Microsoft, OpenAI change terms of deal so startup can court Amazon and others
Microsoft and OpenAI Renegotiate Their Strategic Partnership
By Aditya Soni, Akash Sriram and Stephen Nellis
April 27 (Reuters) - Microsoft and OpenAI renegotiated a pact that let Microsoft exclusively sell the ChatGPT creator's artificial intelligence models, clearing the way for the startup to forge new deals with rivals to the software and enterprise giant, including Amazon.
The loosened ties between Microsoft and OpenAI, which have been expected for a while, are a sweeping change to one of the AI era's most consequential alliances. It is arguably advantageous for both companies.
Microsoft shares initially fell 1.3% on the news but closed largely unchanged. Alphabet closed up 1.81%, while Amazon closed down 1.1%.
Background: Microsoft’s Investment and OpenAI’s Growth
Microsoft's early investment, totaling $13 billion since 2019, helped pave the way for OpenAI’s ascent as an AI pioneer and powered growth at its Azure cloud-computing business. Tensions between the two had been rising as OpenAI wanted the freedom to strike cloud deals with Microsoft's rivals.
Key Changes in the New Agreement
Benefits for Both Companies
The renegotiated terms announced jointly will help OpenAI secure more computing power and build out an enterprise business that can compete better with Anthropic ahead of planned IPOs by both artificial intelligence companies. Microsoft will get greater certainty about its revenues from OpenAI under the deal, while OpenAI will gain newfound flexibility.
Details of the Revised Deal
Microsoft will remain OpenAI's primary cloud partner with a license to the startup's intellectual property through 2032. Microsoft also will get a guaranteed 20% cut of OpenAI's revenue until 2030, though the total will now be subject to an undisclosed cap.
The fresh terms remove a rider that would have allowed OpenAI to stop paying Microsoft if it achieved so-called artificial general intelligence, the point at which AI matches or surpasses human ability.
Enterprise Market Impact
OpenAI’s Expanded Reach
In an internal memo reported by CNBC this month, OpenAI said the Microsoft partnership had been foundational but had limited the startup's enterprise reach. The memo added that demand since OpenAI launched on Amazon's cloud had been staggering.
"The new deal with Microsoft was essential for OpenAI to be successful in the enterprise market," said Gil Luria, analyst at D.A. Davidson & Co. "AWS and Google Cloud enterprise customers have been limited in their ability to integrate OpenAI's products because of the exclusive relationship and will now be more likely to consider OpenAI alongside Anthropic," he added.
Ongoing Commitments and Changes
OpenAI's promise to use at least $250 billion in Azure services by 2032 remains in place, with Microsoft having the right to make OpenAI products available first on Azure, unless Microsoft decides not to support them. Microsoft will also no longer pay OpenAI a share of Microsoft's revenue for offering OpenAI models on Azure.
Signing Deals with Microsoft Rivals
Previous Restrictions and Legal Concerns
The original deal gave Microsoft control over how OpenAI’s models were run on the cloud. Microsoft could offer the broadest access to OpenAI's models, with cloud rivals such as Amazon able to offer only more limited and legally questionable ways of accessing the models.
The Financial Times reported last month that Microsoft was weighing legal action against Amazon and OpenAI over a $50 billion cloud deal that may breach its exclusive cloud tie-up.
The new deal does away with that.
Amazon and Other Partnerships
In a post on LinkedIn, Amazon CEO Andy Jassy said OpenAI's models would be available directly to developers on Amazon Web Services "in the coming weeks" and that the two firms would share more details at an event in San Francisco on Tuesday.
"With this, builders will have even more choice to pick the right model for the right job," Jassy wrote.
OpenAI has also struck deals including cloud and infrastructure agreements with Oracle and Alphabet's Google, a chip partnership with Nvidia, and a manufacturing tie‑up with Apple supplier Luxshare as it pushes into consumer devices.
Microsoft Works to Reduce OpenAI Reliance
Strategic Shifts
Microsoft appears to be allowing that deal to proceed and in exchange getting certainty around a lingering risk if OpenAI asserted it had achieved AGI.
Microsoft and OpenAI had restructured their tie-up in October, removing major constraints on the startup's ability to raise capital and secure computing resources.
Developing In-House AI Capabilities
In recent months, Microsoft has been working to reduce its reliance on OpenAI by developing its own AI models and rolling out those developed by the likes of Anthropic in its products including the 365 Copilot for enterprises.
"From Microsoft's perspective, it does not need to build out all the data center needs for OpenAI, freeing up capital for Copilot and other cloud capacity," Barclays analysts said, calling the move a positive for both Microsoft and OpenAI.
Antitrust Implications
Ending the exclusivity pact may help Microsoft fight antitrust scrutiny in the UK, the U.S. and Europe over whether its OpenAI tie-up gives it an unfair advantage in the cloud and enterprise AI markets.
Reporting Credits
(Reporting by Aditya Soni and Akash Sriram in Bengaluru and Stephen Nellis in San Francisco, additional reporting by Anhata Rooprai; Editing by Nick Zieminski, Arun Koyyur, Sayantani Ghosh and David Gregorio)
