Microsoft has a surprising and powerful new competitor in its attempt to dominate the generative AI market – OpenAI, the company behind Microsoft’s genAI products, in which Microsoft has invested $13 billion, and whose technology is the sole reason Microsoft has taken the lead in genAI.
That competition began in late August, when OpenAI launched ChatGPT Enterprise. The company claims “offers enterprise-grade security and privacy, unlimited higher-speed GPT-4 access, longer context windows for processing longer inputs, advanced data analysis capabilities, customisation options, and much more.” And, according to OpenAI, the tool is “an AI assistant for work that helps with any task, is customised for your organisation, and that protects your company data.”
If you’re confused about how OpenAI can go head-to-head with its biggest investor and partner, join the club. So let’s look at why that’s possible, exmaine how Microsoft and AI went from partners to frenemies, and delve into whether OpenAI’s move could put a serious dent into Microsoft’s plans to own the genAI market.
Understanding Microsoft’s investment in OpenAI
Microsoft’s investment in OpenAI is an unusual and complex one, as is the history of OpenAI itself. The company was founded in 2015 as a non-profit AI research lab and included a host of well-known founders and partner companies. Among them: Elon Musk, Amazon Web Services, PayPal co-founder Peter Thiel, LinkedIn co-founder Reid Hoffmann, and others. Founders and partner companies funded OpenAI to the tune of $1 billion.
In 2018, Musk resigned from the board. In 2019, OpenAI restructured to become a “capped” for-profit company, which allowed it to attract investors and raise more money. The earliest investors in OpenAI had their potential profits capped at 100 times what they invested. Later investors had their potential profits capped at a lower rate.
That’s the year that Microsoft first invested in OpenAI, initially with $1 billion, then with an additional $2 billion. In January 2023, Microsoft invested another $10 billion, making it OpenAI’s largest investor. (Note: Microsoft is considered a late investor, because it wasn’t part of the original group funding OpenAI.)
That investment allows Microsoft to use all of OpenAI’s models across its entire line of products. The myriad AI-driven Microsoft Copilots include those for Bing, GitHub, Microsoft 365 (formerly called Microsoft Office), Teams, and Microsoft Dynamics 365 ERP. All are powered by OpenAI technology. So is Microsoft’s Azure OpenAI Service, which allows enterprises to build their own AI apps.
Nothing in the deal bars OpenAI from launching its own products, even those that compete directly against Microsoft.
OpenAI’s ChatGPT Enterprise versus Microsoft
OpenAI’s ChatGPT Enterprise is the business version of ChatGPT, which took the world by storm after it was launched in late November 2022. It directly competes with Microsoft Bing Chat Enterprise, Microsoft’s business-focused chatbot.
OpenAI is hoping that businesses will turn to it rather than Microsoft for enterprise-focused features such as compliance with the SOC 2 (System and Organization Controls 2) security standard established by the American Institute of Certified Public Accountants (AICPA). There is also an admin console for doing things such as allowing single sign-on and domain verification.
ChatGPT Enterprise won’t compete against Microsoft’s Copilot tools for for Microsoft 365 and Teams, because Copilots piggyback directly onto Microsoft products, something ChatGPT Enterprise can’t do. That’ll make it very tough for ChatGPT Enterprise to put a dent into Microsoft’s genAI ambitions.
Microsoft envisions a seamless AI experience throughout its entire product line for enterprises, something OpenAI won’t be able to provide because ChatGPT Enterprise is a single standalone product. As a result, there’s a reasonable chance many companies that use Microsoft’s Copilots will opt for Bing Chat Enterprise rather than ChatGPT Enterprise.
And Microsoft might well be helped by ChatGPT Enterprise, not hurt by it. It could help further publicise how chatbots can be used by businesses, and Microsoft can point out that its products give companies the best of both worlds — the power of ChatGPT Enterprise, combined with AI embedded into the products businesses use most.
If ChatGPT succeeds, Microsoft would win in another way as well. The terms of its investment in OpenAI give Microsoft 75% of OpenAI profits until its $13 billion investment is paid back, according to Fortune. After that $13 billion is paid back, the magazine says, Microsoft gets 49% of OpenAI’s profits until it earns a profit of $92 billion. After that, Microsoft receives no more profits.
So, Microsoft has many reasons to hope OpenAI succeeds — more than $100 billion of them. Ultimately, Microsoft can’t lose, no matter what happens. It’s already taken the lead in genAI thanks to its deal with OpenAI. And it gets the lion’s share of OpenAI profits as well, until it receives $100 billion.
Because of all this, and especially because of its sizable lead in genAI, the deal with OpenAI could prove to be as decisive for Microsoft as the one it signed decades ago to provide the operating system for IBM’s original PC.