Microsoft and OpenAI part ways but remain friends with some benefits

THE ESSENCE

Sam Altman made it official early Monday morning: OpenAI is seeing other people.

Microsoft will remain the ChatGPT maker’s “primary” cloud partner, but OpenAI can now offer products on any cloud.

Microsoft shares quickly plummeted following the announcement, recovered and are now trading 0.37% in the red at the time of writing.

WHAT HAPPENED

The official reason for OpenAI and Microsoft’s seemingly friendly shift from monogamy to polyamory is the same justification that AI companies have been shouting to the rest of the world: get on board or you’ll be left behind.

In a joint statement from both companies, OpenAI and Microsoft explained that due to this inevitable and unavoidable “rapid pace of innovation,” they now consider it necessary to “evolve” their partnership to “selflessly benefit our customers and both companies.” This “amended agreement” aims to “simplify” their partnership while continuing to focus on the broader end goal of “delivering the benefits of AI broadly.” Both companies’ main prerogatives here are to “build and operate AI platforms at scale” while looking toward “new opportunities.”

Favorable preambles aside, this announcement feels like OpenAI and Microsoft are telling kids they’re getting divorced.

Microsoft will remain OpenAI’s “primary” cloud partner, and any updated models and products will be pushed to Azure first. If Microsoft doesn’t want them for some reason, you can choose to “do not support required capabilities.” Probably the most important line in this section is that OpenAI can now offer its products to customers “through any cloud provider.” Previously, they were tied to Microsoft as the exclusive host and licensee of intellectual property. Those days are gone, which means they’ll start splitting capacity between Azure, AWS, Oracle, CoreWeave, and more. If you thought OpenAI’s inference costs were high now… wait.

Microsoft will no longer have to pay a revenue share to OpenAI. According to TechCrunch figures, this represents around 20% of Bing and Azure OpenAI’s revenue, which could be a likely revenue stream of hundreds of millions per year from Microsoft just for OpenAI to buy its freedom. The real kicker is that OpenAI will continue to pay Microsoft “until 2030,” but is now “subject to a total cap,” which remains confidential, although rumors suggest 20%.

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The biggest red flags in this announcement were, as we’ve become accustomed to, the things that weren’t said: where does this leave Microsoft, where does OpenAI get the money to do this, and what happened to AGI?

WHY IT MATTERS

This soft breakup of two of the largest technology and artificial intelligence companies was a long time coming, with announcements being released staggered throughout the year. Microsoft’s biggest problem, which will likely be reflected in future earnings reports across its cloud segment, is Azure. Azure’s remaining performance obligations (RPOs) amounted to $625 billion, of which 45% came from commercial activities related to OpenAI. Chief Financial Officer Amy Hood even told investors on the company’s second-quarter earnings conference call not to worry about the concentration.

Since OpenAI is going multi-cloud, that concern has gone from being too concentrated to possibly not existing at all in the future. This will certainly be something to watch in the coming days as Microsoft prepares for its third quarter earnings and possibly addresses whether OpenAI’s future share of RPO is stable, increasing, or offsetting.

OpenAI officially closed its largest funding round to date at $122 billion at the end of March. Its valuation is now around $852 billion, and OpenAI has also raised $3 billion from individual retail investors for the first time, CNBC reports.

They got what they wanted from Amazon, Nvidia and Softbank, but with requirements. Amazon has to see OpenAI go public or reach AGI, there are 35 billion dollars at stake. SoftBank backed up its commitment with a $40 billion unsecured bridge loan arranged by JPMorgan, Goldman Sachs and other big banks. Nvidia is applying the same playbook: winning OpenAI means they continue to buy its hardware. All that money ends up in the same operating group that pays for everything from salaries, computing, infrastructure development, model development, and, yes, Microsoft’s 20% revenue share through 2030.

WHAT’S NEXT?

To reiterate, OpenAI is not expected to be cash flow positive until 2030. Without Microsoft’s revenue, OpenAI’s ability to write any checks depends more than ever on continued access to outside capital, putting them in probably the most precarious position they have ever been in.

Obviously, these companies are the largest and most powerful in the world, but if, for some reason, they have to tighten their belts and OpenAI needs more money to go public or “catch up” to AGI, what exactly will happen to their roadmap? Does it stop completely?

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