Microsoft and OpenAI reach deal

Microsoft and OpenAI announced a deal to allow the ChatGPT maker to restructure itself into a public benefit corporation, cementing CEO Sam Altman's power within the AI world and giving the startup more freedom to expand its empire. 

The deal removes a major constraint on raising capital for OpenAI that has existed since 2019, when it signed a deal with Microsoft that gave the tech giant rights over much of OpenAI's work in exchange for costly cloud computing services needed to carry it out.

But once AI assistant ChatGPT exploded in popularity three years ago, those limitations sparked significant tension between the two firms.

Altman will not get equity in the restructured company, an OpenAI spokesperson said, in a reversal from discussions last year that would have given him a stake.

The spokesperson added there will be no changes to his compensation from OpenAI, which pays him some US$76,000 ($115,350) a year. 

The company has no plans to focus on a potential public offering, the spokesperson said. 

The discussions to restructure OpenAI started after Altman was unexpectedly pushed out of OpenAI temporarily.

The episode in late 2023 highlighted how the startup's unusual structure limited the power of its investors and business partners, such as Microsoft. 

The new OpenAI Group PBC will function a little more like a traditional company, giving Altman more power to strike deals and shape the broader AI industry.

Microsoft will not have rights to any consumer hardware produced by OpenAI, and no longer has the right of first refusal to be OpenAI's compute provider. 

Even so, Microsoft will hold a 27 percent stake in OpenAI and remain a significant player in its future.

OpenAI will continue to share about 20 percent of its revenue with Microsoft for years to come, people familiar with the matter said.  

Microsoft's stake

Microsoft will still hold a stake of about US$135 billion ($205 billion) in OpenAI Group PBC, which will be controlled by the OpenAI Foundation, a nonprofit, the companies said. 

The Redmond-based firm has invested US$13.8 billion in OpenAI, with this new deal implying that Microsoft had generated a return of nearly 10 times its investment.

Microsoft shares rose 2.1 percent, sending its market value above US$4 trillion again.  

The deal keeps the two firms intertwined until at least 2032, with a massive cloud computing contract and with Microsoft retaining some rights to OpenAI products and AI models until then, even if OpenAI reaches artificial general intelligence (AGI), the point at which AI systems can match a well-educated human adult.

OpenAI and Microsoft expect to end the revenue-share agreement once an independent panel declares AGI, but OpenAI can also make those payments later.

Both companies declined to say when they expect those commitments to end. 

With some 800 million weekly users as of October, ChatGPT has exploded in popularity to become the face of AI for many consumers after OpenAI's founding as a nonprofit AI safety group.

As the company grew, the Microsoft deal constrained OpenAI's ability to raise funds from outside investors and secure computing contracts as the crush of ChatGPT users and its research into new models caused its computing needs to skyrocket. The requirement that OpenAI exclusively rely on Microsoft for computational resources was among the largest sources of tension. 

"OpenAI has completed its recapitalization, simplifying its corporate structure," Bret Taylor, the OpenAI Foundation's board chair, said in a blog post.

"The nonprofit remains in control of the for-profit, and now has a direct path to major resources before AGI arrives."

Taylor and other board members - including Altman - have the power to appoint and remove members of the PBC's board.

The OpenAI Foundation has a 26 percent stake in OpenAI Group and a warrant to receive additional shares if the company hits certain milestones. 

Microsoft's previous 2019 agreement had many provisions that rested on when OpenAI reached that point, and the new deal requires an independent panel to verify OpenAI's claims it has reached AGI.

"OpenAI still faces ongoing scrutiny around transparency, data usage, and safety oversight. But overall, this structure should provide a clearer path forward for innovation and accountability," said Adam Sarhan, CEO of 50 Park Investments.

Gil Luria, head of technology research at investment firm DA Davidson, said the deal "resolves the longstanding issue of OpenAI being organized as a not-for-profit (organisation) and settles the ownership rights of the technology vis-à-vis Microsoft.

"The new structure should provide more clarity on OpenAI's investment path, thus facilitating further fundraising."

Microsoft also said that it has secured a deal with OpenAI where the ChatGPT maker will purchase US$250 billion of Azure cloud computing services. In exchange, Microsoft will no longer have the right of first refusal to provide computing services to OpenAI.

In March, OpenAI bought longtime Apple design chief Jony Ive's startup io Products in a US$6.5 billion deal.