The management upheaval at OpenAI last month reached a swift conclusion with co-founder Sam Altman being reinstated less than a week after his unexpected dismissal. This period also marked a significant enhancement of Microsoft's involvement, as the tech giant secured a seat on OpenAI's board for the first time since it invested billions in the startup earlier this year. This closer relationship is now under scrutiny by the Competition and Markets Authority (CMA) in the U.K., which is investigating whether Microsoft and OpenAI are in a “relevant merger situation.”
Today, the CMA announced its interest and issued a formal “Invitation to Comment.” This process allows both companies and interested third parties to share their insights as the CMA considers its next steps, if any.
“This invitation is the initial stage of the CMA’s information-gathering process, preceding any formal Phase 1 investigation, which will commence once we have received necessary information from the parties involved,” stated Sorcha O’Carroll, senior director for Mergers at the CMA. The investigation process involves multiple stages and may lead to measures aimed at separating the two entities.
The term “relevant merger situation” categorizes various types of business relationships that can impact competition, even when there is no outright merger or acquisition involved. The CMA recognizes that “a wide range of transactions and arrangements may be deemed a relevant merger situation,” encompassing minority shareholdings and commercial partnerships.
This situation is particularly pertinent to Microsoft and OpenAI's relationship. Microsoft made a substantial investment last year, acquiring nearly 50% of OpenAI. Furthermore, both companies collaborate closely on a range of AI services, including several that leverage Microsoft’s Azure cloud platform.
As AI continues to evolve rapidly, Microsoft and OpenAI have emerged as significant players in the field. OpenAI has been at the forefront of developing large language models (LLMs) and related services. Microsoft has provided both financial backing and operational support during this period of unprecedented growth, and its involvement played a crucial role during last month’s organizational turmoil, which has now drawn the CMA's attention.
“There have recently been various developments in OpenAI’s governance, some of which involved Microsoft,” the CMA noted today.
While OpenAI has not fully explained the circumstances surrounding Altman and co-founder Greg Brockman’s ousting, Microsoft swiftly extended job offers to them and any other OpenAI employees who wished to leave in protest. After Altman and Brockman’s reinstatement, Microsoft celebrated its new board representation, albeit as a non-voting observer.
“The acceleration of artificial intelligence (AI) applications is unmatched in economic history, and advancements in powerful foundation models (FMs) signify a pivotal moment in the evolution of this transformative technology,” the CMA stated. The regulator's concern lies in the notion that, at this early stage, a small number of companies may hinder competition within the realm of foundation models. “The collaboration between Microsoft and OpenAI (including a multi-year, multi-billion dollar investment, joint technology development, and exclusive cloud service provisions from Microsoft to OpenAI) represents a close relationship between two firms with significant activities in FMs and related markets,” it added.
To be classified as a relevant merger situation under the country's Enterprise Act, several criteria must be met. Should the CMA decide to pursue a full investigation, these factors will certainly come into play. Key questions will include whether the two businesses in the AI sector are distinct enough, the revenue generated from their partnership (with a target of £70 million), and whether they combined account for over 25% of the relevant market. These are critical points that both sides may contest.
One perspective suggests that, regardless of whether this leads to a thorough investigation of the Microsoft/OpenAI partnership under merger regulations, it provides the CMA an opportunity to scrutinize their relationship and the activities of both entities. Given their prominence in the AI landscape, this scrutiny could inform the regulator's future decisions.
“Today’s announcement by the CMA indicating its consideration of an investigation into the Microsoft/OpenAI partnership under its merger control powers is especially notable amid broader concerns regarding AI regulation,” remarked Alex Haffner, competition partner at U.K. law firm Fladgate. “For the CMA to initiate a full investigation, they will need to find evidence that the recent fallout from the Sam Altman incident has significantly altered OpenAI's governance and, specifically, Microsoft’s influence. Nevertheless, even if the investigation does not advance further, this preliminary examination will enhance the CMA’s understanding of the governance framework that supports OpenAI and will be crucial for overseeing the rapidly evolving AI sector.”
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