OpenAI Seeks New Financial Concessions From Microsoft, a Top Shareholder
Negotiations between Microsoft and OpenAI over the startup’s plan to restructure its for-profit unit, which requires Microsoft’s approval, have entered their eighth month with no end in sight and new conflicts emerging.
OpenAI wants Microsoft, the startup’s biggest outside shareholder, to have a roughly 33% stake in the reshaped unit in exchange for foregoing its rights to future profits, according to a person who spoke to OpenAI executives.
OpenAI also wants to modify existing clauses in its contract with Microsoft that give the software firm exclusive rights to host OpenAI models in its cloud, and it wants to exempt a planned $3 billion stock acquisition of AI coding startup Windsurf from the existing contract between the parties that grants Microsoft access to OpenAI intellectual property, according to that person and another person who spoke to Microsoft executives about it.
Renegotiating details of the companies’ cloud arrangement could have far reaching consequences in the tech industry. OpenAI has told investors it wants to get out of its exclusive cloud contract with Microsoft, which makes Microsoft the only cloud provider that offers OpenAI models for sale through an application programming interface, one of the people said.
Microsoft rivals Amazon and Google could jump at the chance to host OpenAI models on their servers, which would make it easier for their cloud customers to use them. Google has already lobbied the government to kill Microsoft’s exclusive right to host OpenAI models.
Microsoft hasn’t agreed to OpenAI’s terms and is looking to get other concessions from the startup, such as extending the length of time in which it has the right to use OpenAI’s intellectual property, according to the person who spoke to Microsoft executives about it.
OpenAI’s current deal with Microsoft gives the software giant the right to use OpenAI’s IP through 2030, according to the two people with knowledge of the talks.
Competitive Concerns
OpenAI leaders are concerned about including Windsurf in the current deal because Windsurf competes directly with Microsoft’s GitHub Copilot, said one of these people.
Microsoft has blessed OpenAI’s plans to acquire Windsurf under their current contract, said the person who spoke to Microsoft executives about it.
OpenAI also wants to cut the amount of revenue it shares with Microsoft in the coming years, in part by excluding new products from the existing agreement. If the companies don’t change the 20% cut OpenAI owes to Microsoft, Microsoft could be in line to get $35 billion in payments in 2030, when OpenAI has projected it will generate $174 billion in revenue.
In a joint statement, spokespeople for OpenAI and Microsoft said that “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.”
A Windsurf spokesperson said its planned acquisition by OpenAI is “speculative.”
The Wall Street Journal earlier Monday reported some details of the two companies’ negotiations around Windsurf and also reported that some OpenAI executives were considering complaining to antitrust regulators about Microsoft’s conduct.
The person who spoke to OpenAI executives said the company doesn’t have any imminent plans to escalate its frustrations to antitrust regulators.
Microsoft in recent years committed more than $13 billion in capital to OpenAI in exchange for rights to the AI startup’s technology. The stock Microsoft currently holds in the for-profit unit entitles it to a maximum cut of future profits up to around $120 billion.
OpenAI’s restructuring aims to change the stock to traditional equity, removing the profit sharing units and allowing the unit to eventually go public.
The companies agreed in 2023 that AGI would be achieved only when OpenAI’s nonprofit board of directors, which includes Altman, determines that OpenAI has developed systems that have the “capability” to generate the maximum total profits to which its earliest investors, including Microsoft, are entitled.
The two firms became fast friends early in the AI boom, which was catalyzed by OpenAI’s ChatGPT. Almost immediately, they began to compete in areas such as selling AI to enterprises, terrain that Microsoft dominates.
OpenAI also chafed under the limits of Microsoft’s capacity to power its technology, prompting the startup to strike cloud deals with Microsoft competitors such as Oracle. Some Microsoft executives complained that OpenAI wasn’t abiding by its agreement to fully share its technology with Microsoft according to the terms of their agreement.
Starting around October last year, OpenAI embarked on an effort to change its corporate structure.
OpenAI CEO Sam Altman began discussing terms with counterparts at Microsoft, including CEO Satya Nadella, but the talks didn’t progress much, except for one element that was hashed at out the end of that year: Microsoft agreed to amend the contract to allow OpenAI to rent servers from other cloud providers, but would continue to be the exclusive cloud reseller of OpenAI models to businesses. And OpenAI made a large new commitment to spend heavily on renting servers from Microsoft.
What AGI?
In addition to current disagreements about Microsoft’s equity stake and Windsurf acquisition, the firms are also tussling over the definition of artificial general intelligence, AGI, which OpenAI has said is AI that can outperform humans at most economically valuable work.
Their current agreement says Microsoft will relinquish its rights to OpenAI revenue and IP when the startup achieves AGI. Microsoft has argued AGI is still years away, while OpenAI leaders have argued that AGI could be much closer. The two firms are still negotiating a possible change to the current contract’s definition of AGI, one of the people said.
The companies agreed in 2023 that AGI would be achieved only when OpenAI’s nonprofit board of directors, which includes Altman, determines that OpenAI has developed systems that have the “capability” to generate the maximum total profits to which its earliest investors, including Microsoft, are entitled, according to documents OpenAI distributed to investors. Those profits initially totaled about $100 billion, the documents showed.
But companies may still have differing views on whether the existing technology has a large, profit-generating capability. OpenAI is still losing billions of dollars a year, with no plans to generate a profit until 2029.
OpenAI faces an end-of-year deadline to complete its restructuring or it risks investors taking back up to $20 billion of the $40 billion round that the startup seeks to raise by then.
