The European Union is currently assessing whether Microsoft’s investment in OpenAI, a leading generative AI firm, falls under its merger review regulations. This announcement follows a dramatic series of events at OpenAI last November, where the board controversially voted to remove founder and CEO Sam Altman. In response, Microsoft swiftly intervened, announcing it would hire Altman and offering positions to any OpenAI employees wishing to leave amid the turmoil.
This situation culminated in Altman's return as CEO and the formation of a new board, resulting in the departure of several members who had voted for his ousting. Notably, Microsoft secured a seat on the board as a non-voting observer for the first time. The ongoing relationship between Microsoft, which holds a 49% stake in for-profit OpenAI controlled by its nonprofit board, seems to have piqued the interest of competition regulators.
Last month, the UK's competition authority initiated a review to determine if Microsoft and OpenAI are involved in a "relevant merger situation." Their call for comments closed on January 3, but the scrutiny process is still active. Similarly, Germany’s Federal Cartel Office (FCO) evaluated the partnership last fall and concluded that their collaboration was not currently subject to merger control. However, it cautioned that if Microsoft's influence over OpenAI were to increase, this decision would warrant a reassessment.
Today's announcement from the EU aligns with its new initiatives to enhance understanding of competition in innovative sectors. The EU is seeking feedback from stakeholders about competition levels in both virtual worlds and generative AI, emphasizing the importance of keeping these markets competitive. The deadline for submitting insights is March 11.
“The European Commission will meticulously analyze all contributions received,” the agency stated. “Following this review, we may organize a workshop in the second quarter of 2024 to further explore diverse perspectives.” Additionally, the Commission is examining agreements between major digital market players and generative AI developers to assess their influence on market dynamics.
“We are investigating whether Microsoft’s investment in OpenAI is subject to review under the EU Merger Regulation,” the Commission clarified.
Margrethe Vestager, the EU's competition chief, commented: “As virtual worlds and generative AI rapidly evolve, it's crucial that these new markets remain competitive and do not hinder innovation.” The Commission is inviting insights from businesses and experts regarding any potential competition issues in these sectors while closely monitoring AI partnerships.
A Commission spokesperson refrained from confirming which major digital players had been approached for information pertaining to the generative AI market, noting that there are currently no identified concerns regarding competition in this area. “Gathering information swiftly is essential for us to understand these markets comprehensively. For now, we have not identified any particular concerns, but we will analyze the input received,” they stated.
A transaction may require notification under EU Merger Regulation if it changes control on a lasting basis. Should that occur, the Commission would be empowered to investigate the impact on competition, including potentially revoking the transaction if necessary, similar to past interventions like the one involving Facebook and Giphy in 2021.
“While this transaction has not been formally notified, the Commission remains closely attentive to the control dynamics over OpenAI, particularly Microsoft's role on its board and the investment agreements,” the Commission spokesperson added without speculating on future steps.
Responses from Microsoft and OpenAI regarding the EU's announcement have been requested. A Microsoft spokesperson highlighted the ongoing strategic partnership with OpenAI, stating: "Since 2019, we’ve developed a collaboration that has driven AI innovation and competition while maintaining independence for both companies. The only recent change is that Microsoft now has a non-voting observer position on OpenAI’s board."
In light of the EU’s renewed approach to digital competition, particularly with the Digital Markets Act (DMA) targeting internet gatekeepers, regulatory challenges may arise. The DMA’s guidelines, drawn from past experiences with Big Tech, may feel somewhat outdated before the compliance deadline for designated firms. Although Microsoft has been labeled a gatekeeper under the DMA in relation to its Windows OS, it is leveraging its cloud infrastructure to gain a competitive edge in the rapidly evolving generative AI landscape through its partnership with OpenAI.
Whether the DMA can effectively curb the capital of large tech firms leveraging their extensive cloud capabilities to dominate the generative AI sector remains uncertain. Traditional merger regulations could serve as a robust regulatory check against potential overreach from tech giants, assuming authorities can effectively apply these rules. Structured collaborations between tech giants and AI startups are likely designed to sidestep regulatory action, prompting questions about the EU's ability to pursue scrutiny of the Microsoft-OpenAI relationship.
The FCO previously noted that national merger laws did not apply but indicated that a deepening partnership would necessitate a reevaluation of this conclusion, particularly given recent events at OpenAI. Advocacy groups for digital rights and competition are urging regulators to take proactive measures.
A coalition of organizations, including the Irish Council for Civil Liberties, the Open Markets Institute, and the Mozilla Foundation, submitted a plea to the UK competition authority today, urging an investigation into Microsoft's investments in AI. Their statement cautioned that "weak antitrust enforcement has allowed a few dominant tech firms to control vast portions of the digital economy."
The coalition argues that AI innovation should be diverse, competitive, and responsive to the needs of stakeholders, warning that regulators must act decisively against anti-competitive practices in the AI field to prevent oligopolistic control from increasing.
Microsoft and OpenAI’s alliance now faces scrutiny from several regulatory bodies regarding its implications for competition.
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