Microsoft's initial $1 billion investment in OpenAI in 2019 went mostly unnoticed as startup funding in artificial intelligence (AI) was commonplace. Fast forward three years, and AI, specifically generative AI, has become the standout sector as startup funding has dropped off.
OpenAI, the San Francisco-based company, introduced ChatGPT in November, a chatbot that went viral due to its human-like responses. Microsoft's total investment in OpenAI now reportedly stands at $13 billion, and the startup's valuation has reached around $29 billion.
Microsoft is more than just an investor; it's the exclusive provider of computing power for OpenAI's research, products, and programming interfaces. As a result, startups and multinational companies are rushing to integrate their products with OpenAI, translating into a massive workload for Microsoft's cloud servers.
Microsoft is incorporating OpenAI technology into various products, including Bing, sales and marketing software, GitHub, Microsoft 365, and Azure cloud. Michael Turrin, a Wells Fargo analyst, estimates this could generate over $30 billion in new annual revenue for Microsoft, with approximately half coming from Azure.
The financial implications are complex, as OpenAI's unique capped-profit structure restricts early investors' returns, with lower returns for later investors such as Microsoft. After recouping its investment, Microsoft will receive a percentage of OpenAI LP's profits up to an agreed cap, with the remainder going to the nonprofit body.
Despite concerns from Elon Musk, one of OpenAI's founders and early backers, about the company's unconventional structure and Microsoft's influence, the partnership could significantly boost Microsoft's AI presence.
Microsoft's exclusive license on OpenAI's GPT-4 model and other models offers a potential competitive edge. However, Quinn Slack, CEO of code-search startup Sourcegraph, remains skeptical about whether the partnership has given Microsoft a notable advantage.
While skeptics question the technology's safety and privacy, the more likely future for OpenAI is an eventual IPO, according to Scott Raney, a managing director at Redpoint Ventures. OpenAI's spokesperson stated that there are no plans for an IPO or acquisition at this time.
