Soundtrack: Queens of the Stone Age - Era Vulgaris
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Based on recent reporting by The Information and the Wall Street Journal, some very specific facts have been established:
- OpenAI is the largest customer of Microsoft Azure, where it pays "favorable server rental rates compared to other customers."
- Per The Information (emphasis mine), "several top Microsoft executives [during the period where they invested $10 billion in OpenAI] told colleagues they thought OpenAI’s business would eventually fail, even if its technology was good, according to a former manager who discussed it with them."
As I discussed in last week's Friday premium column, OpenAI and Microsoft are currently negotiating over the terms under which it would allow OpenAI to convert to a for-profit entity, in which OpenAI is offering Microsoft...a reduction in its revenue share (down to 10%), less stock (33%, down from 49%, though The Wall Street Journal reports that "Microsoft has indicated that it is willing to accept an equity stake of about 35% in the new for-profit company," though that could easily be a leak from OpenAI), and cutting it off from future intellectual property.
Hell of a deal! Please read that piece if you want to break down how the non-profit works, because it was a pain in the ass to write.
In any case, this negotiation is "high stakes" because OpenAI needs Microsoft to agree to terms, otherwise OpenAI can't become a for-profit entity, and thus can never go public. Furthermore, the Wall Street Journal reports that the companies are at odds over the term AGI:
Many AI experts see AGI as the point at which generative AI systems achieve humanlike intelligence, but OpenAI and Microsoft are at odds over the issue. OpenAI executives including Sam Altman believe they are close to being able to declare that their AI tools have achieved the AGI level of proficiency, according to people familiar with the matter.
I'll get into the nitty gritty shortly, but the term "AGI" would allow OpenAI to stop sharing IP with Microsoft.
That, however, is not what's making me think.
The Financial Times reported last week that Microsoft was prepared to walk away from its "high-stakes" talks with OpenAI, and closed their piece with this quote:
A Silicon Valley veteran close to Microsoft said the software giant “knows that this is not their problem to figure this out, technically, it’s OpenAI’s problem to have the negotiation at all”.
When referring to "their problem," the source is talking about OpenAI's conversion to a for-profit. Walking away from these negotiations would effectively end OpenAI's ability to become a for-profit, cutting its recent $40 billion round to $20 billion, make it impossible to take the company public, and likely make it much harder — if not impossible — for OpenAI to raise further funds.
To be clear, OpenAI plans to raise another $17 billion in 2027, and investors generally invest in a company because they believe they'll receive a return. The current only way that investors or employees of OpenAI have been able to liquidate their shares has been to other people. OpenAI employees have cashed out $3 billion so far, mostly to SoftBank.
In simpler terms:
- OpenAI is Microsoft's biggest Azure customer, providing a projected $10 billion in revenue in 2025, just under 77% of Microsoft's $13 billion in projected annual revenue (not profit) from AI according to The Information, who also note that Microsoft made $4.7 billion from AI in 2024, with $2.7bn (57%) of that coming from OpenAI. This means that, outside of OpenAI, Microsoft made $2 billion on AI in 2024.
- This also means that Microsoft is reporting OpenAI's compute spend as pure revenue.
- Top executives at Microsoft believed OpenAI would die when they gave it $10 billion in funding in 2023.
- Microsoft is directly representing in leaks to the media that it is willing to block OpenAI's conversion, and knows that this would potentially kill OpenAI — and, indeed, previously believed the company would fail.
- The real argument here is over the intellectual property, and neither side wants to budge, with OpenAI making noises that suggest it would pull bullshit games over the definition of AGI.
So, Microsoft funded and built the infrastructure of its biggest customer, which it also allowed to expand by doing business with Microsoft’s competitors in cloud, and now appears to be willing to let it die.
Why would Microsoft do that?