Just how significant could Microsoft’s deepening relationship OpenAI prove to be?

The tech giant is keen to close a new $10 billion investment deal with the AI company behind Chat-GPT. Here’s how the strengthening relationship could be pivotal to Microsoft’s future.

Before the end of January, Microsoft are expected to conclude a new $10 billion investment deal with OpenAI, the company behind the ChatGPT natural language processing tool causing a sensation. It’s a huge sum in the current economic environment, especially in a company that isn’t expected to be profitable any time soon.

But Microsoft clearly has a huge amount of interest in what OpenAI is doing and sees access to the machine learning technology behind ChatGPT and the AI image generator DALL-E 2 as potentially crucial to its future. In a recent newsletter, Fortune magazine’s Jessica Mathews also writes that based on documents she has seen, it appears Microsoft’s current investment in OpenAI is $3 billion, rather than the $1 billion publicly reported.

Microsoft’s investment in OpenAI is long term and strategic but the company is demonstrating that it sees the relationship as extremely important. However, it’s not a standard investment structure because OpenAI itself has an alternative model. Originally established as a not-for-profit research lab, OpenAI subsequently reached the conclusion its research would be best served also establishing a commercial arm.

The for-profit business was set up in a way that means any return is capped. Mathews reports Microsoft would be able to, at best, realise a return of $96 billion on a combined $13 billion investment. That’s not bad if it comes off but also far removed from the kind of best-case-scenario returns that would normally be hoped for when investing $13 billion in a start-up that barely generates any revenues, never mind profit.

How much of OpenAI could Microsoft own?

While the future commercial potential OpenAI’s technology could be huge, it is also a theoretical possibility and one not expected to be realised in the short or even medium term. The terms of Microsoft’s investment are reportedly favourable to the tech giant and mean that it will receive returns ahead of other investors when OpenAI starts to generate a profit – 75% of profits will flow to it until its investment is recouped.

Reuters reports the terms of the current funding round will see Microsoft left with 49% of OpenAI’s for-profit business once it has recouped its investment. Another 49% will be held by other investors and 2% by the not-for-profit OpenAI lab.

However, the motivation is undoubtedly more about access to the technology being developed than future returns based on its commercial success as a business. For now, through a deal announced in 2020, Microsoft has an exclusive license to use ChatGTP commercially within its products.

Why is the technology OpenAI is developing so significant?

OpenAI is developing generative A.I. technology it believes could eventually challenge the way everyday people access the internet (Google’s management team is reportedly worried about this possibility); The NLP tech that powers ChatGTP is also seen as leading to a universe of high-performing digital assistants that are more effective than humans.

Google, Amazon, Apple and other representatives of big tech like Oracle are also working on similar AI tools to OpenAI’s but Microsoft is betting on the latter’s having an edge. And eventually, OpenAI aims to become the first company to create computers that can think and learn, which could, says OpenAI CEO Sam Altman “be the most important technological development in human history”.

Could Microsoft-owned Bing re-emerge as a genuine challenger to Google thanks to OpenAI tech?

Microsoft has already announced, in late 2022, plans to integrate image-generation software from OpenAI into its search engine Bing. A recent report from the Information said there are similar plans around ChatGPT as Microsoft looks to take on Google Search, which currently dominates the global search engine market with a share of 92.58%. Bing’s current market share is a paltry 3%.

In Q3 2022, Google earned its holding Alphabet $39.5 billion from gross ad revenues from search alone, up 4.25% on the same quarter a year earlier, despite a worsening global economy.

Source: StatCounter

Google’s domination of search has grown almost unchallenged for the past two decades but Microsoft has always kept Bing ticking along in the background, despite its poor relative performance compared to the market leader’s near monopoly. It’s now starting to become clear why – Microsoft plans to mount a delayed challenge to Google’s search hegemony through a Bing newly supercharged by OpenAI’s technology.

It’s not a given that infusing Bing with ChatGPT and DALL-E 2 will see it challenge Google in search in the foreseeable future. While ChatGPT and other AI-powered chatbots can give convincing answers to specific questions, they still have a long way to go to match Google.

Last month, Altman warned that ChatGPT can give a “misleading impression of greatness” and shouldn’t be relied upon for factual queries. It also costs much more in computing power to generate an answer from a tool like ChatGPT than to perform a Google search.

Google, which in 2014 acquired the UK-based AI company DeepMind for $600 million, is also developing its own AI tools that are approximate equivalents to ChatGPT. How they compare is hard to tell as they are largely kept behind closed doors but last year the company dismissed a senior engineer, Blake Lemoine, who publicly claimed its LaMDA chatbot was sentient.

Lemoine told the Washington Post the chatbot had the perception and ability to express thoughts and feelings equivalent to a human child, saying “if I didn’t know exactly what it was, which is this computer program we built recently, I’d think it was a seven-year-old, eight-year-old kid that happens to know physics”.

Microsoft Office suite to embed an AI assistant

Microsoft is also reportedly exploring how to integrate ChatGPT in its Office suite of productivity tools, particularly Word, PowerPoint and Outlook. AI-infused Microsoft Office apps could potentially do everything from generate text based on simple natural language prompts, suggest responses to emails to translate text or analyse data in Excel.

Spreadsheet formula struggles would be a thing of the past with users simply explaining what they wanted to achieve in standard English and Excel setting up the necessary settings and formulas. Microsoft already has a significant moat when it comes to productivity software, which is one of its most profitable businesses. Further integration, it’s already used in a limited way, of ChatGPT would be expected to strengthen that market position.

OpenAI has competition

While Microsoft’s deepening relationship with OpenAI will almost certainly prove significant to its future development and maintaining its position as one of the world’s biggest and most influential companies, investors should temper expectations. ChatGPT and OpenAI’s other tools are impressive but they are not the only AI company working on similar technologies.

Google’s DeepMind has already been mentioned and Amazon, Apple and Facebook have also all invested heavily in their own in-house AI R&D, of which little has been publicly revealed. It’s unlikely that OpenAI’s technology is hugely further advanced than that of its major rivals.

Unlike many of its Big Tech peers, Microsoft has not focused on developing its own cutting edge AI technology in-house. In that context, its investment in and close relationship with OpenAI can be seen as a strategic move to compensate for that. Until we have more information on, for example, Google’s LaMDA chatbot technology we can’t really know if Microsoft’s exclusive commercial access to ChatGPT’s API will give it a powerful edge or not.

That AI tools will have a major impact on how we work and live over the next decade and beyond is becoming clear. However, the current buzz around OpenAI and ChatGPT could be more of a result of the public access to the tool that has been provided than the technology being streets ahead of competitors. We don’t really know yet if the relationship will allow Microsoft to power ahead of big tech rivals, or just help it keep up.