Microsoft Funded a Competitor in OpenAI
Azure Growth, equity, OpenAI revenue, sure - but what did they give up?
Hey there, I hope you had a good summer. This Newsletter is back to its usual cadence.
While funding OpenAI has benefited Microsoft in some ways and Azure’s growth and getting a cut of OpenAI’s revenue and some equity, I believe history will show it will be a net loss for Microsoft.
When incumbents fund BigAI firms like OpenAI and Anthropic, they risk disrupting themselves in the process and making their own models and AI products obsolete. I think with Microsoft we’ve very much seen ChatGPT Enterprise cut into Microsoft’s revenue and own ability to compete in any B2C sense, which doesn’t bode well for the future of Microsoft’s own AI models.
Microsoft’s recently announced in-house models that were in fact were very disappointing. The relationship between Microsoft and OpenAI has cleared gone considerably south and downhill as well. And it’s only getting worse. Even getting access to OpenAI’s model hasn’t benefited Microsoft with Copilot or their other products the way they would have hoped. The execution has been bad. And they are already behind in AI.
At issue, according to a Wednesday (Aug. 27) Financial Times (FT) report, are the artificial intelligence (AI) startup’s negotiations with Microsoft, which could complicate plans for a multi-billion dollar fundraising effort. I rarely go in to Copilots Lab at this point, Microsoft has once again become obsolete in the future of AI.
All that’s left is their disputes with OpenAI on their “AGI” terms among other corporate nonsense. Microsoft funded OpenAI to at least the tune of $13 Billion and you can say that Satya’s incentives basically got Microsoft scammed. Anyone could have seen this coming a while away.
Microsoft’s legal negotiations with OpenAI mean the two sides still can’t agree on a few key issues (after already many months), with an impasse that could push negotiations past Dec. 31. Clearly the two sides have done each other wrong, where a failure to reach an agreement in 2025 would complicate the restructuring (OpenAI) before then that allow Japanese conglomerate SoftBank to withhold a $10 billion commitment to OpenAI and could hinder the company’s efforts to raise more capital. Given the flop that was GPT-5, it’s getting very messy. With a private valuation that isn’t taking into consideration the competitive risks of how fast Anthropic, xAI, Google and China are progressing, it’s not looking good.
Microsoft’s own in-house models MAI-1-preview and MAI-1-Voice-1 are about as inconsequential as you can get. Microsoft currently receives 20% of OpenAI's revenue as part of their partnership agreement, which is set to last until 2030. Microsoft thinks it deserves a sizeable amount of equity in the new OpenAI restructuring, but the stock has been diluted so much due to an exaggerated private valuation of up to $500 Billion. This is not good!
OpenAI wants to transform its for-profit arm into a public benefit corporation overseen by its nonprofit parent and likely go IPO in a gigantic payday while the AI hype narrative is still boosting the stock market higher mostly due to Nvidia providing the GPUs for these huge compute warehouses to serve demand for compute that is being artificially inflated by things like reasoning models, AI agents, inference, test time compute and ever bigger models. Sort of like a sci-fi version of a ponzi scheme. Coupled with ChatGPT’s dramatic rise in subscription revenue Microsoft has clearly gotten the shorter end of the stick 🤯.
Microsoft AI chief Mustafa Suleyman doesn’t seem to like Sam Altman and really looks completely lost in the new Generative AI race (out of touch), where Microsoft outside of Azure really might not perform well. OpenAI has a lot of future plans with Oracle, and is even using CoreWeave and Google Cloud.
Microsoft is looking extremely incompetent in this transaction even though it was the main and key early investor that enabled the world to have this ChatGPT moment and OpenAI’s false advertising hype narrative around so-called AGI. It will be key for them to get decent equity and a favorable deal although that’s looking increasingly unlikely with OpenAI’s stellar B2C chatbot growth. Even as OpenAI is starting to lose its edge in its ability to compete in frontier and SOTA models, especially when it comes to AI coding. Meanwhile Google DeepMind has had a really good year - weaking Microsoft’s leverage and OpenAI’s future trajectory.
Microsoft is supposed to have exclusive access to OpenAI’s application programming interfaces (APIs) and models on Azure, revenue-sharing arrangements, and access to OpenAI’s intellectual property until 2030. But it all seems to be unravelling as OpenAI is proving to be a very difficult partner and extremely manipulative - not a big surprise when you consider Sam Altman’s history.
Microsoft’s relationship with OpenAI has fractured beyond repair
I just wonder how little Microsoft will be left with at the end of the day - as obliviously is supposed to have exclusive rights to host OpenAI’s models on its Azure cloud service, making it a key gatekeeper to the technology. In 2025 that no longer appears to be reality though. The (FT) sources say that OpenAI is lobbying for additional partnerships with Google and Amazon Web Services to increase its API revenues. Microsoft not only funded a competitor but is likely to be defrauded by them in the process. 😲 There’s no other honest way to put it.
Hilariously Github Copilot now mostly uses Claude Code to drive revenue. But importantly, OpenAI has proposed exchanging Microsoft’s entitlement to future profits for a 33% equity stake in the restructured entity, but Microsoft seeks to retain broad access to OpenAI’s intellectual property (IP) and technology, including any acquired through deals like the $3 billion Windsurf acquisition. That’s not likely going to happen. With OpenAI’s push into devices, social networks and other shiny B2C efforts to extend ChatGPT’s cash cow status into a real ecosystem, it can’t give in to the old and greedy behemoth.
Relying on OpenAI’s models has also made Microsoft lazy and incapable of executing on AI with the talent it’s been able to attract and retain. BigAI is likely to disrupt Apple, Microsoft, Amazon and Meta in a significant manner, whether they try to keep up or not. BigAI means OpenAI, xAI, Anthropic, DeepSeek, Qwen (part of Alibaba), Thinking Machines Lab and others.
The legal disputes also arise from the insincerity of OpenAI’s mission overall. The companies are also haggling over Microsoft’s future access to OpenAI’s intellectual property (IP), the sources said, as well as the “AGI clause” in the companies’ contract. This gives OpenAI the right to cut off Microsoft’s IP access if and when the startup achieves “artificial general intelligence” (AGI), which the companies define as “a highly autonomous system that outperforms humans at most economically valuable work.” Microsoft and OpenAI set this to be about the $100 Billion revenue level. OpenAI has meanwhile been telling investors it can be profitable by 2029, while forking 20% of its revenue to Microsoft in the process. 😕
How Poor judgement can lead to Future Losses
Investing in OpenAI will be in the long-term one of the worst decisions Microsoft has ever made, although for short-term revenue it seemed genius, at first.
OpenAI started out in 2015 attempting to be or have a mission to be a responsible, ethical AI-developing company. Of course when they accepted funding from Microsoft this quickly deteriorated with most of their co-founders leaving the company, many to start their own competitors. One day ChatGPT will just be known as the catalyst the kicked off the compute warehouse frenzy. While Microsoft’s Azure has been growing in flying colors (due to OpenAI), and Microsoft’s balance sheets are very rosy in 2025, they don’t tell the whole story. Microsoft has limited capability to compete in Generative AI moving forwards and OpenAI’s ability to build LLMs is waning fast.
As soon as OpenAI claim they have reached “AGI”, the lights go out on Microsoft’s future participation in Generative AI for the most part. If you work at Microsoft, it’s a problem. How could they have agreed to such a deal? Not only did they fund a competitor, but they got themselves into very murky legal waters. Under the companies’ current deal, Microsoft would lose access to any new technology from OpenAI when that company’s board determines it has developed AGI. Sam Altman is essentially the SBF of AI.
BigAI will likely disrupt Incumbents and some BigTech firms
Microsoft has invested over $13 billion in OpenAI since 2019, leveraging this partnership to power much of its AI cloud services and integrate OpenAI's technology into Microsoft products like Azure and Microsoft 365 Copilot. However just six years later, Microsoft is looking like a real loser in this deal. It’s not so much that they haven’t seen ROI as it destroys their future prospects in software, operating systems, and the ability to compete in LLMs. OpenAI’s contribution to Azure growth, ($75 billion in fiscal 2025, up 34% from the prior year) has been tremendous but it’s made Microsoft almost irrelevant in Enterprise AI giving it less leverage in negotiations in OpenAI’s restructuring.
Apple, Microsoft, Amazon and even Meta really do look out of their leagues in this new trend. Only Google and Alibaba have really managed to capitalize on LLMs and new AI products in a satisfactory way. Meta’s failures with Llama are rather serious for its going-future. With xAI and Anthropic ramping up, BigTech will be left behind. Microsoft has done this, while funding the movement that is most likely to disrupt them in the not so distant future.
Microsoft funded a competitor and likely made themselves obsolete simply out of their greed and an opportunistic CEO who claimed AI was going to be a big deal. While Microsoft’s business model on paper looks super diversified, none of those pieces are sure bets if BigAI continues to scale the way they are likely to do. They will build competing operating systems, software services, Cloud and datacenter businesses, and the works.
Microsoft literally has no idea what’s coming for it. The lawyers involved in the deal with OpenAI, really screwed them over.