Takes Two to Tango
…OpenAI and Microsoft’s AI Dance
When the history books are written on how the “overnight success” of OpenAI’s ChatGPT kicked off the current, global AI Gold Rush, much will be made about the unusual partnership forged by OpenAI and Microsoft, aided in part by the multi-decade relationship between OpenAI Founder/CEO Sam Altman and Microsoft CEO Satya Nadella.
How they forged an unexpected partnership since 2019 with a billion dollar investment in the quasi non-profit OpenAI, which then led to a $10 billion plus deal for a 49% ‘non-control’ stake that obviated any possible antitrust concerns.
Important at a time when regulators distinctly have a yellow flag out on tech mergers & acquisitions.
For me it recalled a time when Microsoft, then led by Founder/CEO Bill Gates, made a somewhat similar high stakes deal back in January,1995 for a stake in UUNET, a leading internet service provider.
“A small Falls Church company is going to be the link to the Internet for the millions of people that Microsoft Corp. hopes will use its future electronic communications network.
Microsoft Chairman Bill Gates announced last night that Microsoft will buy a minority stake in the company, UUNet Technologies Inc. The plan is that whenever Microsoft's on-line customers want to explore the global Internet network, they will use UUNet lines.
UUNet is in the fast-growing business of connecting customers' computers to the Internet, which allows them to tap its vast information resources. The partnership is a coup for the company, which had only about $13 million in sales last year and a customer base limited to businesses.”
Then, as now, the Microsoft investment paved the way for core infrastructure investment for the budding commercial internet business. UUNET, went on to build much of the TCP/IP dial-up networks for AOL, MSN, et al, much of the fiber-based internet backbone, and is now part of Verizon after several acquisitions. (Disclosure, I led UUNET’s IPO and secondaries at Goldman Sachs, as the Firm’s Internet Research Analyst).
Today, Microsoft’s multi-billion dollar investments and credits for OpenAI to use Microsoft’s Azure cloud infrastructure, for the multi hundred million dollar ‘Compute’ required for OpenAI’s foundation LLM AI GPT 3 and 4 models. Much of what we now know and use as ChatGPT, would not exist without Microsoft’s core infrastructure investments with OpenAI.
“Beyond the financial risks and rewards for Microsoft, the bigger prize is that it gets to work alongside OpenAI in developing the technology on Microsoft Cloud, which instantly puts Microsoft at the forefront of what could be the most important consumer technology over the next decade.
That’s a huge coup for Microsoft, especially considering Google, a rival, has helped pioneer some of the technology used by OpenAI. Microsoft was also in talks to incorporate some of those features into its other programs, like Word and Outlook email.”
It’s been a complicated deal and partnership to execute, as this WSJ piece outlines. The unusual deal between OpenAI and Microsoft is not without its growing pains and continuing to find alignments:
“At the same time, people within Microsoft have complained about diminished spending on its in-house AI and that OpenAI doesn’t allow most Microsoft employees access to the inner workings of its technology, said people familiar with the relationship. Microsoft and OpenAI sales teams sometimes pitch the same customers.”
Much of this hopefully will be ironed out, especially given the relationship between the two CEOs. The execution challenges and opportunities remain large, at the beginning of the AI wave, much as it was for the commercial Internet wave in the nineties (more on both in later posts).
History does rhyme, and in the end it will likely all come down to the give and take. As in the best of Tangos. Stay tuned.