As the tech industry observes Microsoft attract top executives and AI talent from OpenAI, the generative AI powerhouse in which it has already invested billions, a key question arises: what actions can competition regulators take concerning the mass movement of AI expertise and value into Microsoft's corporate ecosystem?
Recent reports indicated that the OpenAI board's attempt to reinstate CEO Sam Altman, after his abrupt removal, was unsuccessful. Altman has opted to join Microsoft as the head of a new AI research division, alongside President Greg Brockman and several prominent AI engineers, suggesting Microsoft is working to recreate OpenAI internally.
Additionally, a potential mass exodus of OpenAI personnel to Microsoft looms, with hundreds of employees signing a letter indicating they "may" resign unless the startup's board steps down and reinstates Altman and Brockman, along with two independent directors. This means OpenAI either revamps itself amid this turmoil, with Altman reinstated and accruing further power, or risks losing a significant portion of its talent should they follow through on their threat to transition to Microsoft's welcoming embrace. The letter made clear that Microsoft assured them of positions at the new subsidiary if they choose to join.
During these significant upheavals, Microsoft leadership has aimed to maintain a message of continuity. CEO Satya Nadella expressed confidence in their partnership with OpenAI and their product strategy in a recent post on X where he announced Altman's onboarding. He emphasized his excitement about collaborating with Emmett Shear and OpenAI's new leadership, projecting a “smooth operator” tone.
Nadella’s public messaging targets both Microsoft investors and vigilant competition regulators. For investors, it conveys calm and reassurance, while for regulators, it indicates that Microsoft is still merely an “OpenAI partner” and not in full control of the AI landscape.
This aligns with Microsoft's strategic investments in OpenAI over recent years, reportedly keeping its stake below 49% to remain a minority investor. This lower stake may allow Microsoft to evade merger control scrutiny from regulators, as it bypassed the thresholds that could trigger formal competition reviews of its burgeoning generative AI strategy that Nadella has heavily invested in.
However, the evolving relationship between OpenAI and Microsoft resembles a merger in essence. Microsoft has previously faced regulatory scrutiny and has recently navigated a challenge from U.K. competition authorities regarding its $68.7 billion acquisition of Activision. To address the concerns, it proposed divesting most of Activision's cloud-streaming rights to Ubisoft, successfully flipping a U.K. CMA roadblock into approval.
Despite this, the merger control process serves as a critical check on tech giants’ ambitions, meaning that avoiding formal review is optimal. This fast-evolving situation with Microsoft and OpenAI could, however, ignite regulatory concern given the high stakes in the AI market.
“Regulators seem constrained in their ability to intervene effectively,” said Cristina Caffarra, a leading competition economist. She noted that the situation primarily involves retaining a few executives rather than acquiring a controlling interest in a firm or asset. However, should Microsoft secure a seat on OpenAI's board, it might trigger closer regulatory scrutiny as that could be defined as a “change of control.”
Microsoft’s stronghold in cloud computing is pivotal for its AI ambitions, enabling it to offer essential infrastructure for AI training. There are concerns that market dominance in one sector could be leveraged to exert control in others. Yet, regulatory authorities must function within existing frameworks, which can impose significant limitations.
Recently, Germany's Federal Cartel Office (FCO) assessed Microsoft's collaboration with OpenAI and declared it currently doesn't require merger control scrutiny, based on prior assessments and the current dynamics within the partnership. However, they noted that should Microsoft's influence over OpenAI increase, a re-evaluation of merger notification obligations would be necessary.
While the FCO has cautioned about Microsoft’s potential to escalate its influence, the current assessment remains static, especially with ongoing scrutiny on Microsoft's overall market power.
Beyond Germany, the European Union has enacted the Digital Markets Act (DMA), designating Microsoft a "gatekeeper" under the new law. While Microsoft must adhere to strict operational obligations regarding its Windows OS, the DMA has not yet classified cloud services under its purview. This limitation arises from the DMA's focus on historical competition cases rather than proactively addressing new technology trends.
Experts express skepticism regarding the DMA’s capacity to adapt to rapid market changes, emphasizing the need for regulators to take more decisive actions. The unfolding dynamics between Microsoft and OpenAI reveal a compelling narrative of corporate competition that may require immediate regulatory attention.
In summary, the shifting landscape within the AI realm between Microsoft and OpenAI signifies potential challenges for competition regulators who must stay vigilant against the formation of monopolistic behaviors. As the tech world watches this pivotal moment, proactive strategies from regulatory bodies become increasingly essential to safeguard market integrity.
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