With global scrutiny on Microsoft Corp.’s $13 billion investment in OpenAI, the tech behemoth argues that it doesn’t take a classic stake in the startup and, therefore, lacks control over it. When Microsoft negotiated a subsequent $10 billion investment in OpenAI earlier this year, it selected an unconventional arrangement. Instead of acquiring a section of this pioneering artificial intelligence lab, it arranged to procure almost half of OpenAI’s financial returns until this investment is recouped, up to a pre-determined cap.
Regulatory authorities, however, may not necessarily appreciate this distinction. In the United Kingdom, the Competition and Markets Authority expressed concerns over whether the collaboration between Microsoft and OpenAI has the potential to threaten competition, particularly considering Google’s AI research lab Deepmind, also based in the UK. The US Federal Trade Commission is likewise scrutinizing the nature of Microsoft’s investment in OpenAI, exploring whether it may infringe on antitrust laws.
Despite these ongoing deliberations, no formal investigation has been initiated by the agency up until now. Microsoft did not report the investment to the agency, explaining that the transaction with OpenAI does not amount to control over the non-profit entity as per US law. Acquisitions of non-corporate entities, irrespective of their value, are not reported under US merger law. Therefore, the officials are currently analyzing the situation and assessing their legal options.
From Microsoft’s perspective, its deal with OpenAI does not grant it ownership of any part of it but merely entitles the company to a share of profit distributions. Brad Smith, Microsoft’s President, recently stated that the only change made was that Microsoft was now having a non-voting observer on OpenAI’s board. The partnership with Microsoft, according to an OpenAI spokesperson, does not give Microsoft governing authority or control over OpenAI’s operations.
Microsoft and OpenAI have portrayed their relationship as distinctly separate from the outset, demonstrating that neither party was overly reliant on the other. However, last month’s sudden dismissal of OpenAI Chief Executive Officer Sam Altman sparked a chaotic upheaval within the company, demonstrating both Microsoft’s lack of control and its considerable influence. Microsoft, unaware of the board’s decision to dismiss Altman until minutes before the announcement, played a crucial role in reversing this decision.
Microsoft may potentially face numerous regulatory issues as a result of its partnership with OpenAI. The European Commission is also keeping a close eye on the situation. For a transaction to be notifiable to the Commission under the EU Merger Regulation, it needs to involve a fundamental change of control on a permanent basis. The Commission had been following the developments preceding the current management crisis at OpenAI.
Further regulatory scrutiny emerged from Germany’s competition authority, which announced last month that Microsoft’s OpenAI investment would not be subject to a merger review. However, they stipulated that this decision was largely due to OpenAI having no substantial business in Germany. The authority expressed that Microsoft’s investment could grant it a “material competitive influence” over the AI company that may warrant future scrutiny if OpenAI bolsters its activities in the country.
The partnership’s potential competition issues could become apparent if Microsoft decides to cut back its own AI research and development or if the investment deters OpenAI from collaborating with Microsoft’s competitors. Microsoft’s board observer position at OpenAI could give it additional information on OpenAI’s plans even if it doesn’t have rights to influence the decisions, which could potentially raise some eyebrows among antitrust enforcers.