Microsoft is getting ready to bet the farm on artificial intelligence startup OpenAI—and might even get Google’s goat in the process.
Fortune’s Jessica Mathews and Jeremy Kahn reported Tuesday that Microsoft officials are preparing to invest as much as $10 billion in OpenAI, the company behind last year’s generative A.I. hits ChatGPT and DALL-E 2. The deal, if consummated, would mark the fourth-largest financial commitment to an outside company in Microsoft’s history, trailing only its acquisitions of Activision Blizzard, LinkedIn, and Nuance. (The Activision Blizzard purchase is pending regulatory approval.)
If the two sides reach an agreement, and OpenAI can attract more funding from venture capital firms, the startup’s valuation could soon approach $30 billion. Microsoft and OpenAI have not commented on the potential transaction, which was first reported by Semafor.
The reported deal would further solidify the symbiotic relationship between Microsoft and OpenAI, which burst into the broader public consciousness last year following the release of its remarkable chatbot and text-to-image generator.
Microsoft became OpenAI’s “preferred partner” for commercial uses of its technologies after investing $1 billion in the startup in 2019. OpenAI, in turn, used the money to pay for expensive development costs and agreed to build its technologies on the Microsoft Azure cloud platform. (OpenAI only generated roughly $35 million in revenue last year, though it’s forecasting sales of $1 billion by 2024, Mathews and Kahn reported.)
Then, as the ChatGPT chatbot took the internet by storm late last year, The Information reported that Microsoft now wants to integrate the technology into its flagging Bing search engine and suite of software tools, including Microsoft Word and Outlook.
For now, the potential impact of OpenAI’s technology on Microsoft’s business remains largely theoretical. ChatGPT is still buggy, prone to errors, and out-of-date (its knowledge base doesn’t extend beyond 2021). OpenAI co-founder and CEO Sam Altman has admitted as much, tweeting last month that ChatGPT is “incredibly limited, but good enough at some things to create a misleading impression of greatness.”
The promise of generative A.I., however, is enough to warrant Microsoft’s interest in the startup. Industry leaders envision a potential revolution in search, enterprise software, programming, and myriad other sectors that could benefit from intelligent automation.
Up to now, Google parent Alphabet has led Big Tech’s foray into consumer- and enterprise-facing generative artificial intelligence.
The search giant has smashed all challengers with its superlative, A.I.-powered engine, taking more than 90% of search market share. Its A.I. subsidiary, DeepMind, boasts some of the deepest pockets in the industry, spending $3.8 billion between 2017 and 2021. (Alphabet also is deep into development of large-language models similar to ChatGPT, though CNBC reported last month that company executives are keeping them under wraps for now because the reputational costs of any product issues outweigh the benefits of a public release.)
While Microsoft still has a long road to catching Alphabet, particularly on the search front, its potential commitment to OpenAI at least signals an appetite and opportunity for competing in the space.
Insider reported last week that DA Davidson’s director of research, Gil Luria, saw Microsoft’s connection with Open AI as a “once-in-a-decade opportunity to unseat Google’s search dominance.” KeyBanc analysts added Monday that OpenAI’s arrival could become a near-term overhang on Google’s stock.
“Based on our conversations, we believe investors are increasingly questioning whether this collaboration could turn into a competitive headwind for Google,” KeyBanc analysts wrote in a research note, according to Barron’s.
Alphabet surely isn’t going out to pasture anytime soon, but if the purported Microsoft-OpenAI deal goes through, the next several years will separate the wheat from the generative A.I. chaff.
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Jacob Carpenter
