Microsoft and OpenAI's close partnership shows signs of fraying

Last fall, OpenAI CEO Sam Altman asked his counterpart at Microsoft, Satya Nadella, whether the tech giant would invest billions of dollars in start-ups.

Microsoft has already pumped $13 billion into OpenAI, and Mr Nadella was initially keen to keep the cash spigot flowing. But after OpenAI's board of directors briefly ousted Mr. Altman last November, Mr. Nadella and Microsoft reconsidered, according to four people familiar with the discussions who spoke on condition of anonymity.

Over the next few months, Microsoft OpenAI, which expects to lose $5 billion this year, will continue to ask for more money and more computing power to build and run its AI systems.

Mr. Altman once called OpenAI's partnership with Microsoft “the best bromance in tech,” but the bond between the companies has only begun. Financial pressure on OpenAI, concerns about its stability and disagreements between the two companies' staff have strained their five-year partnership, according to interviews with 19 people familiar with the relationship between the companies.

That tension presents a key challenge for AI start-ups: They are dependent on the world's tech giants for funding and computing power because these big companies control the vast cloud computing systems that smaller outfits need to develop AI.

No duo demonstrates this dynamic better than Microsoft and OpenAI, makers of the ChatGPT chatbot. When OpenAI received its massive investment from Microsoft, it agreed to an exclusive deal to buy computing power from Microsoft and work closely with the tech giant on new AI.

“We are deeply grateful for our partnership with Microsoft; The big early bet they took on us and the massive compute resources they provided were essential to our research progress, greatly benefiting both companies,” Mr. Altman said in a statement Thursday. “We are excited and committed to pursue our shared vision and achieve greater things together in the future.”

Over the past year, OpenAI has been trying to renegotiate the contract to help secure more computing power and reduce crushing costs after Microsoft executives grew concerned that their AI work was dependent on OpenAI. Mr. Nadella has said privately that Mr. Altman's firing in November shocked and concerned him, according to five people with knowledge of his comments.

Since then, Microsoft has begun to hedge its bets on OpenAI.

“We continue to invest in OpenAI at many discrete points in the partnership,” Mr. Scott, Microsoft's chief technology officer, said in a recent interview. “We are certainly the largest investor of capital among them.”

But in March, Microsoft paid at least $650 million to Inflection, an OpenAI competitor to hire most of its staff. Inflection's former CEO and co-founder, Mustafa Suleiman, oversees a new Microsoft group working to build AI technology for consumers based on OpenAI software. He's also key to Microsoft's long-term effort to build technology that can replace what the company is getting from OpenAI, according to two people familiar with Microsoft's plans.

“Microsoft could fall behind if it only uses OpenAI technology,” said Gil Luria, an analyst at investment bank DA Davidson. “It's a real race — and OpenAI can't win it.”

Some OpenAI executives and employees, including Mr. Altman, are angry that Mr. Suleman is at Microsoft, according to five people familiar with the relationship between the two companies. Mr. Suleman's team is part of a group of Microsoft engineers who work directly with employees on OpenAI. Dozens of Microsoft engineers work on-site at OpenAI's offices in San Francisco and use laptops provided by OpenAI that are set up to maintain the start-up's security protocols.

Some OpenAI workers recently complained that Mr. Suleman yelled at an OpenAI employee during a recent video call because he thought the start-up wasn't delivering new technology to Microsoft as quickly as it should, according to two people familiar with the call. Others were upset after Microsoft engineers downloaded critical OpenAI software without following protocols agreed upon by the two companies, the people said.

(The New York Times sued OpenAI and Microsoft in December, claiming they violated the Times' copyright in training AI systems.)

After Microsoft pulled out of talks about additional funding, OpenAI was in a bind. It needed more cash to continue its operations, and its executives fretted over the deal's exclusivity. Over the past year, the AI ​​company has repeatedly tried to negotiate lower costs and permits to buy computing power from other companies, according to seven people familiar with the negotiations.

In June, Microsoft agreed to make an exception to the contract, six people with knowledge of the change said. That allowed OpenAI to sign a roughly $10 billion computing deal with Oracle for additional computing resources, according to two people familiar with the deal. Oracle is providing computers packed with chips suitable for building AI, while Microsoft provides the software that runs the hardware.

And in recent weeks, OpenAI and Microsoft discussed a change in a future communication that would reduce how much Microsoft would charge small companies for computing power, though the exact terms were unclear, according to a person familiar with the change.

When it looked for options to get computers, OpenAI ran to expand its investors, according to two people familiar with the company's plans.

Part of the plan was to secure strategic investments from companies that could strengthen OpenAI's potential beyond throwing around money. These companies include Apple, chipmaker Nvidia and MGX, a technology investment firm controlled by the United Arab Emirates.

Mr. Altman and OpenAI had been discussing a possible partnership with Apple for years. In 2022, while OpenAI was developing the technologies that would power ChatGPT, Mr. Altman and Kevin Scott, Microsoft's chief technology officer, met with Apple executives to explore ways the three companies could work together, according to two people familiar with the meeting. That meeting eventually led Apple to agree to put ChatGPT on the iPhone earlier this year.

Nvidia was an important partner because it designed the computer chips that OpenAI needed to build its AI technologies MGX was part of an ambitious OpenAI effort to build new computer data centers around the world.

Earlier this month, OpenAI closed a $6.6 billion funding round led by Thrive Capital with additional participation from Nvidia, MGX and others. Apple did not invest, but Microsoft also participated in the funding round.

OpenAI is expected to account for at least $5.4 billion in computing costs by the end of 2024, according to documents reviewed by The New York Times. That amount was expected to skyrocket over the next five years as OpenAI expanded, adding an estimated $37.5 billion in annual computing spending by 2029, the documents show.

It's unclear how much recent changes to the partnership between OpenAI and Microsoft will change that trajectory, but Microsoft executives were happy with the changes, according to a person familiar with the company's strategy. The tech giant can benefit from OpenAI's advanced technology, while the start-up pays the tech giant for substantial amounts of computing power.

Still, OpenAI workers complain that Microsoft isn't providing enough computing power, according to three people familiar with the relationship. And some have complained that if another company beats it to create AI that matches the human brain, Microsoft will be blamed because it didn't give OpenAI the computing power it needed, according to two people familiar with the allegations.

Oddly enough, this could be the key to getting out of contract with Microsoft. The agreement includes a clause that says if OpenAI develops artificial general intelligence, or AGI — roughly speaking, a machine that matches the power of a human brain — Microsoft will lose access to OpenAI's technologies.

The clause was meant to ensure that a company like Microsoft wouldn't abuse the machine in the future, but today, OpenAI executives see it as a path to a better deal, according to a person familiar with the company's discussions. Under the terms of the agreement, the OpenAI board can decide when AGI has arrived.

At an AI conference in Seattle this month, Microsoft didn't spend much time discussing OpenAI. Asha Sharma, an executive working on Microsoft's AI products, emphasized the freedom and diversity of the tech giant's offerings.

“We definitely believe in offering choice,” Ms. Sharma said

Karen Weiss And Trip missed Contribution reporting.