Deal terms and more: 4 things causing tension in Microsoft and OpenAI’s ‘marriage’

The partnership between

Microsoft

and ChatGPT-maker OpenAI, forged in 2019 with over $13 billion in Microsoft investment, is reportedly facing significant strains. Despite OpenAI’s status as the world's most valuable AI startup, underlying deal terms set to last until 2030 are said to be creating friction, threatening future collaborations and OpenAI’s crucial fundraising efforts.Last week, reports by The Wall Street Journal and Financial Times indicated that tensions have escalated, with OpenAI reportedly considering antitrust action against Microsoft and Microsoft threatening to pull back from ongoing discussions. However, Business Insider says that both companies have now issued a joint statement, saying that talks are “ongoing” and expressing optimism for continued collaboration. The publication has also listed four key areas that are likely fueling the growing discord.

Money and equity is likely the core financial ‘problem’ between Microsoft and OpenAI

The report says that the heart of the dispute is Microsoft's stake in OpenAI's revenue. Under their current agreement, Microsoft is entitled to 20% of OpenAI's revenue, or up to $92 billion. OpenAI is said to be pushing to reduce this substantial cut, offering Microsoft a larger equity stake in return. Discussions reportedly involve Microsoft gaining anywhere from 20% to 49% equity in OpenAI.

However, this is a problem for Microsoft because of its position as a public company, whose shareholders typically prioritise revenue over stakes in unprofitable startups.

OpenAI 'AGI Clause' is a problem

An "AGI clause" within the companies’ contract poses another significant challenge. This clause stipulates that if OpenAI achieves Artificial General Intelligence (AGI) – which is AI surpassing human capabilities in most tasks, or specifically, generating $100 billion in profits – Microsoft would forfeit its 20% revenue share and access to new OpenAI technology.While OpenAI’s broad definition of AGI provides it ‘freedom’ to potentially declare its achievement, Microsoft is reportedly insistent on removing this clause as a condition for approving OpenAI's restructuring plans, which are vital for its multi-billion dollar fundraising initiatives. Further, Microsoft CEO Satya Nadella has publicly downplayed the significance and immediate prospects of AGI, a stance that has reportedly irked OpenAI's leadership.

Windsurf acquisition adds new ‘wrinkles’ to Microsoft-OpenAI relationship

OpenAI’s recent agreement to acquire coding assistant startup Windsurf for an estimated $3 billion has introduced a fresh point of contention. Windsurf directly competes with Microsoft's own Copilot offering.Under the existing agreement, Microsoft would typically gain access to Windsurf's intellectual property. However, both Windsurf and OpenAI are reportedly seeking an exemption for the acquisition from Microsoft's IP rights, raising concerns for Microsoft about potentially missing out on future IP from OpenAI's acquisitions.

OpenAI's structure is complicating fundraising

OpenAI’s corporate structure, overseen by a non-profit entity, has historically created hurdles for its fundraising efforts. Microsoft holds a crucial card here: OpenAI requires its approval for a critical restructuring plan that would streamline future fundraising.This approval is so essential that SoftBank has reportedly made a $10 billion investment contingent on the restructuring. SoftBank CEO Masayoshi Son recently expressed his strong intent to go “all in” on Artificial Superintelligence, adding that SoftBank missed out on early investment in OpenAI to Microsoft.