OpenAI and Microsoft appear to have finally found common ground over a standoff that lasted almost the entirety of this year. The two companies, on Thursday, signed a non-binding memorandum of understanding (MoU) highlighting that it kickstarts the next phase of their partnership. While the details or the financial terms of the new deal are not known currently, a separate statement issued by the San Francisco-based artificial intelligence (AI) firm confirms that Microsoft is not stopping the conversion of its for-profit arm into a Public Benefit Corporation (PBC) or the non-profit part’s access to its equity.
New Microsoft Deal Lets OpenAI Non-Profit Gain Control Over PBC’s Equity
On Thursday, both companies made a joint statement and said, “OpenAI and Microsoft have signed a non-binding memorandum of understanding (MOU) for the next phase of our partnership. We are actively working to finalise contractual terms in a definitive agreement.”
While the short statement does not give away anything, it might have finally allowed OpenAI to go ahead with its PBC vision of generating revenue and removing the capped-profit mechanism, something the AI firm announced in May.
So, what was the holdup, and how does this MoU solve it?
According to The Verge’s report in June, OpenAI and Microsoft were in a strained relationship ever since the former’s announcement regarding the company’s change of structure. The reason was simple. Ever since 2019, the Windows maker has invested $13 billion (roughly Rs. 1.1 lakh crore) into the company. In return, it receives first access to all OpenAI models and a percentage of profit from both ChatGPT and its enterprise services.
Another term, which is now not in effect, made Microsoft the ChatGPT-maker’s exclusive cloud partner. The report claims that after the PBC announcement, the tech giant backed down from the cloud exclusivity clause; however, it did not provide OpenAI the approval to convert its business into a PBC.
Since Microsoft had a partnership contract, it had a contractual consent or investor right over any major changes to the structure of OpenAI’s for-profit arm. Since the conversion into PBC removes the 100x capped-profit mechanism, it could significantly affect the tech giant’s commercial terms. As a result, OpenAI required it, and Microsoft was reluctant to provide it.
The Verge reported that due to this stalemate, OpenAI executives were also considering accusing the Satya Nadella-led corporation of anticompetitive behaviour, bringing regulators into the frame for potential violation of antitrust laws.
However, it appears that both companies have found a way to amicably deal with the situation by signing a non-binding MoU, which should give OpenAI the right to formalise the conversion. This opens the path for the company to either seek more private investors, who will not be pushed away by the capped-profit mechanism, or push for an initial public offering (IPO) and let market forces determine its valuation.
In a separate statement, the AI firm said, “As previously announced and as outlined in our non-binding MOU with Microsoft, the OpenAI nonprofit’s ongoing control would now be paired with an equity stake in the PBC.”
OpenAI shared that the new equity stake will be more than $100 billion (roughly Rs. 8.8 lakh crore). The company emphasises that the growth of the PBC would mean an increase in the non-profit’s resources, which would then be used for “AI literacy and public understanding, community innovation, and economic opportunity.”
