UK and US regulators examine Microsoft’s ties to OpenAI

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Competition regulators in the UK and US are examining Microsoft’s multibillion-dollar partnership with OpenAI, one of the tech industry’s most lucrative tie-ups.

The UK’s Competition and Markets Authority on Friday said it had begun an “information gathering process”, a necessary precursor to a formal investigation that is likely to begin next year.

“The CMA has decided to investigate and is inviting comments,” the agency said.

The US Federal Trade Commission is also looking into Microsoft’s investment in the company, according to a person familiar with the matter, although no formal investigation has been launched. The agency declined to comment.

The CMA is the first competition watchdog to launch an official probe of Microsoft and OpenAI since an upheaval last month at the start-up that led to chief executive Sam Altman being ousted by its board and then rehired days later. Microsoft, which alongside other investors had pushed for Altman’s reinstatement, ended up taking a non-voting observer seat on OpenAI’s board following the bust-up.

The CMA on Friday said it had asked the two companies, as well as “any interested party” such as competitors and customers, whether “the partnership between Microsoft and OpenAI, including recent developments, has resulted in a relevant merger situation”. The deadline to comment is January 3.

Brad Smith, Microsoft’s vice-chair and president, said on Friday that its relationship with OpenAI was “very different from an acquisition”.

OpenAI said in a statement: “Our partnership with Microsoft empowers us to pursue our research and develop safe and beneficial AI tools for everyone, while remaining independent and operating competitively. Their non-voting board observer does not provide them with governing authority or control over OpenAI’s operations.”

The CMA, which this year locked horns with Microsoft over its $75bn acquisition of video games maker Activision Blizzard, has become a formidable obstacle to Big Tech’s dealmaking in recent years. Antitrust enforcers in Brussels and Washington have also indicated they are watching developments in the AI market closely.

Microsoft’s investment of up to $13bn in OpenAI has made it the largest backer of the ChatGPT creator.

Microsoft’s chief executive Satya Nadella told the Financial Times earlier this year: “We have a pretty 360 [degree] relationship with them. We are investors, we have economic interests, we have commercial interests.”

However, the two companies have never fully explained the details of their alliance.

The deal initially granted Microsoft certain exclusive rights to commercialise OpenAI’s technology for corporate clients, though the AI system is now more widely available. In return, OpenAI gained access to Microsoft’s vast cloud computing resources, which are essential to building the latest generative AI systems capable of creating humanlike prose, computer code and realistic imagery with just a few words of instruction. Its large language model, GPT, is trained and made accessible to customers through Microsoft’s Azure data centres.

Over the course of this year, Microsoft has enmeshed OpenAI’s artificial intelligence technology into many of its products, including its Office workplace software, Bing search engine and GitHub coding service — triggering a race across Silicon Valley to deploy generative AI in all manner of applications.

The arrangement between Microsoft and OpenAI has become a template for Big Tech’s alliances with AI start-ups, which need access to large-scale computing power to compete. OpenAI’s rival Anthropic recently secured billions of dollars in investment from Microsoft’s two main cloud computing rivals, Amazon and Google.

“Since 2019, we’ve forged a partnership with OpenAI that has fostered more AI innovation and competition, while preserving independence for both companies,” Smith said.

“The only thing that has changed is that Microsoft will now have a non-voting observer on OpenAI’s Board, which is very different from an acquisition such as Google’s purchase of DeepMind in the UK,” he added. “We will work closely with the CMA to provide all the information it needs.”

OpenAI, which has a complex corporate structure stemming from its origins as a not-for-profit organisation, has said that Microsoft is a “minority owner” of its “capped profit company”, a subsidiary of its non-profit holding company.

Among the CMA’s first tasks at this stage of such an investigation is to establish whether it has jurisdiction to review a deal. That can depend on factors including the size of an investor’s shareholding, its ability to influence decision-making or strategic direction, or a change in control.

Last month, before OpenAI’s boardroom ructions, the German competition authority determined that Microsoft’s alliance was not subject to merger control. The Bundeskartellamt said it would re-examine the case if Microsoft were to “increase its influence on OpenAI in the future”.

Sorcha O’Carroll, senior director for mergers at the CMA, said: “The invitation to comment is the first part of the CMA’s information gathering process and comes in advance of launching any phase 1 investigation, which would only happen once the CMA has received the information it needs from the partnership parties.”