an AI conference in Seattle this month, Microsoft didn't spend much time discussing OpenAI. Asha Sharma, an executive working on Microsoft's AI products, emphasized the independence and variety of the tech giant's offerings. "We definitely believe in offering choice," Sharma said.

Microsoft and OpenAI's close partnership shows signs of fraying

Last fall, Sam Altman, OpenAI's CEO, asked his counterpart at Microsoft, Satya Nadella, if the tech giant would invest billions of dollars in the startup. Microsoft had already pumped $13 billion into OpenAI, and Nadella was initially willing to keep the cash spigot flowing. But after OpenAI's board of directors briefly ousted Altman last November, Nadella and Microsoft reconsidered, according to four people familiar with the talks who spoke on the condition of anonymity. Over the next few months, Microsoft wouldn't budge as OpenAI, which expects to lose $5 billion this year, continued to ask for more money and more computing power to build and run its artificial intelligence systems. Altman once called OpenAI's partnership with Microsoft "the best bromance in tech," but ties between the companies have started to fray. Financial pressure on OpenAI, concern about its stability and disagreements among employees of the two companies have strained their five-year partnership, according to interviews with 19 people familiar with the relationship between the companies. That tension demonstrates a key challenge for AI startups: They are dependent on the world's tech giants for money and computing power because those big companies control the massive cloud computing systems the small outfits need to develop AI. No pairing displays this dynamic better than Microsoft and OpenAI, the maker of the ChatGPT chatbot. When OpenAI got its giant investment from Microsoft, it agreed to an exclusive deal to buy computing power from Microsoft and work closely with the tech giant on new AI. "We're deeply grateful for our partnership with Microsoft; the early big bet they took on us and the vast compute resources they've provided have been essential to our research breakthroughs, benefiting both companies greatly," Altman said in a statement Thursday. "We are excited and committed to pursuing our shared vision and achieving even greater things together far into the future." Over the past year, OpenAI has been trying to renegotiate the deal to help it secure more computing power and reduce crushing expenses while Microsoft executives have grown concerned that their AI work is too dependent on OpenAI. Nadella has said privately that Altman's firing in November shocked and concerned him, according to five people with knowledge of his comments. Since then, Microsoft has started to hedge its bet on OpenAI. "We have continued to invest in OpenAI at many discrete points in the partnership," Scott, Microsoft's chief technology officer, said in a recent interview. "We are certainly the very largest investor of capital in them." But in March, Microsoft paid at least $650 million to hire most of the staff from Inflection, an OpenAI competitor. Inflection's former CEO and co-founder, Mustafa Suleyman, oversees a new Microsoft group that is working to build AI technologies for consumers based on OpenAI software. He is also the point person for Microsoft's long-term effort to build technologies that could replace what the company is getting from OpenAI, according to two people familiar with Microsoft's plans. "Microsoft could be left behind if it is only using OpenAI technologies," said Gil Luria, an analyst at investment bank D.A. Davidson. "It is a real race -- and OpenAI may not win it." Some OpenAI executives and employees, including Altman, are angered that Suleyman is at Microsoft, according to five people familiar with the relationship between the two companies. Suleyman's team is part of a group of Microsoft engineers who work directly with employees at OpenAI. Dozens of Microsoft engineers work on-site at OpenAI's offices in San Francisco and use laptops provided by OpenAI that are set up to maintain the startup's security protocols. Some OpenAI staff recently complained that Suleyman yelled at an OpenAI employee during a recent video call because he thought the startup was not delivering new technology to Microsoft as quickly as it should, according to two people familiar with the call. Others took umbrage after Microsoft's engineers downloaded important OpenAI software without following the protocols the two companies had agreed on, the people said. (The New York Times sued OpenAI and Microsoft in December claiming that they had infringed the Times's copyright in training AI systems.) After Microsoft backed away from the discussions about additional funding, OpenAI was in a bind. It needed more cash to keep its operations going, and its executives chafed at the exclusivity of the contract. Over the past year, the AI company repeatedly tried to negotiate to lower the cost and allow it to buy computing power from other companies, according to seven people familiar with the discussions. In June, Microsoft agreed to an exception in the contract, six people with knowledge of the change said. That allowed OpenAI to sign a roughly $10 billion computing deal with Oracle for additional computing resources, according to two people familiar with the deal. Oracle is providing computers packed with chips suited to building AI, while Microsoft provides the software that drives the hardware. And in recent weeks, OpenAI and Microsoft negotiated a change to a future contract that reduces how much Microsoft will charge the smaller company for computing power, although the exact terms were unclear, according to a person familiar with the change. While it was looking for computer power alternatives, OpenAI also raced to broaden its investors, according to two people familiar with the company's plan. Part of the plan was to secure strategic investments from organizations that could bolster OpenAI's prospects in ways beyond throwing around money. Those organizations included Apple, chipmaker Nvidia, and MGX, a tech investment firm controlled by the United Arab Emirates. Altman and OpenAI had been discussing potential partnerships with Apple for years. In 2022, as OpenAI was developing the technologies that would drive ChatGPT, Altman and Kevin Scott, Microsoft's chief technology officer, met with executives at Apple to explore ways the three companies might work together, according to two people familiar with the meeting. That meeting eventually led Apple to agree to put ChatGPT on the iPhone earlier this year. Nvidia was an important partner because it designed the computer chips that OpenAI needed to build its AI technologies. MGX was part of an ambitious OpenAI effort to build new computer data centers across the globe. Earlier this month, OpenAI closed a $6.6 billion funding round led by Thrive Capital, with additional participation from Nvidia, MGX and others. Apple did not invest, but Microsoft also participated in the funding round. OpenAI expected to spend at least $5.4 billion in computing costs through the end of 2024, according to documents reviewed by The New York Times. That amount was expected to skyrocket over the next five years as OpenAI expanded, soaring to an estimated $37.5 billion in annual computing costs by 2029, the documents showed. It is not clear how much the recent tweaks to the partnership between OpenAI and Microsoft will alter that trajectory, but Microsoft executives were happy with the changes, according to a person familiar with the company's strategy. The tech giant can continue to benefit from OpenAI's improving technologies, while the startup continues to pay the tech giant for substantial amounts of computing power. Still, OpenAI employees complain that Microsoft is not providing enough computing power, according to three people familiar with the relationship. And some have complained that if another company beat it to the creation of AI that matches the human brain, Microsoft will be to blame because it hasn't given OpenAI the computing power it needs, according to two people familiar with the complaints. Oddly, that could be the key to getting out from under its contract with Microsoft. The contract contains a clause that says that if OpenAI builds artificial general intelligence, or AGI -- roughly speaking, a machine that matches the power of the human brain -- Microsoft loses access to OpenAI's technologies. The clause was meant to ensure a company like Microsoft did not misuse this machine of the future, but today, OpenAI executives see it as a path to a better contract, according to a person familiar with the company's negotiations. Under the terms of the contract, the OpenAI board could decide when AGI has arrived. At an AI conference in Seattle this month, Microsoft didn't spend much time discussing OpenAI. Asha Sharma, an executive working on Microsoft's AI products, emphasized the independence and variety of the tech giant's offerings. "We definitely believe in offering choice," Sharma said.

Microsoft and OpenAI's Close Partnership Shows Signs of Fraying

Last fall, Sam Altman, OpenAI's chief executive, asked his counterpart at Microsoft, Satya Nadella, if the tech giant would invest billions of dollars in the start-up. Microsoft had already pumped $13 billion into OpenAI, and Mr. Nadella was initially willing to keep the cash spigot flowing. But after OpenAI's board of directors briefly ousted Mr. Altman last November, Mr. Nadella and Microsoft reconsidered, according to four people familiar with the talks who spoke on the condition of anonymity. Over the next few months, Microsoft wouldn't budge as OpenAI, which expects to lose $5 billion this year, continued to ask for more money and more computing power to build and run its A.I. systems. Mr. Altman once called OpenAI's partnership with Microsoft "the best bromance in tech," but ties between the companies have started to fray. Financial pressure on OpenAI, concern about its stability and disagreements between employees of the two companies have strained their five-year partnership, according to interviews with 19 people familiar with the relationship between the companies. That tension demonstrates a key challenge for A.I. start-ups: They are dependent on the world's tech giants for money and computing power because those big companies control the massive cloud computing systems the small outfits need to develop A.I. No pairing displays this dynamic better than Microsoft and OpenAI, the maker of the ChatGPT chatbot. When OpenAI got its giant investment from Microsoft, it agreed to an exclusive deal to buy computing power from Microsoft and work closely with the tech giant on new A.I. "We're deeply grateful for our partnership with Microsoft; the early big bet they took on us and the vast compute resources they've provided have been essential to our research breakthroughs, benefiting both companies greatly," Mr. Altman said in a statement Thursday. "We are excited and committed to pursuing our shared vision and achieving even greater things together far into the future." Over the last year, OpenAI has been trying to renegotiate the deal to help it secure more computing power and reduce crushing expenses while Microsoft executives have grown concerned that their A.I. work is too dependent on OpenAI. Mr. Nadella has said privately that Mr. Altman's firing in November shocked and concerned him, according to five people with knowledge of his comments. Since then, Microsoft has started to hedge its bet on OpenAI. "We have continued to invest in OpenAI at many discrete points in the partnership," Mr. Scott, Microsoft's chief technology officer, said in an interview. "We are certainly the very largest investor of capital in them." But in March, Microsoft paid at least $650 million to hire most of the staff from Inflection, an OpenAI competitor. Inflection's former chief executive and co-founder, Mustafa Suleyman, oversees a new Microsoft group that is working to build A.I. technologies for consumers based on OpenAI software. He is also the point person for Microsoft's long-term effort to build technologies that could replace what the company is getting from OpenAI, according to two people familiar with Microsoft's plans. "Microsoft could be left behind if it is only using OpenAI technologies," said Gil Luria, an analyst at the investment bank D.A. Davidson. "It is a real race -- and OpenAI may not win it." Some OpenAI executives and employees, including Mr. Altman, are angered that Mr. Suleyman is at Microsoft, according to five people familiar with the relationship between the two companies. Mr. Suleyman's team is part of a group of Microsoft engineers who work directly with employees at OpenAI. Dozens of Microsoft engineers work on-site at OpenAI's offices in San Francisco and use laptops provided by OpenAI that are set up to maintain the startup's security protocols. Some OpenAI staff recently complained that Mr. Suleyman yelled at an OpenAI employee during a recent video call because he thought the start-up was not delivering new technology to Microsoft as quickly as it should, according to two people familiar with the call. Others took umbrage after Microsoft's engineers downloaded important OpenAI software without following the protocols the two companies had agreed on, the people said. (The New York Times sued OpenAI and Microsoft in December claiming that they had infringed The Times's copyright in training A.I. systems.) After Microsoft backed away from the discussions about additional funding, OpenAI was in a bind. It needed more cash to keep its operations going, and its executives chafed at the exclusivity of the contract. Over the past year, the A.I. company repeatedly tried to negotiate a lower the cost and allow it to buy computing power from other companies, according to seven people familiar with the discussions. In June, Microsoft agreed to an exception in the contract, six people with knowledge of the change said. That allowed OpenAI to sign a roughly $10 billion computing deal with Oracle for additional computing resources, according to two people familiar with the deal. Oracle is providing computers packed with chips suited to building A.I., while Microsoft provides the software that drives the hardware. And in recent weeks, OpenAI and Microsoft negotiated a change to a future contact that reduces how much Microsoft will charge the smaller company for computing power, although the exact terms were unclear, according to a person familiar with the change. While it was looking for computer power alternatives, OpenAI also raced to broaden its investors, according to two people familiar with the company's plan. Part of the plan was to secure strategic investments from organizations that could bolster OpenAI's prospects in ways beyond throwing around money. Those organizations included Apple, the chipmaker Nvidia, and MGX, an tech investment firm controlled by the United Arab Emirates. Mr. Altman and OpenAI had been discussing potential partnerships with Apple for years. In 2022, as OpenAI was developing the technologies the would drive ChatGPT, Mr. Altman and Kevin Scott, Microsoft's chief technology officer, met with executives at Apple to explore ways the three companies might work together, according to two people familiar with the meeting. That meeting eventually led to Apple agreeing to put ChatGPT on the iPhone earlier this year. Nvidia was an important partner because it designed the computer chips that OpenAI needed to build its A.I. technologies. MGX was part of an ambitious OpenAI effort to build new computer data centers across the globe. Earlier this month, OpenAI closed a $6.6 billion funding round led by Thrive Capital, with additional participation from Nvidia, MGX and others. Apple did not invest, but Microsoft also participated in the funding round. OpenAI expected to spend at least $5.4 billion in computing costs through the end of 2024, according to documents reviewed by The New York Times. That amount was expected to skyrocket over the next five years as OpenAI expanded, soaring to an estimated $37.5 billion in annual computing costs by 2029, the documents showed. It is not clear how much the recent tweaks to the partnership between OpenAI and Microsoft will alter that trajectory, but Microsoft executives were happy with the changes, according to a person familiar with the company's strategy. The tech giant can continue to benefit from OpenAI's improving technologies, while the start-up continues to pay the tech giant for substantial amounts of computing power. Still, OpenAI employees complain that Microsoft is not providing enough computing power, according to three people familiar with the relationship. And some have complained that if another company beat it to the creation of A.I. that matches the human brain, Microsoft will be to blame because it hasn't given OpenAI the computing power it needs, according to two people familiar with the complaints. Oddly, that could be the key to getting out from under its contract with Microsoft. The contract contains a clause that says that if OpenAI builds artificial general intelligence, or A.G.I. -- roughly speaking, a machine that matches the power of the human brain -- Microsoft loses access to OpenAI's technologies. The clause was meant to ensure that a company like Microsoft did not misuse this machine of the future, but today, OpenAI executives see it as a path to a better contract, according to a person familiar with the company's negotiations. Under the terms of the contract, the OpenAI board could decide when A.G.I. has arrived. At an A.I. conference in Seattle this month, Microsoft didn't spend much time discussing OpenAI. Asha Sharma, an executive working on Microsoft's A.I. products, emphasized the independence and variety of the tech giant's offerings. "We definitely believe in offering choice," Ms. Sharma said. Karen Weise and Tripp Mickle contributed reporting.

Microsoft and OpenAI 'bromance' begins to fray

Last fall, Sam Altman, OpenAI's CEO, asked his counterpart at Microsoft, Satya Nadella, if the tech giant would invest billions of dollars in the startup. Microsoft had already pumped $13 billion into OpenAI, and Nadella was initially willing to keep the cash spigot flowing. But after OpenAI's board of directors briefly ousted Altman last November, Nadella and Microsoft reconsidered, according to four people familiar with the talks who spoke on the condition of anonymity. Over the next few months, Microsoft wouldn't budge as OpenAI, which expects to lose $5 billion this year, continued to ask for more money and more computing power to build and run its artificial intelligence systems. Altman once called OpenAI's partnership with Microsoft "the best bromance in tech," but ties between the companies have started to fray. Financial pressure on OpenAI, concern about its stability and disagreements among employees of the two companies have strained their five-year partnership, according to interviews with 19 people familiar with the relationship between the companies. That tension demonstrates a key challenge for AI startups: They are dependent on the world's tech giants for money and computing power because those big companies control the massive cloud computing systems the small outfits need to develop AI. No pairing displays this dynamic better than Microsoft and OpenAI, the maker of the ChatGPT chatbot. When OpenAI got its giant investment from Microsoft, it agreed to an exclusive deal to buy computing power from Microsoft and work closely with the tech giant on new AI. "We're deeply grateful for our partnership with Microsoft; the early big bet they took on us and the vast compute resources they've provided have been essential to our research breakthroughs, benefiting both companies greatly," Altman said in a statement Thursday. "We are excited and committed to pursuing our shared vision and achieving even greater things together far into the future." Over the past year, OpenAI has been trying to renegotiate the deal to help it secure more computing power and reduce crushing expenses while Microsoft executives have grown concerned that their AI work is too dependent on OpenAI. Nadella has said privately that Altman's firing in November shocked and concerned him, according to five people with knowledge of his comments. Since then, Microsoft has started to hedge its bet on OpenAI. "We have continued to invest in OpenAI at many discrete points in the partnership," Scott, Microsoft's chief technology officer, said in a recent interview. "We are certainly the very largest investor of capital in them." But in March, Microsoft paid at least $650 million to hire most of the staff from Inflection, an OpenAI competitor. Inflection's former CEO and co-founder, Mustafa Suleyman, oversees a new Microsoft group that is working to build AI technologies for consumers based on OpenAI software. He is also the point person for Microsoft's long-term effort to build technologies that could replace what the company is getting from OpenAI, according to two people familiar with Microsoft's plans. "Microsoft could be left behind if it is only using OpenAI technologies," said Gil Luria, an analyst at investment bank D.A. Davidson. "It is a real race and OpenAI may not win it." Some OpenAI executives and employees, including Altman, are angered that Suleyman is at Microsoft, according to five people familiar with the relationship between the two companies. Suleyman's team is part of a group of Microsoft engineers who work directly with employees at OpenAI. Dozens of Microsoft engineers work on-site at OpenAI's offices in San Francisco and use laptops provided by OpenAI that are set up to maintain the startup's security protocols. Some OpenAI staff recently complained that Suleyman yelled at an OpenAI employee during a recent video call because he thought the startup was not delivering new technology to Microsoft as quickly as it should, according to two people familiar with the call. Others took umbrage after Microsoft's engineers downloaded important OpenAI software without following the protocols the two companies had agreed on, the people said. After Microsoft backed away from the discussions about additional funding, OpenAI was in a bind. It needed more cash to keep its operations going, and its executives chafed at the exclusivity of the contract. Over the past year, the AI company repeatedly tried to negotiate to lower the cost and allow it to buy computing power from other companies, according to seven people familiar with the discussions. In June, Microsoft agreed to an exception in the contract, six people with knowledge of the change said. That allowed OpenAI to sign a roughly $10 billion computing deal with Oracle for additional computing resources, according to two people familiar with the deal. Oracle is providing computers packed with chips suited to building AI, while Microsoft provides the software that drives the hardware. And in recent weeks, OpenAI and Microsoft negotiated a change to a future contract that reduces how much Microsoft will charge the smaller company for computing power, although the exact terms were unclear, according to a person familiar with the change. While it was looking for computer power alternatives, OpenAI also raced to broaden its investors, according to two people familiar with the company's plan. Part of the plan was to secure strategic investments from organizations that could bolster OpenAI's prospects in ways beyond throwing around money. Those organizations included Apple, chipmaker Nvidia, and MGX, a tech investment firm controlled by the United Arab Emirates. Altman and OpenAI had been discussing potential partnerships with Apple for years. In 2022, as OpenAI was developing the technologies that would drive ChatGPT, Altman and Kevin Scott, Microsoft's chief technology officer, met with executives at Apple to explore ways the three companies might work together, according to two people familiar with the meeting. That meeting eventually led Apple to agree to put ChatGPT on the iPhone earlier this year. Nvidia was an important partner because it designed the computer chips that OpenAI needed to build its AI technologies. MGX was part of an ambitious OpenAI effort to build new computer data centers across the globe. Earlier this month, OpenAI closed a $6.6 billion funding round led by Thrive Capital, with additional participation from Nvidia, MGX and others. Apple did not invest, but Microsoft also participated in the funding round. OpenAI expected to spend at least $5.4 billion in computing costs through the end of 2024, according to documents reviewed by The New York Times. That amount was expected to skyrocket over the next five years as OpenAI expanded, soaring to an estimated $37.5 billion in annual computing costs by 2029, the documents showed. It is not clear how much the recent tweaks to the partnership between OpenAI and Microsoft will alter that trajectory, but Microsoft executives were happy with the changes, according to a person familiar with the company's strategy. The tech giant can continue to benefit from OpenAI's improving technologies, while the startup continues to pay the tech giant for substantial amounts of computing power.

Microsoft AI Chief Apparently Yelled at OpenAI Employees; Cracks Starting to Appear?

Besides that, OpenAI is seeking greater independence from Microsoft and looking to leverage the AGI clause, to stop sharing AI advancements with Microsoft. In 2019, OpenAI partnered with Microsoft in a multi-year deal that would change the landscape of the AI industry. Since then, Microsoft has invested billions in the hot AI startup and supplied computing resources through its Azure cloud platform. In 2023, OpenAI CEO Sam Altman said its partnership with Microsoft is the "best bromance in tech." However, a recent report by The New York Times reveals that the OpenAI-Microsoft partnership is starting to show some cracks. Tension is flaring up between the two companies as OpenAI is reportedly delaying the transfer of new AI technologies to Microsoft. The NYT reports that during a recent video call, Microsoft's AI chief Mustafa Suleyman yelled at an OpenAI employee. He believed that OpenAI was not providing new AI advancements to Microsoft as quickly as the company expected. Meanwhile, some OpenAI employees took offense when Microsoft's engineers downloaded crucial OpenAI software without following the protocols. Mustafa Suleyman was the co-founder of DeepMind (now Google DeepMind) and headed Applied AI at the company. In 2019, Suleyman was accused of bullying employees at DeepMind. In light of the accusation, Google hired an external law firm to investigate the issue, reported The Wall Street Journal. After the investigation was over, Suleyman was placed on a leave of absence. However, in late 2019, Google promoted Suleyman to the influential role of Vice President of AI Policy at Google. In 2021, Business Insider revealed an internal memo from DeepMind that said, "We found Mustafa's management style fell short of the standards we expect..." In another report, one of the former DeepMind employees revealed, "He used to say, 'I crush people'", referring to Suleyman's behavior. Another former employee said, "He had a habit of just flying off the handle out of nowhere." Later, in a statement, Suleyman apologized and said, "I drove people too hard and at times my management style was not constructive... I apologise unequivocally to those who were affected by my past behaviour." In 2022, Suleyman finally quit Google and started his own startup, Inflection AI, popular for the Pi chatbot, a personal AI designed to be supportive. Fast forward to 2024, and Microsoft hired Mustafa Suleyman to lead its AI efforts in the consumer space. The appointment, as per the report, angered Sam Altman and other executives at OpenAI. Shortly after that, the head of Bing Search, Mikhail Parakhin left Microsoft who was overseeing AI integration into Bing and Copilot. And now, Microsoft's top AI researcher, Sébastien Bubeck has left Microsoft to join OpenAI, who was just recently building a larger Phi model for Microsoft. Besides Mustafa Suleyman's odd behavior, OpenAI is reportedly re-negotiating its contract with Microsoft. The Redmond giant charges OpenAI for using its Azure cloud infrastructure to train AI models and provides services for ChatGPT and its API. OpenAI wants Microsoft to reduce the computing cost or allow it to purchase resources from other companies. The contract says that OpenAI must use Azure for all its services. In June this year, Microsoft finally relented and allowed OpenAI to sign a deal with Oracle for additional resources. Apart from that, OpenAI is looking to expand its investor base beyond Microsoft. Recently, OpenAI raised $6.6 billion from Thrive Capital, Nvidia, Khosla Ventures, MGX, and Microsoft. Apple didn't join the funding round at the last moment. Finally, and most interestingly, OpenAI has a strategic contract with Microsoft that says that once OpenAI achieves AGI (Artificial General Intelligence), Microsoft will lose access to OpenAI's technologies. And it's OpenAI's board that will decide when AGI has been achieved. Now, executives at OpenAI view this clause as leverage to re-negotiate with Microsoft and get a favorable contract. The development suggests that OpenAI is seeking greater independence from Microsoft and wants to have control over its future technology. How will this pan out, we don't know yet, but there is a clear sign of discontent between OpenAI and Microsoft.

The surprising way OpenAI could reportedly get out of its pact with Microsoft

The New York Times on Thursday published a look at the "fraying" relationship between OpenAI and its investor, partner, and, increasingly, rival, Microsoft, reporting their five-year romance has cooled owing to financial pressure on OpenAI, the amount of computing power Microsoft is providing OpenAI, and disagreements between the two about ground rules. Most fascinating perhaps is a clause in OpenAI's contract with Microsoft that reportedly cuts off Microsoft's access to OpenAI's tech if the latter develops so-called artificial general intelligence (AGI), meaning an AI system capable of rivaling human thinking. According to the Times -- which says it talked with 19 people familiar with the companies' relationship -- the clause aims to ensure Microsoft can never misuse the technology. Thing is, OpenAI's board can reportedly decide when AGI has arrived, and CEO Sam Altman has already said that moment will be somewhat subjective. As he told this editor early last year, "The closer we get, the harder time I have answering [how far away AGI is] because I think that it's going to be much blurrier, and much more of a gradual transition than people think."

Tensions with OpenAI underscore Microsoft's need to ensure its own AI future

Microsoft partnership with OpenAI has become increasingly strained by the AI startup's need for more funding and computing power, Microsoft's recruitment of leaders from OpenAI rival Inflection AI, and questions over the Redmond company's equity stake in any future version of OpenAI as a for-profit company. That's the collective gist of a pair of stories that broke overnight from the New York Times and the Wall Street Journal, respectively, citing anonymous people familiar with the situation. Microsoft isn't commenting on the stories. OpenAI CEO Sam Altman put gave the New York Times an optimistic take on the shared future of the companies. But the clear takeaway is that Microsoft is doing what it can to chart its own course in AI regardless of its relationship with OpenAI over the long term. GeekWire explored some of the underlying issues this week in our deep dive on Microsoft's history in artificial intelligence, the opening chapter in our Microsoft @ 50 series. For that piece, we asked Microsoft if there was a risk that the company was effectively outsourcing long-term AI research to OpenAI. In short, the company said no -- citing its long history and ongoing work at the forefront of AI research and applications, with specific examples in a variety areas. But the question became all the more relevant when the news emerged this week that one of Microsoft's key AI researchers, Sebastien Bubeck, is joining OpenAI. The situation may also cast a new light on OpenAI's relatively new satellite office in Bellevue, Wash., just down the road from Microsoft's headquarters. Yes, the office gives OpenAI a convenient location near its partner, but it also puts the startup closer to many of Microsoft's current employees should they decide to jump ship. Sam Altman has called OpenAI's Microsoft partnership "the best bromance in tech," as the New York Times notes, but these latest developments suggest their relationship status may be sliding more into frenemy territory.

The AI Boom Has an Expiration Date

Tech executives are setting deadlines for the arrival of superintelligence. They might regret it. Over the past few months, some of the most prominent people in AI have fashioned themselves as modern messiahs and their products as deities. Top executives and respected researchers at the world's biggest tech companies, including a recent Nobel laureate, are all at once insisting that superintelligent software is just around the corner, going so far as to provide timelines: They will build it within six years, or four years, or maybe just two. Although AI executives commonly speak of the coming AGI revolution -- referring to artificial "general" intelligence that rivals or exceeds human capability -- they notably have all at this moment coalesced around real, albeit loose, deadlines. Many of their prophecies also have an undeniable utopian slant. First, Demis Hassabis, the head of Google DeepMind, repeated in August his suggestion from earlier this year that AGI could arrive by 2030, adding that "we could cure most diseases within the next decade or two." A month later, even Meta's more typically grounded chief AI scientist, Yann LeCun, said he expected powerful and all-knowing AI assistants within years, or perhaps a decade. Then the CEO of OpenAI, Sam Altman, wrote a blog post stating that "it is possible that we will have superintelligence in a few thousand days," which would in turn make such dreams as "fixing the climate" and "establishing a space colony" reality. Not to be outdone, Dario Amodei, the chief executive of the rival AI start-up Anthropic, wrote in a sprawling self-published essay last week that such ultra-powerful AI "could come as early as 2026." He predicts that the technology will end disease and poverty and bring about "a renaissance of liberal democracy and human rights," and that "many will be literally moved to tears" as they behold these accomplishments. The tech, he writes, is "a thing of transcendent beauty." These are four of the most significant and well respected figures in the AI boom; at least in theory, they know what they're talking about -- much more so than, say, Elon Musk, who has predicted superhuman AI by the end of 2025. Altman's start-up has been leading the AI race since even before the launch of ChatGPT, and Amodei has co-authored several of the papers underlying today's generative AI. Google DeepMind created AI programs that mastered chess and Go and then "solved" protein folding -- a transformative moment for drug discovery that won Hassabis a Nobel Prize in chemistry last week. LeCun is considered one of the "godfathers of AI." Perhaps all four executives are aware of top-secret research that prompted their words. Certainly, their predictions are couched in somewhat-scientific language about "deep learning" and "scaling." But the public has not seen any eureka moments of late. Even OpenAI's new "reasoning models," which the start-up claims can "think" like humans and solve Ph.D.-level science problems, remain unproven, still in a preview stage and with plenty of skeptics. Read: It's time to stop taking Sam Altman at his word Perhaps this new and newly bullish wave of forecasts doesn't actually imply a surge of confidence but just the opposite. These grand pronouncements are being made at the same time that a flurry of industry news has been clarifying AI's historically immense energy and capital requirements. Generative-AI models are far larger and more complex than traditional software, and the corresponding data centers require land, very expensive computer chips, and huge amounts of power to build, run, and cool. Right now, there simply isn't enough electricity available, and data-center power demands are already straining grids around the world. Anticipating further growth, old fossil-fuel plants are staying online for longer; in the past month alone, Microsoft, Google, and Amazon have all signed contracts to purchase electricity from or support the building of nuclear power plants. All of this infrastructure will be extraordinarily expensive, requiring perhaps trillions of dollars of investment in the next few years. Over the summer, The Information reported that Anthropic expects to lose nearly $3 billion this year. And last month, the same outlet reported that OpenAI projects that its losses could nearly triple to $14 billion in 2026 and that it will lose money until 2029, when, it claims, revenue will reach $100 billion (and by which time the miraculous AGI may have arrived). Microsoft and Google are spending more than $10 billion every few months on data centers and AI infrastructure. Exactly how the technology warrants such spending -- which is on the scale of, and may soon dwarf, that of the Apollo missions and the interstate-highway system -- is entirely unclear, and investors are taking notice. When Microsoft reported its most recent earnings, its cloud-computing business, which includes many of its AI offerings, had grown by 29 percent -- but the company's stock had still tanked because it hadn't met expectations. Google actually topped its overall ad-revenue expectations in its latest earnings, but its shares also fell afterward because the growth wasn't enough to match the company's absurd spending on AI. Even Nvidia, which has used its advanced AI hardware to become the second-largest company in the world, experienced a stock dip in August despite reporting 122 percent revenue growth: Such eye-catching numbers may just not have been high enough for investors who have been promised nothing short of AGI. Read: Silicon Valley's trillion-dollar leap of faith Absent a solid, self-sustaining business model, all that the generative-AI industry has to run on is faith. Both costs and expectations are so high that no product or amount of revenue, in the near term, can sustain them -- but raising the stakes could. Promises of superintelligence help justify further, unprecedented spending. Indeed, Nvidia's chief executive, Jensen Huang, said this month that AGI assistants will come "soon, in some form," and he has previously predicted that AI will surpass humans on many cognitive tests in five years. Amodei's and Hassabis's visions that omniscient computer programs will soon end all disease is worth any amount of spending today. With such tight competition among the top AI firms, if a rival executive makes a grand claim, there is pressure to reciprocate. Altman, Amodei, Hassabis, and other tech executives are fond of lauding the so-called AI scaling laws, referencing the belief that feeding AI programs more data, more computer chips, and more electricity will make them better. What that really entails, of course, is pumping their chatbots with more money -- which means that enormous expenditures, absurd projected energy demands, and high losses might really be a badge of honor. In this tautology, the act of spending is proof that the spending is justified. More important than any algorithmic scaling law, then, might be a rhetorical scaling law: bold prediction leading to lavish investment that requires a still-more-outlandish prediction, and so on. Only two years ago, Blake Lemoine, a Google engineer, was ridiculed for suggesting that a Google AI model was sentient. Today, the company's top brass are on the verge of saying the same. All of this financial and technological speculation has, however, created something a bit more solid: self-imposed deadlines. In 2026, 2030, or a few thousand days, it will be time to check in with all the AI messiahs. Generative AI -- boom or bubble -- finally has an expiration date.