Microsoft’s $13 billion bet on OpenAI carries huge potential together with loads of uncertainty

When Microsoft first investing $1 billion in OpenAI in 2019, the deal garnered no more attention than the typical round of a company enterprise. The start-up market was hot, and artificial intelligence was certainly one of the numerous areas attracting mega valuations, together with electric vehicles, advanced logistics and aviation.

Three years later, the market looks completely different.

Startup funding fell after public market benchmarks for high-growth, loss-making tech firms collapsed. The exception is artificial intelligence, specifically generative AI, which refers to technologies focused on generating automated textual, visual, and audio responses.

No private company is hotter than OpenAI. In November, the San Francisco-based start-up introduced ChatGPT, a chatbot that went viral for its ability to create human responses to user queries on almost any topic.

Microsoft’s once underrated investment is now a significant topic of dialogue, each in investor circles and amongst public shareholders who are attempting to work out what it means for the potential value of their stock. Microsoft’s cumulative investment in OpenAI has reportedly increased to $13 billion and the startup’s valuation reached roughly $29 billion.

That’s because Microsoft is not just opening up its fat wallet to OpenAI. It can also be an arms dealer, as the only real supplier of computing power for OpenAI research, products and programming interfaces for developers. Startups and multinationals, including Microsoft, are rushing to integrate their products with OpenAI, which implies massive workloads running on Microsoft’s cloud servers.

Microsoft integrates this technology with its Bing search engine, sales and marketing software, GitHub coding tools, Microsoft 365 productivity suite, and the Azure cloud. Michael Turrin, Research Analyst Wells Fargosays all of this might bring Microsoft greater than $30 billion in latest annual revenue, roughly half of which comes from Azure.

What does this mean for Microsoft’s investment and the broader deal?

“It’s so good that investors ask me how they did it or why OpenAI would do it,” Turrin said in an interview.

However, the financial consequences should not obvious.

OpenAI was founded in 2015 as a non-profit organization. The structure modified in 2019 when two top executives published a blog post announcing the formation of a “limited profit” entity called OpenAI LP. The current setup prevents early startup investors from earning greater than 100 times their money, with lower returns for later investors like Microsoft.

Once the investment is returned, Microsoft will receive a percentage of OpenAI LP’s profits as much as an agreed limit, with the remainder flowing to the nonprofit, an OpenAI spokesperson said. A Microsoft spokesman declined to comment.

Greg Brockman, co-founder of OpenAI and certainly one of the authors of the blog post, wrote in 2019: Reddit comment that for investors, the system “seems commensurate with what they may earn by investing in a reasonably successful start-up (but lower than what they might get by investing in essentially the most successful startups of all time!).”

It’s an unfamiliar model in Silicon Valley, where maximizing profits has long been a priority for the enterprise community. It also doesn’t make much sense to Elon Musk, who was certainly one of the founders and early supporters of OpenAI. Several times this yr, Musk tweeted about his concerns about OpenAI’s unconventional structure and its implications for AI, especially given Microsoft’s level of ownership.

“OpenAI was created as an open source (that is why I called it “Open” AI), a non-profit company that was alleged to function a counterbalance to Google, but has now grow to be a closed source, maximum profit company effectively controlled by Microsoft, Musk wrote on Twitter in February. “That’s not what I meant in any respect.”

Brockman said on Reddit that if OpenAI is successful, it could “create orders of magnitude more value than any company up to now.” As a significant investor in OpenAI, Microsoft would profit.

In addition to investment, counting on OpenAI could help Microsoft dramatically turn the tide in AI, where it stumbled publicly and did not construct a big business by itself. Microsoft pulled the Clippy assistant from Word, Cortana from the Windows taskbar, and its Tay chatbot from Twitter.

Unlike areas equivalent to promoting or security, Microsoft has not disclosed the dimensions of its AI business, although CEO Satya Nadella said in October that Azure Machine Learning revenue had doubled for 4 consecutive quarters.

If nothing else, working with OpenAI has given Nadella some bragging rights. Here’s what he said at Microsoft’s annual shareholder meeting in December, a month after ChatGPT launched:

“When I feel of Azure, certainly one of the things we have done within the context of even ChatGPT, which is certainly one of the more popular AI apps today, guess what? All that is trained on the Azure supercomputer. “

In February, Microsoft held a press conference at its headquarters in Redmond, Washington to announce latest AI-powered updates to its Bing search engine and Edge browser. Altman was certainly one of the featured speakers.

It’s been a bumpy ride since then, because the chatbot Bing conducted some highly publicized and scary conversations with users, in addition to giving some incorrect answers during its launch. Fortunately for Microsoft, Google’s rollout of its rival Bard AI service has been disappointing, leading employees to explain it as “hurried” and “buggy”.

Despite initial difficulties, enthusiasm for brand new technologies based on large language models (LLMs) is palpable throughout the tech industry.

At the guts of the OpenAI bot is an LLM called GPT-4 that learned to compose natural-sounding text after being trained in extensive online information sources. Microsoft has an exclusive license to GPT-4 and all other OpenAI models, an OpenAI spokesperson said.

Many other LLMs can be found.

Last month, Google said it gave some developers early access to the file LLM named PaLM.

Startups AI21 Labs, Aleph Alpha and Cohere offer their very own LLMs as well Powered by Google Anthropic that has selected Google as a “preferred” cloud provider. Like Altman and Musk, Anthropic co-founder Dario Amodei, who was previously vice chairman of research at OpenAI, expressed concern in regards to the unbridled power of AI.

In 2021, Anthropic registered in Delaware as a public profit corporation, signifying its intention to make a positive impact on society, at the same time as it pursues profits.

“We have been and are focused on developing revolutionary structures to supply incentives for the secure development and deployment of AI systems, and we may have more information on this in the long run,” an Anthropic spokesperson said in an email to CNBC.

In the complete industry, one thing is definite: that is the start.

Quinn Slack, CEO of code-search startup Sourcegraph, said he saw no evidence that the OpenAI partnership gave Microsoft a big advantage, despite calling OpenAI a top LLM provider.

“I do not think people have a look at Microsoft and say they shut down OpenAI completely and OpenAI is doing their bidding,” Slack said. “I actually consider that the people there are motivated to create amazing technologies and use them to the fullest extent. They see Microsoft as an incredible customer, but not someone who controls. That’s good and I hope it stays that way.”

OpenAI has many skeptics. Late last month, the nonprofit Center for Artificial Intelligence and Digital Policy urged the Federal Trade Commission to stop OpenAI from releasing latest business versions of GPT-4, describing the technology as “biased, fraudulent, and a threat to privacy and public safety.”

When considering potential exits for OpenAI, Microsoft – which has no seat on the OpenAI board – can be a natural buyer given its imminent entanglement. But such a deal would likely attract scrutiny from regulators on account of concerns about artificial intelligence and Microsoft’s throttling of competition. By remaining an investor and never becoming the owner of OpenAI, Microsoft could have avoided Hart-Scott-Rodino’s review by US competition regulators.

“I’ve been through it. It’s painful,” said David Zilberman, a partner at Norwest Venture Partners.

Based on the prevailing valuation, a more likely path for OpenAI is an eventual IPO, said Scott Raney, managing director at Redpoint Ventures.

According to PitchBook data, OpenAI is on the right track to generate $200 million in revenue this yr, up 150% from 2022, after which $1 billion in 2024, up 400%.

“When you raise at $30 billion, it’s like there is no turning back at that time,” Raney said. You say, “Our plan is to be a giant, independent, stand-alone company.”

An OpenAI spokesperson said there aren’t any plans to go public or take over.

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