A $13 Billion Bet On Openai By Microsoft Carries Huge Potential But Also Plenty Of Uncertainties

When Microsoft originally invested $1 billion in OpenAI in 2019, the transaction attracted no more notice than a typical corporate venture round. The startup industry was exploding, and artificial intelligence, along with electric cars, smart logistics, and aerospace, was one of several industries drawing mega-valuations.

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Three years later, the market has changed dramatically.

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After the collapse of public market multiples for high-growth, money-losing tech companies, startup investment has plummeted. The exception is artificial intelligence, more especially generative AI, which refers to systems that generate automatic text, visual, and audio answers.

No private firm is more popular than OpenAI. In November, the San Francisco-based business launched ChatGPT, a chatbot that quickly became popular due to its ability to construct human-like responses to users' questions on practically any topic.

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Microsoft's once-unnoticed investment is suddenly a hot subject in venture capital and among public shareholders, who are attempting to figure out what it implies for the prospective value of their shares. Microsoft's total investment in OpenAI is said to be $13 billion, with the firm valued at over $29 billion.

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That's because Microsoft isn't simply throwing money toward OpenAI. It is also the weapons dealer, being the exclusive source of computer capacity for OpenAI's research, products, and developer programming interfaces. Startups and major corporations, such as Microsoft, are scrambling to connect their products with OpenAI, resulting in huge workloads running on Microsoft's cloud servers.

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The technology is being integrated into Microsoft's Bing search engine, sales and marketing applications, GitHub coding tools, Microsoft 365 productivity package, and Azure cloud. According to Michael Turrin, an analyst at Wells Fargo, that may all add up to more than $30 billion in additional yearly income for Microsoft, with Azure accounting for approximately half of that.

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What does this signify for Microsoft's investment and the overall agreement?

"It's so fantastic that investors are questioning how they did it or why OpenAI would do this," Turrin said in an interview.

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The financial ramifications, on the other hand, are anything from straightforward.

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Possession of bragging rights

OpenAI was established as a non-profit in 2015. In 2019, two key executives announced the establishment of a "capped-profit" business dubbed OpenAI LP in a blog post, limiting the startup's original investors from making more than 100 times their money, with lesser returns for subsequent investors, such as Microsoft.

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When Microsoft's investment is repaid, it will get a share of OpenAI LP's income up to the agreed-upon maximum, with the remainder going to the nonprofit organization, according to an OpenAI representative. A Microsoft representative declined to comment.

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Greg Brockman, an OpenAI co-founder and one of the blog post's writers, noted in a 2019 Reddit comment that the system "feels congruent with what people could make investing in a very successful business (but less than what they'd receive investing in the most successful companies of all time!)"

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It's an unusual concept in Silicon Valley, where increasing profits has long been the emphasis of the venture industry. That also doesn't make sense to Elon Musk, who was one of OpenAI's founders and early backers. Musk has expressed his worries about OpenAI's unorthodox structure and its consequences for AI on several occasions this year, particularly considering Microsoft's degree of ownership.

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′′OpenAI was founded as an open-source (thus the term 'Open' AI), non-profit firm to compete with Google, but it has now evolved into a closed source, the maximum-profit company essentially controlled by Microsoft," Musk tweeted in February. "That was not my intention at all."

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According to Brockman on Reddit, if OpenAI succeeds, it might "generate orders of magnitude more value than any firm has to date," with Microsoft benefiting as a big OpenAI investor.

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Apart from its investment, Microsoft's reliance on OpenAI has the potential to help it radically reverse its fortunes in AI, where it has openly struggled and failed to develop a major company on its own.

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Unlike in advertising or security, Microsoft hasn't revealed the scope of its AI business, while CEO Satya Nadella stated in October that income from its Azure Machine Learning service has quadrupled for four consecutive quarters.

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At the very least, Nadella's involvement with OpenAI has earned him bragging rights. Here's what he stated in December, a month after ChatGPT was released, at Microsoft's annual shareholder meeting:

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"When I think about Azure, one of the things that we've done in the context of even ChatGPT, which is now one of the most prominent AI apps out there, guess what? Everything has been trained on the Azure supercomputer."

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Microsoft conducted a press event in late February at its Redmond, Washington headquarters to showcase new AI-powered improvements to its Bing search engine and Edge browser. One of the prominent speakers was Altman.

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Since then, the Bing chatbot has had several widely publicized and unsettling exchanges with users, as well as serving out some wrong responses at launch. Fortunately for Microsoft, the launch of Google's competitor Bard AI service was unimpressive, with staff describing it as "rushed" and "botched."

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Quite apart from the early setbacks, interest in new technologies based on large language models, or LLMs, is apparent throughout the technology sector.

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The basis of OpenAI's bot is an Algorithm dubbed GPT-4, which has learned to write natural-sounding language after being trained on large amounts of web material. According to an OpenAI spokesman, Microsoft holds an exclusive license on GPT-4 and all other OpenAI models.

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There are several different LLM programs available.

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Google said last month that it has granted select developers early access to an LLM dubbed PaLM.

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AI21 Labs, Aleph Alpha, and Cohere are among the startups that provide their LLMs, as does Google-backed Anthropic, which has chosen Google as its "preferred" cloud provider. Anthropic cofounder Dario Amodei, who was previously vice president of research at OpenAI, has highlighted worries about AI's unfettered power, as have Altman and Musk.

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Anthropic filed as a public-benefit company in Delaware in 2021, indicating a desire to have a beneficial influence on society while pursuing profits.

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"We were and are focused on establishing new frameworks to give incentives for safe development and deployment of AI systems and will have more to contribute on this in the future," an Anthropic spokeswoman told CNBC in an email.

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One thing is certain: it is early days.

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Quinn Slack, CEO of code-search firm Sourcegraph, said he hasn't seen evidence that the OpenAI agreement has provided Microsoft a significant edge, despite calling OpenAI the top LLM supplier.

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"I don't believe people should look at Microsoft and assume that they've completely closed down OpenAI and that OpenAI is doing their bidding," Slack added. "I honestly feel the individuals there are driven to create wonderful technology and make it as broadly available as possible." They see Microsoft as a fantastic customer, but not one who is overbearing. That's great, and I hope it continues."

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Many people are skeptical of OpenAI. The nonprofit Center for Artificial Intelligence and Digital Policy petitioned the Federal Trade Commission late last month to prevent OpenAI from releasing additional commercial releases of GPT-4, calling the technology "biased, misleading, and a risk to privacy and public safety."

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With its intimate connection with OpenAI, Microsoft — which does not have a seat on the OpenAI board — would be the obvious buyer. Yet, such a transaction would almost certainly be subject to regulatory scrutiny due to worries about AI and Microsoft restricting competition. Microsoft might dodge Hart-Scott-Rodino investigations from US competition regulators by being an investor and not becoming the owner of OpenAI.

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"I went through it. "It's excruciating," said Norwest Venture Partners partner David Zilberman.

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According to Scott Raney, managing director at Redpoint Ventures, the most likely future for OpenAI based on its current price is an eventual IPO.

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According to PitchBook statistics, OpenAI is on track to create $200 million in revenue this year, a 150% increase from 2022, and $1 billion in 2024, a 400% increase.

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"When you raise at a $30 billion value, it's almost as if there's no going back," Raney said. "Our objective is to establish a large independent standalone firm," you remark.

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According to a spokeswoman for OpenAI, there are no intentions for the company to go public or be bought.

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