Microsoft & OpenAI Break Up But Stay Friends with Some Benefits

THE GIST

Sam Altman made it official bright and early Monday morning: OpenAI is seeing other people.

Microsoft will stay the ChatGPT-maker’s “primary” cloud partner, but OpenAI can now serve products across any cloud.

Microsoft’s stock promptly dumped on the announcement, recovered, and is now trading red 0.37% at the time of writing.

WHAT HAPPENED

The official reason for OpenAI’s and Microsoft’s seemingly amiable shift from monogamy to polyamory is the same justification AI companies have been screaming at the rest of the world: Get on board or get left behind.

In a joint statement from both companies, OpenAI and Microsoft explained that because of this unavoidable, inescapable “rapid pace of innovation,” they are now seeing it as necessary to “evolve” their partnership to selflessly “benefit our customers and both companies.” This “amended agreement” is meant to “simplify” their partnership while remaining focused on the broader end goal of “delivering the benefits of AI broadly.” Both companies’ main prerogatives here are to “build and operate AI platforms at scale” while looking ahead to “new opportunities.”

Favorable preambles aside, this announcement feels like OpenAI and Microsoft are telling the kids they’re getting divorced.

Microsoft will remain OpenAI’s “primary” cloud partner, and any updated model and product will ship to Azure first. If Microsoft doesn’t want them for any reason, they can choose “not to support the necessary capabilities.” Probably the biggest line in this section is that OpenAI can now serve its products to customers “across any cloud provider.” Before, they were tied to Microsoft as an exclusive host and IP licensee. Those days are over, which means they will start splitting capacity across Azure, AWS, Oracle, CoreWeave, and more. If you thought OpenAI’s inference costs were high now… just wait.

Microsoft will no longer have to pay a revenue share to OpenAI. Based on numbers from TechCrunch, this is around 20% of Bing and Azure OpenAI revenue, which could be a likely high-hundreds-of-millions-per-year revenue stream from Microsoft just for OpenAI to buy their freedom. The real kicker is Microsoft is still getting paid by OpenAI “through 2030,” but is now “subject to a total cap,” which remains confidential, though rumors suggest 20%.

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The biggest red flags in this announcement were, as we’ve grown accustomed to, the things not said: where does this leave Microsoft, where is OpenAI getting the money to do this, and what happened to AGI?

WHY IT MATTERS

This mild breaking up of two of the biggest tech/AI companies was a long time coming, with tiered announcements released throughout the year. Microsoft’s biggest problem, which is likely to be reflected in future earnings reports via its cloud segment, is Azure. Azure’s remaining Performance Obligations (RPO) totaled $625 billion, of which 45% was from OpenAI-related business activities. CFO Amy Hood even told investors on the company’s second-quarter earnings call not to worry about the concentration.

Given that OpenAI is going multi-cloud, that worry has shifted from being too concentrated to possibly not existing at all in the future. This will certainly be something to watch in the next few days as Microsoft prepares for its Q3 earnings and possibly addresses whether OpenAI’s future share of RPO is stable, rising, or being offset.

OpenAI officially closed its biggest-ever funding round at $122 billion at the end of March. Their valuation now sits around $852 billion, and OpenAI has also raised $3 billion from individual retail investors for the first time, reports CNBC.

They got what they wanted from Amazon, Nvidia, and Softbank, but with requirements. Amazon has to see OpenAI go public or reach AGI, $35 billion is on the line there. SoftBank backed its commitment with a $40 billion unsecured bridge loan arranged by JPMorgan, Goldman Sachs, and other big banks. Nvidia is running the same playbook: OpenAI winning means they continue to buy its hardware. All that money ends up in the same operating pool that pays out everything from salaries, compute, infrastructure buildout, model development, and yes, the 20% revenue share to Microsoft running through 2030.

WHAT’S NEXT

To reiterate, OpenAI is not scheduled to be cash flow positive until 2030. Without Microsoft’s revenue, OpenAI’s ability to write any check is more dependent than ever on continued access to outside capital, putting them in probably the most precarious position they’ve ever been in.

Obviously, these companies are the biggest and most powerful in the world, but if, for any reason, they have to tighten their belts and OpenAI needs more money to IPO or “reach” AGI, what exactly happens to their roadmap? Does it stall completely?

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