Microsoft executives doubted OpenAI in 2018, feared Amazon poaching before billion-dollar bet

What Microsoft Executives Really Thought About OpenAI in 2018

But Microsoft executives had reservations about sending additional funding to OpenAI as far back as 2018 when it was just a small nonprofit research lab, according to emails between more than a dozen Microsoft executives, including CEO Satya Nadella, shown in a federal court on Thursday during the Musk v. Altman trial. The emails show how Microsoft, at the time, wavered over what has since been held up as one of the most successful corporate partnerships in tech history. Several Microsoft executives said in the emails their visits to OpenAI did not indicate any imminent breakthroughs in developing artificial general intelligence. In 2017, much of OpenAI's work was focused on building AI systems that could play video games, which showed early signs of success. But OpenAI needed five times more computing power than it had originally secured from Microsoft to continue the project. Microsoft worried that not providing support could push OpenAI into the arms of Amazon, the world's dominant cloud computing provider at the time. Roughly 18 months after the emails were sent, Microsoft announced a landmark $1 billion investment in OpenAI after the lab created a for-profit arm that provided the tech giant with the potential to generate a return of $20 billion. Microsoft declined to comment. Elon Musk's attorneys introduced the emails to show Microsoft's evolving relationship with OpenAI. After Musk reached out to Nadella, Microsoft in 2016 agreed to provide $60 million worth of cloud computing services to OpenAI at a steep discount. OpenAI consumed the services twice as fast as expected. The email chain kicked off on August 11, 2017 with Nadella reaching out to OpenAI CEO Sam Altman to congratulate the lab on winning a video game competition using AI to mimic a human player. Ten days later, Altman responded seeking $300 million worth of Microsoft Azure cloud computing services. "We could figure how to fund some of it but not that much," Altman wrote, apparently seeking a financial handout and engineering help. "I think it will be the most impressive thing yet in the history of AI." Nadella asked four lieutenants for their input on how to respond three days later. Microsoft's AI team saw "no value in engaging," according to a response from Jason Zander, Microsoft's executive vice president, that also documented how other teams felt. Its research team thought its own work was "more advanced," while the public relation teams didn't like the idea of supporting a group pushing the idea of "'machines beating humans.'" Ultimately, Zander suggested that Azure would benefit from associating with Musk and Altman but that he wouldn't want to "take a complete bath," or large financial hit, in doing so. A subsequent analysis showed that Microsoft stood to lose about $150 million over several years if it provided the services Altman wanted, according to one email. "Unless he can help us draw a more direct networking effect with OpenAI->Microsoft business value, we will wind up having to pass," Zander wrote. The thread went dark for several months, but was revived on January 10, 2018 with an email to Nadella from Brett Tanzer -- who signed off his emails with "Brettt" -- then a director on the Azure cloud unit. Altman had told Tanzer that OpenAI could license its gaming AI to Microsoft's Xbox video game division in exchange for "$35-50 million in Azure Credits." But Xbox couldn't commit that much money. Microsoft planned to tell Altman there would be no more discounts after that March, per Tanzer's email.

Microsoft was worried OpenAI would run off to Amazon and 'shit-talk' Azure

When OpenAI was busy experimenting with AI-powered gaming bots, Microsoft CEO Satya Nadella and OpenAI CEO Sam Altman were in the early days of forming an AI partnership. Court documents from the ongoing Musk v. Altman trial have provided a rare look at the communications between Microsoft's top executives about investing in OpenAI and fears the AI startup could "storm off to Amazon" and "shit-talk" Microsoft. Just days after OpenAI showed a bot beating a Dota 2 professional in the summer of 2017, Altman responded to Nadella's congratulations email with a proposal for a much bigger partnership with OpenAI to fund its next phase of AI research. OpenAI needed large sums of compute to expand the Dota 2 project, far beyond the Azure credits it was using from Microsoft at the time. "Probably something like $300 million at Azure list prices" according to Altman. This initially spooked some executives inside Microsoft. "For those numbers to make sense we'd have to be generating significant incremental revenue directly due to the deal ($500 million+) that couldn't be gained in a more efficient way," said Jason Zander, who was Microsoft's Azure chief at the time, in an August 2017 email to Nadella. Altman came back with an alternative proposal several months later to "create a partnership with Xbox around gaming, and an open offer to share their technology and IP in exchange for expanded sponsorship for their Dota research," according to Brett Tanzer, now VP of Azure solutions and ecosystem. The Xbox team was interested in "exploring collaboration opportunities," but couldn't commit to the research costs by itself. Microsoft CTO Kevin Scott then weighed in on the debate over whether to give OpenAI more Azure credits for its research in an email to Nadella in January 2018. He wasn't sure what Microsoft was "going to get out of [the deal]" and wasn't sure how the Dota efforts would benefit the company, but he was definitely concerned about OpenAI moving over to Microsoft's biggest cloud rival. "I guess the other thing to think about here is the PR downside of us not funding them, and having them storm off to Amazon in a huff and shit-talk us and Azure on the way out," said Scott in his January 2018 email. "They are building credibility in the AI community very fast, recruiting well, and are going to be an influential voice. All things equal, I'd love to have them be a Microsoft and Azure net promoter. Not sure that alone is worth what they're asking." A year later, Scott admitted in an email to Nadella and Microsoft cofounder Bill Gates that he had been "highly dismissive" of AI efforts at OpenAI and Google DeepMind when the companies were competing to see who "could achieve the most impressive game-playing stunt." Scott became a lot more impressed when OpenAI moved toward natural language processing models and feared Microsoft would slip behind Google's AI efforts. A month after Scott's "thoughts on OpenAI" email, Microsoft announced a $1 billion investment in OpenAI. Nearly seven years on, the close partnership-turned-situationship has led to OpenAI renegotiating its deal with Microsoft to bring its AI models, Codex, and other tools to AWS. The latest change to the deal was announced just days after the kind of OpenAI "shit-talk" that Scott was worried about. OpenAI told its employees last month that its deal with Microsoft had "also limited our ability to meet enterprises where they are -- for many that's [Amazon] Bedrock."

Microsoft might be all-in on OpenAI now, but back in 2018 thought it was just 'motivated by a need to show how Al can crush humans'

"We don't want 'machines beating humans' and are not supportive of any push on this." Remember when OpenAI created a bot that could beat humans at Dota 2? As PCG reported last week, that was because Elon Musk had personally called Microsoft CEO Satya Nadella to secure a massive discount on access to Azure, the company's cloud computing platform. Now a new document released thanks to the ongoing Musk vs Altman legal spat has revealed just how big that discount was: and how nervy Microsoft execs were about the whole deal, and OpenAI generally. Our story begins after OpenAI had succeeded in its Dota 2 mission, with Nadella emailing Sam Altman on 11 August 2017: "Just wanted to pass on my Congrats on the win today!" A few weeks later Altman emails Nadella, saying: "Would you be up for a big partnership on the next phase of this (teams of 5 vs 5)? I think it will lead to major new breakthroughs in Al but will require huge amounts of compute, probably something like $300M at Azure list prices. We could figure out how to fund some of it but not that much [...] Would love to make it a joint team. I think it will be the most impressive thing yet in the history of Al." Nadella then emails some of his fellow Microsoft execs: Brett Tanzer, Jason Zander, Eric Horvitz and Jason Graefe. "I know we have been on this road before," writes Nadella, referring to Microsoft's previous sweetheart deal. "Wondering how to reply to this..." Thanks to this we get a breakdown of what OpenAI actually got from Microsoft in 2016 and, surprise surprise, it was an absolutely eye-watering discount. The list price for Azure was $1.15 per GPU hour, and OpenAI paid $0.24 per GPU hour. Obviously the list price is not the cost price to Microsoft, but the execs are soon fretting about the money. "The 2016 deal, where they agreed to pay $10M for $60M in Azure services was projected at a $15M loss over three years, given assumed usage profile," writes Tanzer. "They'll have consumed all the usage in 1/2 that time." Essentially OpenAI got $60 million worth of compute for $10 million, Microsoft had to take the hit on that, and then OpenAI asked for even more. Things get a little more interesting than the numbers when the suits start talking about the kind of AI Microsoft should be supporting. "PR/Marketing have taken your previous guidance to mean clearly that we don't want 'machines beating humans' and are not supportive of any push on this," writes Microsoft's Jason Zander, adding he's got a cost analysis in the works. "Basically if we are [Gross Margin] neutral or if the negative GM is reasonable to think of as a marketing expense I still want to proceed. There certainly is some nuance in the 'machines vs humans' thing but I worry we are being overly literal and I do believe the pop from someone like Sam and Elon will help build momentum for Azure [...] But I won't take a complete bath to do it." That cost analysis? It wasn't good. "I reviewed the GM with the team and this deal would cost us ~-$150M over the current contract which frankly makes it a non-starter," writes Zander a few days later. "[Tanzer] is going to let [Altman] know we are having a hard time getting the numbers to make sense given they are huge even for Microsoft." "After communicating the [above] to Sam Altman, he came back with an alternate proposal to create a partnership with Xbox around Gaming," writes Tanzer, "and an open offer to share their technology and IP in exchange for expanded sponsorship for their Dota research. His hope was that together we could accelerate the adoption of Reinforcement Learning in our game platform as a differentiation play for Microsoft." The Xbox team was interested in this idea, but not interested enough to cover the additional $35-50 million dollars in Azure credits that OpenAI was asking for. On January 10, 2018, Nadella writes: "From what Elon is telling everyone... he feels Open Al is at verge of some big AGI breakthroughs. They clearly are pushing Al at a level none of our first party or third parties are [but] right now we are just renting/discounting HW and there is no real learning/feedback cycle back to our work." Microsoft's Kevin Scott is having none of the AGI chat. "I'm highly skeptical of an imminent breakthrough in AGI. On the incremental investment, I'm not sure what Microsoft is going to get out of it. It doesn't feel to me like we've earned much branding or marketing benefit from the collaboration with them so far. IMO, they're treating us like a bucket of undifferentiated GPUs, which isn't interesting for us at all." Scott goes on to list various "what-if" scenarios that could change his mind but doesn't consider any of them likely. He is, however, concerned about "the PR downside of us not funding them, and having them storm off to Amazon in a huff and shit-talk us and Azure on the way out." "I agree with Kevin and Brett/Jason that it does not make financial sense to keep doing this undifferentiated GPU deal," writes Harry Shum, who's also dubious about the AGI claims. "They worked on two main streams: gaming like Dota 2, and learning from observation with robots. Sam is all about gaming and beating human champions perhaps motivated by DeepMind." "My worst case scenario is having them ditch Azure for AWS, as Kevin says bad-mouth us on the way over, and then land with some big new innovation that is shared with our competition," writes Zander in a follow-up. "To walk away from the deal altogether, I think we have to be convinced that there is no unique / valuable IP that they are going to generate which offers unique advantage to their cloud partner." Eric Horvitz suggests the possibility of "angling some of their work (even in Dota) toward our interest in human-Al collaborations, centering on extending human intellect with Al-versus beating human [...] I had the feeling that the two phases of Dota work are motivated by a need to show how Al can crush humans, as part of Elon Musk's interest in demonstrating why we should all be concerned about the power of Al." Bear in mind that these are conversations from late 2017/early 2018, and Microsoft's scepticism wouldn't last. It invested $1 billion in the company in 2019, and a further $10 billion in January 2023, eventually taking a 27% stake in the now for-profit company. But perhaps what's more interesting is that line Microsoft drew internally between AI that extends human capabilities, as opposed to AI that can "crush humans" at things like Dota 2. Musk has indeed made repeated dire warnings about what could happen with AI, which is arguably one rationale for why OpenAI would have pursued the latter goal (in limited contexts, admittedly), but it's hard not to feel that, for once, Microsoft were actually the good guys in this scenario.