Regulators probe Microsoft’s OpenAI ties — is it only smoke, or is there fire?

For years, Microsoft has managed to fly under the radar of government agencies looking at potential violations of antitrust laws, even though it’s the second largest company in the world by market valuation, just behind Apple and ahead of Google, Facebook, and Amazon. Microsoft CEO Satya Nadella is well aware of how his company was laid low by the US Justice Department’s prosecution for antitrust violations in the 1990s and has been careful not to run afoul of regulators.

That changed last year when Microsoft announced plans to buy video game maker Activision for $68.7 billion. The Federal Trade Commission (FTC) sued the company to stop the takeover, but Microsoft prevailed and closed the deal last October.

Now, though, Microsoft faces several potential antitrust probes around the world that could be far more consequential; regulators want to know more about the company’s close relationship with OpenAI, the creator of ChatGPT. If they end up going forward, Microsoft’s lead in generative AI (genAI) could be in danger, with consequences potentially as severe as those the company faced a quarter century ago.

You need a scorecard to keep track of all the genAI probes now under way. Note: at the moment, these are initial queries rather than full-blown investigations. These kinds of things don’t always lead to prosecutions, and prosecutions don’t always lead to guilty verdicts. So the danger for Microsoft is still more theoretical than real — for now.

Here’s the current state of the various inquiries into whether in genAI Microsoft might be violating antitrust laws — and why.

The FTC and Microsoft

The FTC is still smarting from its failed attempt to block the Activision buy — so much so that it has appealed the ruling. Once the feds put a company in its crosshairs, they often keep it there, so it’s no surprise that the agency is now considering going after Microsoft on its AI ambitions.

Bloomberg reports the agency is looking into whether Microsoft’s $13 billion investment in OpenAI violates antitrust laws. (The large language model behind ChatGPT also powers Microsoft’s big genAI push, including Copilot.) At this point, Bloomberg says, it’s not a formal investigation, but instead a preliminary inquiry.

Microsoft first began investing in OpenAI in 2019 and poured an additional $10 billion into the company a year ago. So why nearly a year after that big spend did the FTC finally set its sights on the relationship between the two companies?

What did it was the bizarre soap opera of OpenAI’s board firing OpenAI CEO Sam Altman for reasons that remain unclear, and then hiring him back four days later. Microsoft and Altman have always marched in lockstep, and the company wanted him back in power after he was fired. As OpenAI’s biggest investor, Microsoft played an almost bullying, behind-the-scenes role in forcing the board to reinstate Altman.

According to The New Yorker magazine, Nadella spearheaded a drive by top Microsoft executives to put Altman back in the top spot. A Microsoft executive explained the company’s moves this way: “From our perspective, things had been working great, and OpenAI’s board had done something erratic, so we thought, ‘Let’s put some adults in charge and get back to what we had.’”

After Altman was canned, Microsoft hired him to run its AI division, and nearly all of OpenAI’s staff said they would quit the company to join him at Microsoft. That sealed the deal: The OpenAI board backed down and rehired him. The board was reconfigured as well, with Microsoft given a seat as a nonvoting member — essentially giving Microsoft everything it wanted.

To the FTC, that likely signaled that OpenAI is more a part of Microsoft than a truly independent company. The fact that they’re the two most powerful AI companies on the planet naturally raised antitrust concerns.

The UK considers an antitrust probe

The UK’s Competition and Markets Authority has gone public with its potential investigation into Microsoft’s relationship with OpenAI. It’s seeking public feedback on whether the “close, multi-faceted relationship” between Microsoft and OpenAI amounts to a “relevant merger” — and whether that merger violates antitrust laws.

The agency made it clear Microsoft’s influence in getting Altman rehired and getting a spot on the OpenAI board is what led to the inquiry: “There have recently been a number of developments in the governance of OpenAI, some of which involved Microsoft. In light of these developments, the CMA is now issuing an ITC [invitation to comment] to determine whether the Microsoft / OpenAI partnership, including recent developments, has resulted in a relevant merger situation and, if so, the potential impact on competition.”

The EU piles on

The European Union is also looking into whether Microsoft’s relationship with OpenAI violates antitrust laws. It cites the same reasoning as the UK.

The EU’s antitrust regulator told Reuters, “While this transaction has not been formally notified, the (European) Commission has been following very closely the situation of control over OpenAI already before the recent events involving its management, including Microsoft’s role on the OpenAI board and the investment agreements between Microsoft and OpenAI.”

The upshot — Microsoft and OpenAI joined at the hip?

Given that some of the world’s most powerful agencies regulating antitrust issues are looking into Microsoft’s relationship with OpenAI, the company has much to fear. Are they being fair, though? Is there not just smoke, but also fire?

You might argue that AI — and genAI in particular — is so new, and the market so wide open, that these kinds of investigations are exceedingly preliminary, would only hurt competition, and represent governmental overreach. After all, Google, Facebook, Amazon, and billion-dollar startups are all competing in the same market. That shows there’s serious competition.

But that’s not quite the point. The OpenAI soap opera shows that OpenAI is separate from Microsoft in name only. If Microsoft can use its $13 billion investment to reinstall Altman (and grab a seat on the board), even if it’s a nonvoting one, it means Microsoft is essentially in charge of the company.

Microsoft and OpenAI have a significant lead over all their competitors. If governments wait too long to probe what’s going on, that lead could become insurmountable. So, they should at least investigate whether what is in essence a merger between Microsoft and OpenAI violates antitrust laws. After that, let the chips fall where they may.

Copyright © 2024 IDG Communications, Inc.


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