Microsoft and OpenAI: Will they opt for the nuclear option?

The fight between Microsoft and OpenAI over what Microsoft should get for its $13 billion investment in the AI company has gone from nasty to downright toxic, with each of the companies considering strategies against the other that can only be described as their nuclear options. 

The stakes couldn’t be higher. 

Microsoft needs access to OpenAI technologies to keep its worldwide lead in AI and grow its valuation beyond its current more than $3.5 trillion. OpenAI needs Microsoft to sign a deal so the company can go public via an IPO. Without an IPO, the company isn’t likely to keep its highly valued AI researchers — they’ll probably be poached by companies willing to pay hundreds of millions of dollars for the talent.

How did things get so down and dirty? What comes next? To find out, let’s look at what started it all: that potential OpenAI IPO.

Chasing a $300 billion+ IPO

OpenAI was originally created as a non-profit with the sole goal of making sure AI was developed and used in an ethical manner. Founders, including current CEO Sam Altman and tech entrepreneur Elon Musk among others, said they wanted the technology to be “used in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return.”

But that was before it became clear that trillions of dollars were at stake. So, now the company wants to restructure itself in a way that would include a for-profit focus and allow it to launch an IPO. If the IPO were launched today, the company would be worth an estimated $300 billion. Given that it won’t be launched until next year, the stakes are likely even higher.

Before OpenAI can go public, it must get approval for its restructuring from California, where the company is based, and Delaware, where the company is incorporated. To gain those approvals, it needs to ink a deal with Microsoft, its earliest and primary investor.

 Because of the peculiarities of OpenAI’s non-profit founding, Microsoft and OpenAI never made clear how Microsoft would be paid off if OpenAI went public. They’ve been sparring about it for more than a year. Now, the fight has become a steel-cage deathmatch.

Choosing their nuclear options

For its $13 billion investment in OpenAI, Microsoft received sole rights to OpenAI technologies, which it used to build its line of Copilot generative AI (genAI) tools. But nothing in the agreement specified what might happen if OpenAI were to go public.

Two issues are in play: What percentage of the company Microsoft should get for its investment, and whether Microsoft will get long-term exclusive access to OpenAI technologies.

The Financial Times reports that in negotiations over the past year, the companies have discussed Microsoft getting anywhere from a 20% to 49% equity stake in the OpenAI, which means the companies might be $100 billion apart in what they think should be done. They’re also still battling over whether Microsoft will continue to get exclusive rights to certain OpenAI technologies. 

For now, things are at an increasingly bitter impasse. Both companies are considering options that could threaten the other’s existence.

According to the Wall Street Journal, OpenAI is considering publicly accusing Microsoft of anticompetitive behavior. It might also ask the US government to review their contract to see whether it violates antitrust laws.

Antitrust suits are Microsoft’s biggest nightmare. One such suit laid the company low during the late 1980s and 1990s and led to a “lost decade” in which Microsoft became an also-ran in the most important new technologies, including the internet, social media, and mobile computing.

Google, Meta, Apple, and Amazon are all currently embroiled in federal antitrust suits and investigations, while Microsoft has remained — for now — untouched. But the US  government is quietly investigating whether Microsoft’s AI, cloud, and productivity suite technologies have been used to violate antitrust laws. OpenAI telling the feds Microsoft violated antitrust laws in their agreement could go a long way towards turning the investigation into an outright prosecution. And in prosecutions, anything can happen, including Microsoft being broken into pieces, even spinning off its AI capabilities.

Microsoft is mulling a nuclear option of its own — it might walk away from negotiations and, in the words of the Financial Times, “rely on its existing commercial contract to retain access to OpenAI’s technology until 2030.”  If that were to happen, OpenAI might not be able to go public. That would endanger a $400 billion investment in the company from Softbank and other investors.

Hovering over it all is an even bigger wildcard. Microsoft’s and OpenAI’s existing agreement dramatically curtails Microsoft’s rights to OpenAI technologies if the technologies reach what is called artificial general intelligence (AGI) — the point at which AI becomes capable of human reasoning. AGI wasn’t defined in that agreement. But Altman has said he believes AGI might be reached as early as this year. 

If he declares that OpenAI’s technologies have reached AGI, all bets for what might happen are off. At that point, we’d be in uncharted territory with judges trying to decide whether AGI had really been reached or not.

It’s not likely Altman will do that, because it would hand over OpenAI’s fate to the legal system, something he certainly doesn’t want. On the other hand, given the increasing bitterness of this fight, anything could happen. 

Who will be the winner in all this? My bet is still on Microsoft. It’s got enough cash and revenue to wait things out. OpenAI has more to lose than Microsoft. 

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