Monologue: OpenAI Vs. Microsoft

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Greetings! I'm Ed Zittra, and this is your weekly Better Offline monologue.

Earlier this week, a story came out in the Wall Street Journal that tensions between OpenAI and Microsoft are, and I quote, reaching a boiling point. Why? Well, let's give you some background.

As OpenAI tries to convert part of itself into a for-profit entity, all very annoying, but it would still be controlled by the non-profit board, it faces one big obstacle. Its deal with Microsoft.

Back in 2019, Microsoft invested a billion dollars into OpenAI, and as part of that deal, OpenAI agreed to let Microsoft have full access and rights to its pre-AGI intellectual property, which means all of their intellectual property, along with their research and the exclusive right to sell OpenAI's models to their customers.

Microsoft also, as a result of the deal, owns 49% of the future profits of OpenAI and offers or offered, it's unclear how these terms are these days, discounted rates on Azure for OpenAI, Microsoft's cloud compute service, so OpenAI would pay less than other customers to host their services.

I should also be clear that this deal means that Microsoft has almost complete control over OpenAI's future, and without their blessing, OpenAI cannot complete its conversion to a for-profit entity.

In the event that that conversion fails, SoftBank is able to pare the size of their investment in OpenAI down to a mere $20 billion, according to the Wall Street Journal, as opposed to the $40 billion that OpenAI, well, needs.

In simpler terms, OpenAI has got $10 billion so far from SoftBank, and if they don't become a for-profit entity by the end of 2025, they only get another $10 billion rather than the $30 billion that they want and, well, need to keep burning more money.

All very silly, and actually existentially bad. I'm surprised people aren't more freaked out about this.

So OpenAI and Microsoft are currently locked in negotiations, by which I mean OpenAI is making arbitrary demands and Microsoft is saying no.

So as part of the conversation, according to the information, OpenAI is asking for some very fucking stupid things. I'll list them.

They want Microsoft to only have 33% of the new entity as opposed to the 49% of profits they have already.

They want to lower Microsoft's revenue share, which is currently 20% of OpenAI's revenue, to 10%.

Just... Just they want that.

And they want to bar Microsoft from having access to OpenAI's future intellectual property, in part due to OpenAI's attempts to acquire coding startup Windsurf, which competes with Microsoft's GitHub Copilot.

What's funny is part of the information story, they're like, yeah, Microsoft has said as part of the current deal, they're totally fine with the acquisition.

What's really interesting as well is everyone reported the Windsurf deal, which is about $3 billion as a done deal. But at the time I was saying, hey, this hasn't happened yet.

It's been two months since people talked about it. The information says that Windsurf has said this deal was speculative.

Kind of weird, right? Be cool if we had like a kind of an analyst or a journalist who covered tech and thought about it. Yeah.

Anyway, you may be wondering what it is that OpenAI is offering in return for these concessions and the answer is nothing.

Understandably, Microsoft is refusing to budge, which has led to OpenAI considering making an outlandish antitrust complaint against them.

It's kind of like putting a gun to your own head and threatening to release the hostages if your demands aren't met.

And if I'm honest, it's one of the most ridiculous things I've seen a company do in the valley.

Later in the week, the information also reported that OpenAI has been undercutting Microsoft and selling ChatGPT to enterprise customers, discounting ChatGPT Enterprise by 10 to 20% for customers buying additional products from OpenAI.

And that directly competes, by the way, with Microsoft's copyload.

The information also reports that Microsoft has been losing deals to OpenAI because their finance side will only generally discount by 5-10%.

They also add that the same has been happening with enterprise deals over providing access to OpenAI's models, which Microsoft also sells. This whole relationship is so goddamn stupid.

You've got two companies selling the same thing for some reason. I don't even know why you'd buy from Microsoft.

It doesn't really make any sense to me other than, and the information even says that companies like Fidelity buy it because they're already buying crap from Microsoft.

I just, I think about this and it makes me slightly annoyed because it's like, this is not real business.

Why would you have both companies selling the same thing? And it's just because everyone wants a monopoly these days, but it's all bad business. They all lose money.
It's all very silly.

But another tidbit from the information story is that, and I quote, OpenAI's pricing power may not be as strong with enterprises as it is with customers.

This is a huge deal because it means that OpenAI's future is tied to the idea that they can sell, and I shit you not, these are their alleged projections, over $100 billion a year in subscriptions to consumers by 2029.

I want to give you some scale as to how fucking stupid this is.

In 2024, Spotify, the most popular music streaming app, made just under $16 billion in revenue from subscriptions and Netflix, the most popular streaming service, made around $39 billion from the same.

Are you telling me that ChatGPT is going to become more successful than two Netflixes and two Spotify's? Are you fucking insane?

Anyway, this whole situation is completely ridiculous.

OpenAI does not have any real leverage here and the only possible way that they can lean on Microsoft is to try and make them look bad, which would require OpenAI to piss off their number one infrastructure provider and their number one financial backer.

By arbitrarily threatening an antitrust case, an obvious leak to the press as a means of dragging down Microsoft, OpenAI has attempted to put pressure on a company that holds all the cards.

You see, Sam Altman's real talent is that OpenAI has not really had to commit anything to build their company. Microsoft provides them with the infrastructure.

Microsoft funded them along with venture capitalists, private equity firms and SoftBank.

Oracle is covering all the costs of the GPUs going into the Stargate data center project in Abilene, which is funded by a private equity firm that pays Crusoe, an unproven data center builder, who has also taken out $750 million in a line of credit to get the data center built.

More egregiously, the Stargate entity, which SoftBank will have full financial responsibility for, has not even been formed.

And from reports, it doesn't even sound like OpenAI has signed a contract to use it. What the f- It's so silly.

The other side of this, though, is that having everybody else own all of the problems means that OpenAI doesn't really own anything, making them dependent on literally everybody.

Any delays to Stargate are out of OpenAI's hands, as are any issues with their infrastructure, as are any issues with their funding.

And when bartering with other companies, OpenAI has little to offer other than discounts on the... software that loses the money all the time.

Sam Mooreman's play here is that Microsoft is somehow dazzled dazzled by the glory that is OpenAI and wouldn't want to take the reputational hit of scorning Silicon Valley's favorite company and their clammiest founder.

Sammy's only hope is that Satchinadella likes him enough to make major concessions for no apparent reason, something that seems increasingly unlikely as they send passive-aggressive leaks to different media outlets.

I should also add that Microsoft's legal team is 2,000 people.

2,000, I'm not kidding.

That is the team that if they did an antitrust complaint that would take years and years and years and years cannot be clear enough how long that would take they would be going up against a company that has already won an antitrust case back in the 90s and the 2000s

I think OpenAI has like 50 lawyers. Maybe they probably have an outside firm as well.
How the fuck is that meant to work? I've had people suggest, oh, they could bribe Trump. No, they no, they can't.

And also, to what end? A bailout? How much money? OpenAI constantly burns cash. It's more likely Microsoft absorbs them.

And the outcome of this event will determine the entire future of the AI bubble.

Though there is a decent chance that Microsoft agrees to some concessions and they work it out as a means of continuing their stranglehold on OpenAI, there's also a chance that they just let OpenAI die.

After all, they own all the IP and the research, as well as housing all their infrastructure.

They could just rip the OpenAI sticker, put a Microsoft sticker on it, OpenAI sends to Microsoft, chatgpt.com goes to Copilot. They'd probably do chat GPT by Copilot or by Microsoft.

Pretty easy, right?

I understand why people don't think that can happen just because it would be so big, but all the rails are there for it to occur. All very silly.

I also think this pissy back and forth is a helpful distraction from OpenAI's core problem, that they've yet to ship a meaningful new product in some time, and their entire future is based on consumer subscriptions, which will require them to create meaningful consumer products.

A thing they've failed to do.

I can't wait to see how this shakes out. I feel bad for Silicon Valley, but this is tremendous content.

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