Microsoft and OpenAI: A High-Stakes Negotiation in the AI Industry
Introduction
Recent reports suggest that Microsoft may step away from its negotiations with OpenAI as both companies struggle to redefine the terms of their partnership. This development highlights deep disagreements over intellectual property rights, revenue sharing, and OpenAI's plans to become a fully for-profit entity.
Background and the AGI Clause
In 2019, Microsoft secured exclusive rights to OpenAI's models—including intellectual property and Azure distribution—until 2030. This agreement also guarantees Microsoft a 20% share of OpenAI’s revenue. However, a critical provision, known as the AGI clause, allows OpenAI to revoke these rights if it achieves Artificial General Intelligence (AGI). OpenAI now wants to eliminate this clause to ease its transition to a for-profit structure and enable a future IPO. (source)
Revenue Sharing and Equity Disputes
Microsoft is pushing for a larger equity stake—reportedly between 20% and 49%—to account for OpenAI’s shift to a for-profit model. Meanwhile, OpenAI is looking to replace Microsoft's 20% revenue share with a combination of royalties and equity but is resisting any significant loss of control or profits. (source)
Microsoft's Position
According to reports from the Financial Times and Reuters, Microsoft has signaled it may abandon negotiations altogether if a new deal cannot be reached soon. In that scenario, Microsoft would rely on its existing contract, which remains valid through 2030. (source)
OpenAI's Countermove: Accusations of Anti-Competitive Behavior
Facing stalled negotiations, OpenAI is reportedly considering accusing Microsoft of anti-competitive practices. This so-called "nuclear option" could involve filing complaints with regulators such as the FTC or DOJ and launching a public campaign to pressure Microsoft. (source)
Timeline Pressures and Financial Stakes
OpenAI must complete its conversion to a for-profit Public Benefit Corporation by the end of the year to secure critical funding. Delays could reduce SoftBank’s pledged $30 billion investment by $10 billion. Additionally, if Microsoft does not approve changes within six months, its existing investments could convert to debt. OpenAI is also diversifying its partnerships, working with Google Cloud, Oracle, and securing a $200 million U.S. Department of Defense contract to reduce its dependence on Microsoft.
Key Questions Moving Forward
- Will Microsoft ultimately walk away from the deal?
- Will OpenAI pursue antitrust claims?
- Can both sides reach an agreement before the year-end deadline?
Conclusion
This tense negotiation represents a pivotal moment for the AI industry. Issues around the AGI clause, revenue-sharing, and equity highlight the power dynamics and strategic stakes involved. As OpenAI aims to go public and diversify, Microsoft’s leverage and willingness to walk away introduce uncertainty that could reshape their collaboration and the broader AI landscape.