OpenAI to Save $97 Billion Through 2030 in Latest Microsoft Deal
The Takeaway
- OpenAI’s Microsoft revenue-sharing payments are now capped at $38 billion.
- This new deal saves OpenAI $97 billion, boosting its long-term investor appeal.
- OpenAI faces higher short-term cash burn as it no longer defers payments to Microsoft.
OpenAI Chief Financial Officer Sarah Friar has plenty of things to worry about. But paying OpenAI’s early backer Microsoft as much as $135 billion through 2030 as part of a revenue-sharing deal is no longer one of them.
OpenAI’s initial agreement to pay 20% of its revenue to Microsoft could have amounted to that much if the ChatGPT maker ended up hitting its long-term revenue goals. But thanks to previously undisclosed terms of a new deal between the companies, OpenAI is on the hook for only a fraction of that amount.
The companies agreed to cap the total payments at $38 billion, according to a person with knowledge of the arrangement. If OpenAI meets its ambitious revenue goals, it would likely hit that cap sometime in 2028, according to an analysis of its revenue projections. The cap on the payments amounts to a savings of about $97 billion for OpenAI, based on those projections.
The payment cap could help OpenAI present a stronger long-term pitch to investors as it works toward a public offering some executives have said could take place as soon as the end of this year. OpenAI counts the payments as expenses, which lower free cash flow. Before the payment cap, it had projected its cash burn would reach $219 billion between this year and 2029. It’s expected to be cash flow positive in 2030, when it expects to generate nearly $39 billion.
While Microsoft has given up tens of billions of dollars in potential payments, it gained some important certainty in the April deal. OpenAI agreed to pay Microsoft a portion of its revenue until 2030. Previously those payments would have continued until OpenAI reached artificial general intelligence, and some Microsoft executives were worried that it could hit that milestone at any time. In addition, Microsoft got the rights to continue to resell OpenAI’s tech through 2032, regardless of when AGI was declared.
It’s not all roses for OpenAI, however. In the short term, the renegotiated revenue-sharing agreement will likely hurt its free cash flow. That’s because under the prior agreement, it had the option to defer some of its payments to Microsoft to 2032, according to the person. (Its earlier financial projections showed it expected to pay Microsoft about 5% to 12% of its revenue each year through 2030.)
Now OpenAI can no longer defer the payments, which means it should pay about $6 billion of its projected $30 billion in revenue to Microsoft this year, rather than the nearly $4 billion it projected early this year.
OpenAI earlier this year forecast burning $25 billion this year and $57 billion next year. Now that it no longer can defer revenue payments, that cash burn could increase to roughly $27 billion this year and about $63 billion next, according to The Information’s analysis of its forecasts. These forecasts, however, don’t include any revenue gains from recently announced commercial deals.
The payment cap came about as OpenAI and Microsoft tweaked their partnership so OpenAI could sell more of its products through Amazon and other cloud providers, which could increase revenue.
