OpenAI and Microsoft's Contract Negotiations: Balancing AI Innovation and Corporate Interests

OpenAI and Microsoft's contract negotiations threaten investment and potential IPO -- companies battle over AGI secrecy and Azure exclusivity

Microsoft and OpenAI butt heads over ongoing contract negotiations OpenAI and Microsoft are struggling to come to terms over several sticking points in their ongoing contract, which runs until 2030. Despite being deeply integrated in each other's AI operations, the companies have been unable to agree on what to do if and when OpenAI develops Artificial General Intelligence (AGI), potentially stalling billions in investments and a future IPO, according to a report published by the Financial Times. Microsoft first invested in OpenAI in 2019, offering $1 billion in exchange for OpenAI's commitment to its Azure cloud platform. That partnership expanded in 2023, when Microsoft invested a further $10 billion, securing access to OpenAI's models in its services and locking down 49% of profit from OpenAI's for-profit branch. Soon after, OpenAI models showed up powering Bing Chat and Copilot, as well as various Microsoft 365 applications. Microsoft would go on to make further investments in OpenAI over the following years, bringing the total to $13 billion, and also plan a $100 billion data center with OpenAI. Microsoft has reached a $4 trillion valuation, partly due to the success of its OpenAI partnership, which utilizes Azure servers. However, a shifting AI landscape means that OpenAI and Microsoft are reportedly not on the same page regarding the terms of their ongoing contract and OpenAI's ongoing corporate restructuring. A major sticking point is Microsoft's access to OpenAI's models and insight into how they're trained. Although OpenAI has no issue with Microsoft having access to current and future models, it wants to retain one particular clause. According to a Financial Times report, the clause within the contract that is garnering the most pushback relates to OpenAI keeping any model that could be considered Artificial General Intelligence (AGI) locked away from Microsoft's view. Microsoft wants this clause removed, as it would be a significant technological breakthrough. However, OpenAI remains stubborn, bringing the two firms to a standstill, with no clear indication of how it might be resolved. An additional point that's still being discussed is the possibility of OpenAI having access to other cloud platforms, instead of exclusively using Microsoft's Azure platform. However, OpenAI wishes to loosen the stipulation, which would allow the company to sell its services on Google and Amazon Web Services platforms. This could further drive OpenAI's API revenue, something which is significant, as the company has yet to turn a profit. Microsoft is understandably hesitant to relinquish its monopoly on OpenAI's service provisions. However, a deal is reportedly being considered that would allow other cloud platforms to host the API but within a narrower context, and limit use to governments that do not already use Microsoft's Azure services. Throwing additional weight behind this negotiation is the amount of time negotiations are taking. OpenAI has a further $10 billion investment hanging in the balance from SoftBank, which recently invested $2 billion into Intel. The staggering funding investment stipulates that Microsoft and OpenAI must come into an agreement before the end of 2025. "OpenAI having the AGI clause is a negotiating chit," said one Financial Times source. "It's a threat, but it's more like mutually assured destruction because if it doesn't go by year-end, they won't be able to raise any money again and Sam [Altman] knows that." If the ongoing dispute goes past the end-of-year deadline, Softbank and other investors could renege on funding commitments. If this happens, OpenAI might have to offer Microsoft a larger percentage of the company. After the planned restructuring, Microsoft is expected to hold over 30% of the company. However, if other investors get scared off, this figure could change. On the surface, though, both companies appear confident that a deal can be struck. They said in a joint statement offered to the Financial Times, they said: "We have a long-term, productive partnership that has delivered amazing AI tools for everyone. Talks are ongoing, and we are optimistic we will continue to build together for years to come." Even if the funding deadline is missed, the partnership between the two companies seems likely to continue. Despite recent stumbles with the launch of its flagship GPT-5 model, OpenAI is still considered one of the premier AI companies in the world. On its side, Microsoft's investment is also of real importance. Despite being at the forefront of an industry seeing hundreds of billions of dollars of investment, OpenAI still operates at a significant loss and expects to do so for the next few years. Microsoft would also derive financial benefits from the deal. At its conclusion, Microsoft and other OpenAI investors would be allowed to hold equity in the business, rather than merely sharing profits from a branch of the business. It would also lay the groundwork for a potential future OpenAI IPO, something that all parties would likely want like to happen before any kind of AI bubble bursts; Something even OpenAI CEO Sam Altman sees coming in the future. In an additional twist, Microsoft has also developed its own Copilot models, named MAI-1-preview and a voice-enabled model, MAI-Voice-1. It remains to be seen whether this is Microsoft's attempt to diversify away from being solely reliant upon OpenAI, or if it might affect future negotiations.

Microsoft talks set to push OpenAI's restructure into next year

OpenAI's corporate restructuring is likely to slip into next year, as the ChatGPT maker negotiates over key terms of its future relationship with Microsoft, complicating plans to raise billions of dollars more in funding. The $300bn artificial intelligence start-up has been locked in complex discussions with the software giant, its biggest backer, to rewrite an existing commercial contract between the companies that runs until 2030. A deal would allow OpenAI to complete plans for a restructure which would allow investors to hold equity in the business and unlock a future initial public offering. But multiple people with knowledge of the talks said there is still distance between the two sides on key issues that could push negotiations beyond December 31. Failure to reach an agreement by that date would allow SoftBank to withhold its $10bn commitment to the company, according to the terms of the Japanese group's investment. It could also hamper OpenAI's efforts to raise more capital. There are several outstanding points to resolve with Microsoft, according to multiple people close to both companies. The first is Microsoft's access to OpenAI's "application programming interface" or API. Microsoft has exclusive rights to host OpenAI's models on its Azure cloud service, making it a critical gatekeeper to the technology. OpenAI is pushing for additional partnerships with Google and Amazon Web Services, an arrangement similar to rival Anthropic, according to people with knowledge of the talks. That would boost the start-up's API sales revenues, which currently account for roughly a quarter of current annual recurring revenue of $12bn. While Microsoft has little incentive to cede access to rival cloud providers, the two companies are negotiating a narrow agreement which would enable OpenAI to only serve government customers that are not on Azure, according to one of the people. Second, the companies are wrangling over Microsoft's future access to OpenAI's intellectual property, and whether the software giant will see how future models are trained or merely be able to use them in its products, according to the people. A related point of contention is a so-called AGI clause written into the contract. This empowers OpenAI to cut Microsoft's IP access if and when the company achieves "artificial general intelligence", defined as "a highly autonomous system that outperforms humans at most economically valuable work". Microsoft chief Satya Nadella wants to do away with the clause entirely, according to people familiar with the negotiations. But OpenAI is pushing to retain it in some form, as it provides the company with powerful leverage over the tech giant. "OpenAI having the AGI clause is negotiating chit," said one person with direct knowledge of the negotiations. "It's a threat, but it's more like mutually assured destruction because if it doesn't go by year-end, they won't be able to raise any money again and Sam [Altman] knows that." Resolution of those issues will inform what percentage of OpenAI's equity Microsoft ultimately receives following OpenAI's restructuring. The Big Tech company is expected to hold between 30-35 per cent of OpenAI, in which it has invested more than $13bn to date, but that figure could change, according to the people with knowledge of the talks. A deal remains the likeliest outcome, they added, but negotiations are likely to drag to the end of year fundraising deadline or beyond. In a joint statement, OpenAI and Microsoft said: "We have a long-term, productive partnership that has delivered amazing AI tools for everyone. Talks are ongoing and we are optimistic we will continue to build together for years to come." Other hurdles must also be cleared before the company can restructure. Even with a swifter resolution of its contract with Microsoft, discussions with other shareholders and the attorneys-general in California and Delaware -- where OpenAI operates and is incorporated -- could well extend into next year, these people added. Discussions are being led by the two companies' chief financial officers, OpenAI's Sarah Friar and Microsoft's Amy Hood, according to those with knowledge of the talks. A deal would allow OpenAI's investors to hold equity in the business, rather than the profit sharing arrangement which exists today. OpenAI's last two funding rounds -- one last October at a $157bn valuation and another launched in March and led by SoftBank at a $300bn valuation -- included terms which would allow its backers to claw back or withhold some of their investment if the start-up fails to convert within a set timeframe. For SoftBank, that deadline is the end of 2025. OpenAI executives are confident the Japanese group will not withdraw investment if talks stall and believe they can continue raising capital even with their existing structure, thanks to the company's rapid growth since SoftBank initially committed to lead a $40bn funding round in March. OpenAI is currently talking to investors about a secondary share sale which would value it at $500bn, which would in effect mark up SoftBank's investment by two-thirds. It has also received interest from investors willing to invest in a "primary" fundraising at an even higher valuation, according to people familiar with the matter. Despite the lack of clarity about OpenAI's future, the company's $8.3bn March funding round earlier this month -- which formed one tranche of the SoftBank-led round -- was many times oversubscribed, according to people with knowledge of the matter.

At OpenAI, Signs of Crisis Grow Behind the Scenes

OpenAI is still reeling from the disappointing launch of its latest GPT-5 model. It's being pelted with lawsuits from left and right, for alleged crimes like mass copyright infringement and colluding to ice out its competitors. More than ever, it's being criticized for its chatbot's alarming proclivity to not only give dangerous advice, but convince people to actually take it with its beguiling and sycophantic charm -- a deeply weird phenomenon that's already led to several alleged deaths. Behind the scenes, things aren't looking any better. Tens of billions of dollars in investment hangs in the balance for the Sam Altman-led company as it struggles to squirm out from under the thumb of Microsoft, its longtime monetary sugar daddy. And now, the Financial Times reports, it's looking like OpenAI's attempts to do that by negotiating a new deal with the software titan is going to drag on till next year -- and hold up astronomical sums of money in the process. Microsoft has backed OpenAI with more than $13 billion in funding. Its initial $1 billion cash injection into the then-underdog startup in 2019 is arguably what helped kickstart this entire AI gold rush. In return, the Redmond giant received exclusive rights to OpenAI's intellectual property and access to its software. Needless to say, it's been a lucrative arrangement for both parties. OpenAI owns the world's most popular chatbot and is eyeing a $500 billion valuation. Microsoft gets to be among the top of the pack in the AI race and has seen its own market cap more than triple to nearly $4 trillion. But OpenAI is a big boy now, and wants to cut its own deals with other tech heavyweights. It's spent the past year trying to convert itself into a public benefit corporation, even as it was forced to abandon its plan to put its for-profit arm in charge of the company. As part of that corporate restructuring, according to the FT's sources, it's gunning to partner up with Google and Amazon Web Services to host its AI models, in an arrangement similar to its competitor Anthropic. That would drive up its revenue, the thinking goes. The problem is that Microsoft currently has exclusive rights to host OpenAI's servers on its Azure cloud service, and doesn't have good reason to relinquish them. One FT source said that Microsoft and OpenAI are negotiating a stricter agreement that would allow OpenAI to only serve government customers not on Azure. Another battleground is a clause that ends the partnership if OpenAI achieves artificial general intelligence, or AGI, a nebulous term that describes a powerful AI model that rivals or exceeds human levels of intelligence. OpenAI specifically defines it as a a "highly autonomous system that outperforms humans at most economically valuable work." Microsoft isn't a fan of the clause. In theory, OpenAI could spuriously claim it's built an AGI and it'd evaporate the company's treasured exclusive rights. CEO Satya Nadella particularly has it out for the very idea of AGI: in a recent interview he remarked that declaring an AGI milestone was "nonsensical benchmark hacking." If a new deal is to proceed, Microsoft wants the AGI clause gone. But OpenAI, optimistic that'll come out on top, is trying to keep it in some form. "OpenAI having the AGI clause is negotiating chit," a person with knowledge of the negotiations told the FT. "It's a threat, but it's more like mutually assured destruction because if it doesn't go by year-end, they won't be able to raise any money again and Sam [Altman] knows that." The pressure is on to clinch the deal -- and fast. In a March funding round, Japanese multinational investment firm SoftBank committed $40 billion in funding towards that ChatGPT maker, but with a catch: if OpenAI doesn't reach a new agreement with Microsoft by the end of the year and complete its corporate restructuring, it'll withhold $10 billion. Considering that Altman just boasted that OpenAI's will spend trillions of dollars on AI data centers while in the same breath warning that an AI bubble is on the horizon, it's an investment it can't afford to lose. Its executives, however, are confident SoftBank will come up with the goods anyway, according to the FT.

OpenAI Restructuring Delayed by Negotiations With Microsoft | PYMNTS.com

At issue, according to a Wednesday (Aug. 27) Financial Times (FT) report, are the artificial intelligence (AI) startup's negotiations with Microsoft, which could complicate plans for a multi-billion dollar fundraising effort. As the report notes, OpenAI has been engaged in complex talks with Microsoft -- its largest benefactor -- to rework a commercial contract between the companies that extends until 2030. A deal would let OpenAI complete its restructuring, allowing it to hold equity in the business and set the stage for an initial public offering. However, multiple sources with knowledge of the talks told the FT the two sides still can't agree on a few key issues, an impasse that could push negotiations past Dec. 31. That's a key date, as a failure to reach an agreement and complete the restructuring before then would allow Japanese conglomerate SoftBank to withhold a $10 billion commitment to OpenAI and could hinder the company's efforts to raise more capital, the report said. Sources say there are multiple issues the companies need to resolve, such as Microsoft's access to OpenAI's application programming interface (API). Microsoft has exclusive rights to host OpenAI's models on its Azure cloud service, making it a key gatekeeper to the technology. However, sources say that OpenAI is lobbying for additional partnerships with Google and Amazon Web Services to increase its API revenues. The companies are also haggling over Microsoft's future access to OpenAI's intellectual property (IP), the sources said, as well as the "AGI clause" in the companies' contract. This gives OpenAI the right to cut off Microsoft's IP access if and when the startup achieves "artificial general intelligence" (AGI), which the companies define as "a highly autonomous system that outperforms humans at most economically valuable work." The two companies issued a joint statement to the FT describing a "long-term, productive partnership" and optimism that the talks will allow them to continue to work together. PYMNTS spoke with legal experts earlier this year about the intricacies of OpenAI's restructuring, which will see the company's nonprofit parent remain in place but change its capped-profit LLC subsidiary to a public benefit corporation (PBC). A PBC is a for-profit entity that agrees to spend some of its profits on a specific public benefit. "The unique thing in the case of OpenAI is how they started with this mission to be a responsible, ethical AI-developing company," Angeli Patel, executive director at the Berkeley Center for Law and Business at the University of California at Berkeley, told PYMNTS. "Over the past two years, you've seen AI take off with OpenAI leading that charge. And the thing that's happening now is this clear contention between its original ethical AI-first mission and its commercial goals" that appear to be "more important."