Microsoft has tried to hide its power over OpenAI. The Sam Altman drama ruined that.

The firing and reinstatement of OpenAI CEO Sam Altman has derailed Microsoft’s months-long effort to prevent antitrust regulators from scrutinizing its massive investment in the startup.

The world’s largest software manufacturer has pumped billions into the startup since 2019. The bulk of that reportedly came in a $10 billion deal that gave Microsoft 49% of OpenAI’s future profits, subject to certain financial milestones.

It is difficult to protect such a large business partnership from the potentially intense scrutiny of antitrust authorities. Lina Khan’s FTC has shown clear interest in stopping big tech companies from swallowing up new potential competitors. Microsoft tried anyway.

Intentionally avoiding scrutiny

According to a person familiar with the startup and its leadership, one of Microsoft’s biggest concerns surrounding OpenAI was and remains antitrust law. Both companies have made it their goal to “consciously keep a wall between us,” this person said.

Many OpenAI announcements were not shared with Microsoft, and when they were, the two companies made sure they didn’t announce anything at the same time or too close to each other.

Day-to-day business operations and actions were generally not disclosed by OpenAI, nor were many issues or discussions between OpenAI’s leadership and the startup’s board.

“It was all intentional to avoid antitrust scrutiny,” the person added.

Operational “friction”

This happened despite it causing major operational “friction” in the partnership, which “occurred frequently,” according to this person, who asked not to be identified discussing sensitive matters.

Friction is a polite term for what arose from Altman’s shocking fall in November. Microsoft received little warning about the board’s intention to fire Altman for his lack of openness.

Executives like Microsoft CEO Satya Nadella and its CTO Kevin Scott did not communicate much with OpenAI’s independent board, but were in regular contact with Altman and other senior OpenAI executives.

“Leadership spent far more time in the presence of Kevin and Satya than the board,” the person added. “Much more.”

‘Evil Empire’

A long-time Microsoft insider said the company has been paranoid about antitrust issues since the days when it was known as the “evil empire” and has waged a major antitrust battle over its bundling of Internet Explorer with the Windows operating system. Under Nadella, Microsoft had a largely effective strategy for avoiding antitrust scrutiny. Recently, it even overtook regulators with its acquisition of Activision-Blizzard.

Now, with Altman’s dramatic return, Microsoft’s role in negotiating his reinstatement, and his new position as “observer” to a largely new board, the company is finally under the antitrust microscope after all.

“De facto control”

Britain’s Competition and Markets Authority said on Friday it is conducting a preliminary review of the impact of Microsoft’s investment in OpenAI, including whether the former has “material influence” or “de facto control” over the latter. According to Bloomberg, the FTC is also looking into the connection more closely following the Altman fiasco.

An OpenAI spokesperson did not respond to a request for comment. Microsoft President Brad Smith said the partnership with OpenAI has “fostered more AI innovation and competition” and that their new observer status on the board is “the only thing” that has changed between the two companies. Frank Shaw, chief communications officer, said Microsoft owns “no part” of OpenAI.

Nadella’s role

Microsoft executives were given a heads-up just minutes before Altman’s firing was announced, insiders said at the time, and company leaders have since reiterated that they were surprised by the decision. The long-time Microsoft insider said this bodes well for Microsoft in a possible future antitrust case.

“The fact that Sam was fired and Microsoft was unaware of this decision speaks to whether Microsoft has the ability to control OpenAI,” the person said.

Of course, Nadella played an important role in Altman’s return. Altman and Nadella remained in touch after Altman was forced out of the company. President and co-founder Greg Brockman resigned in solidarity, and most OpenAI employees threatened to do the same – no matter how little they wanted to. Nadella agreed to give Altman and Brockman their own research arm at Microsoft if he couldn’t negotiate their return to OpenAI.

Back to basics

Now that Altman has returned as CEO of OpenAI, Microsoft executives have gotten back to basics and worked hard to publicly distance the company from its ties to the startup and its operations.

At Microsoft’s annual shareholder meeting on Thursday, Nadella said that while the company received a “leading frontier model” through its OpenAI partnership, it was working on separate internal AI projects, such as a language model called Phi. It also offers open source models on Azure, including Mistral, Llama and Cohere, all of which compete with OpenAI’s models and tools, he noted.

Microsoft CFO Amy Hood chimed in during the meeting, emphasizing that the company has AI partners beyond OpenAI. “We work with many other companies and partners in the AI ​​space,” she said.

One interpretation of this is that Microsoft wants to allay investor concerns after the chaos surrounding Altman’s ouster. Another interpretation is that Microsoft wants to show antitrust authorities that OpenAI is an independent company and is not controlled by the software giant.

“Gun jumping”

This level of scrutiny will be an element of any antitrust review of the OpenAI contract, according to a person familiar with the government’s actions.

If the company is found to have exercised real control over OpenAI or shared competitive intelligence with the startup before notifying the FTC, it could be fined for so-called “gun jumping,” one of the easier-to-enforce FTC rules, the person said familiar with the government’s measures, said. Such fines can be up to $50,000 per day of violation.

“That might explain why they are now trying to avoid the appearance of coordination,” this person said.

Big deals like Microsoft’s investment in OpenAI often have to be reported to federal regulators, sometimes triggering an investigation.

Microsoft chose not to report the deal to regulators, in part because OpenAI was a relatively small company until ChatGPT took the world by storm a year ago. Today, Microsoft insists that it owns no part of OpenAI at all. Instead, the software giant says it is only entitled to future revenue from the startup.

Even some of the lawyers at the firm representing OpenAI are confused about Microsoft’s exact legal relationship with the startup, a person familiar with the matter told BI.

Do you work for OpenAI or Microsoft or do you have a tip or insight you would like to share?

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