In a modern-day echo of the spectacular Renaissance patronage, Microsoft has invested over $13 billion in cash and computing power into OpenAI, a once-struggling startup that has become a frontrunner in the field of generative artificial intelligence (AI). This investment has propelled OpenAI’s valuation to an astonishing $157 billion. In return for this generous backing, Microsoft secured the exclusive right to run OpenAI’s models on its cloud-computing platform, Azure. The partnership has been undeniably fruitful, with Microsoft’s funding enabling OpenAI to develop ever-larger and more sophisticated large language models (LLMs). These advanced technologies have been integrated into Microsoft’s various software products, enhancing their capabilities.
The strategic collaboration has demonstrably helped Azure make inroads into the market share dominated by Amazon Web Services (AWS). According to investment bank Jefferies, Azure’s revenue surged by 30% year-on-year in the July-September quarter, outpacing AWS’s growth rate of 19%. This remarkable performance is attributed, in part, to the OpenAI partnership, which has attracted 60,000 customers to Azure AI, as stated by Eric Boyd, head of Microsoft’s AI platform.
However, just as Michelangelo sometimes chafed under the constraints imposed by his patron, the Medici, OpenAI is beginning to feel the limitations of its ties to Microsoft. Some members of OpenAI’s board and other investors have expressed their desire for Microsoft to loosen its grip on the company. Their ambition lies in expanding OpenAI’s reach into the remaining half of the cloud-computing market currently controlled by AWS. Access to this market would solidify OpenAI’s dominance in the provision of LLMs, boosting its revenue streams, which are already projected to exceed $3.5 billion this year.
Microsoft has declined to comment on the specifics of its contract with OpenAI. Given the long-standing rivalry between Azure and AWS, it’s reasonable to assume that Microsoft is hesitant to assist its Seattle-based neighbor. Nonetheless, the idea of terminating its exclusive patronage of OpenAI may not be as outlandish as it initially seems. Those advocating for greater commercial freedom for OpenAI argue that while Microsoft might initially resent sharing its models with AWS, its equity stake in OpenAI would ultimately benefit from the model-maker’s broader market access.
Antitrust concerns further strengthen the case for granting OpenAI more independence. Both the US Federal Trade Commission and the UK Competition and Markets Authority have initiated inquiries into the relationship between Microsoft and OpenAI. Jefferies’ Brent Thill believes that increased openness would serve Microsoft’s long-term interests, comparing it to a parent allowing their child to go to college: initially painful, but ultimately beneficial for the child’s growth and development.
Microsoft has already begun to reduce its dependence on OpenAI. The tech giant’s CEO, Satya Nadella, was reportedly taken aback by the brief ouster of Sam Altman, his counterpart at OpenAI, in November, before his quick reinstatement. In the wake of this incident, Microsoft has diversified its AI portfolio by incorporating LLMs from other providers, such as the French AI firm Mistral, and by acquiring almost all the staff, including the CEO, of OpenAI rival, Inflection (which notably counts Mustafa Suleyman, a board member of The Economist’s parent company, among its ranks).
The dynamic between Microsoft and OpenAI is currently in flux as they renegotiate the terms of their partnership, coinciding with OpenAI’s transition from a non-profit to a for-profit entity. A looming sunset clause may also be a factor. OpenAI is believed to have the right to sever its commercial ties with Microsoft if its models achieve a level of superhuman capability, known as artificial general intelligence. The definition of this threshold is subjective, but some AI enthusiasts believe it could be achieved within a few years.
Amazon, for its part, would eagerly welcome access to OpenAI’s models. Matt Garman, AWS’s newly appointed CEO, expressed his desire to have OpenAI models run on AWS, although he declined to confirm the existence of any formal discussions. Pradeep Sanyal, an AI consultant and former AWS executive, observes that while Amazon’s cloud business remains the largest, it lags behind Azure and Google Cloud in terms of generative AI mindshare. Amazon lacks both a substantial software business to showcase its AI capabilities and a sufficiently impressive LLM to rival those of OpenAI or Google. However, AWS offers a wide range of models, including those from Anthropic (in which Amazon is a significant investor) and Meta’s Llama family of open models, which, according to Garman, are highly popular among AI startups. Adding OpenAI’s models to this lineup would undoubtedly attract more customers.
Despite this, Garman maintains that no single model will dominate the market completely. He notes that OpenAI, Anthropic, and other model developers are constantly surpassing each other’s advancements. On October 22nd, Anthropic launched an experimental version of its Claude 3.5 Sonnet model, capable of utilizing a computer in a human-like manner, including virtual keyboard and mouse operation. Amazon’s more open approach could ultimately prevail in this evolving landscape.
Goldman Sachs’ Eric Sheridan suggests that it will take years, not months, to determine which cloud service provider emerges as the ultimate winner in generative AI. However, he highlights the prevailing trend in cloud computing – a shift from exclusivity towards more open relationships. Companies are increasingly using multiple cloud providers and leveraging different LLMs for diverse functions.
In conclusion, Microsoft, like the Medici of old, has shown astute foresight in identifying creative genius early on. But its hold over OpenAI may not be everlasting. As the AI landscape continues to evolve, the future of this remarkable partnership remains uncertain, with the potential for a more open, collaborative ecosystem emerging on the horizon.
