Microsoft's access to OpenAI tech is focus of contract talks

Business Times

2 days ago

[SEATTLE] Microsoft is in advanced talks to land a deal that could give it ongoing access to critical OpenAI technology, an agreement that would remove a major obstacle to the startup's efforts to become a for-profit enterprise.
The companies have discussed new terms that would let Microsoft use OpenAI's latest models and other technology even if the startup decides it has reached its goal of building a more powerful form of AI known as artificial general intelligence (AGI), according to two people familiar with the negotiations. Under the current contract, OpenAI attaining AGI is seen as a major milestone at which point Microsoft would lose some rights to OpenAI technology.
Negotiators have been meeting regularly, and an agreement could come together in a matter of weeks, according to three people with knowledge of the situation, who requested anonymity to discuss a private matter. OpenAI chief executive officer Sam Altman and Satya Nadella, his Microsoft counterpart, discussed the restructuring at the Allen & Co conference in Sun Valley, Idaho, earlier this month, two of the people said.
While the tone of the talks has been positive, some of the people cautioned that the deal is not finalised and could hit new roadblocks. Moreover, OpenAI's restructuring plans face other complications, including regulatory scrutiny and a lawsuit filed by Elon Musk, an early backer who split with the company and accused the startup of defrauding investors about its commitment to its charitable mission. (OpenAI has pushed back at Musk's claims and said the billionaire is trying to slow down the company.)
Negotiations over OpenAI's future as a profit-company have dragged on for months. Microsoft, which backed OpenAI with some US$13.75 billion and has the right to use its intellectual property, is the biggest holdout among the ChatGPT maker's investors, Bloomberg previously reported. At issue is the size of Microsoft's stake in the newly configured company.
The talks have since broadened into a renegotiation of their relationship, with the software maker seeking to avoid suddenly losing access to the startup's technology before the end of the current deal, which expires in 2030.
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Microsoft and OpenAI declined to comment.
A fraying partnership
The partnership between the two companies helped inaugurate the AI age. Microsoft built the supercomputer that OpenAI used to develop the language models behind ChatGPT and, in exchange, won the right to bake the technology into its software offerings. The relationship began to fray when the OpenAI board fired (and then rehired) Altman in November 2023, an episode that shook Microsoft's faith in its partner.
The rift only widened when the two companies began competing for the same customers – consumers who use their chatbots at home and corporations that have deployed the AI assistants to boost office productivity.
Even as executives publicly touted their close ties, OpenAI sought to loosen its dependance on Microsoft, winning permission to build data centres and other AI infrastructure with rival companies.
OpenAI is eager to alter its complicated nonprofit structure, in part to secure additional funding to keep building data centres to power its next-generation AI models. SoftBank Group, which has said it would back OpenAI with tens of billions of US dollars, has the option to reduce that outlay if OpenAI's restructuring isn't completed by the end of the year.
OpenAI wants a larger slice of the revenue currently shared with Microsoft, and has sought adjustments to Microsoft's access to its intellectual property, two of the people said. Microsoft is looking for continued access to OpenAI technology after the current contract expires in 2030.
There are range of concerns for OpenAI. The startup wants to ensure its business is well-positioned with whatever share of revenue and equity Microsoft receives in part to guarantee its nonprofit will be well-resourced with a significant stake in OpenAI, one person said. OpenAI also wants the ability to offer customers distinct products built on top of its models even if Microsoft has access to the same technology, the person said. And OpenAI wants to be able to find a way to provide its services to more customers, including government providers, not all of which are on Azure, Microsoft's cloud computing platform, the person said.
At the same time, OpenAI seeks to guarantee that Microsoft adheres to strict safety standards when deploying OpenAI's technology, especially as it gets closer to AGI, the person said.
The AGI question
Reaching agreement on what happens once OpenAI achieves artificial general intelligence has been particularly thorny. It's not clear why the language is in the contract, but it gives OpenAI a built-in way to strike out on its own just as its technology matures.
The startup publicly defines AGI as 'highly autonomous systems that outperform humans at most economically valuable work.' The existing contract has separate clauses related to that threshold, which can be triggered by technical or business milestones, according to two people familiar with the matter.
OpenAI's board has the right to determine when the company has reached AGI on a technical level. Under that scenario, Microsoft would lose access to technology developed beyond that point, one of the people said.
The business milestone would arrive once OpenAI has demonstrated it can reach around US$100 billion in total profits for investors including Microsoft – giving it the wherewithal to repay the return Microsoft is entitled to under the existing contract, one person said. In that scenario, Microsoft would lose its rights to OpenAI technology, including products developed before that trigger, another person said.
Microsoft has the right to weigh in on the business milestone, but if the two companies end up at odds over the claim, they could wind up in court, two people said. Another provision in the current contract bars Microsoft from pursuing AGI technology itself, some of the people said.
Microsoft, for its part, has demonstrated some flexibility in revised contract terms. The company agreed to waive some intellectual property rights related to OpenAI's US$6.5 billion acquisition of io, the startup co-founded by iPhone designer Jony Ive, two of the people said.
The software giant was less accomodating over OpenAI's proposed acquisition of AI coding startup Windsurf, the people said. That deal fell apart earlier this month, in part because of the tension with Microsoft, Bloomberg reported.
Windsurf, which sells coding tools that compete with Microsoft's products, did not want the tech giant to have access to its intellectual property – a condition that OpenAI was unsuccessful in getting Microsoft's agreement on, people familiar said. Ultimately, Windsurf's co-founders and a small group of staffers agreed to join Alphabet's Google in a US$2.4 billion deal.
In recent weeks, the companies have been negotiating Microsoft's ownership in a restructured OpenAI – with the two sides discussing an equity stake for Microsoft in the low- to mid-30 per cent range, according to a person familiar with the matter.
The Financial Times previously reported on the stake talks. But if Microsoft deems the stake and other changes to the contract insufficient, the company is willing to abandon the talks and stick with the current contract terms, another person said. BLOOMBERG