Monologue: OpenAI Vs. Microsoft

obstacle it's deal with Microsoft. Back in twenty nineteen, Microsoft invested a billion dollars into open ai, and as part of that deal, OpenAI agreed to let Microsoft have full access to rights to its pre agi intellectual property, which means all of their intellectual property along with their research, and the exclusive right to sell open AI's models to

their customers. Microsoft also, as a result of the deal, owns forty nine percent of the future profits of open ai and offers or offered It's unclear how these terms are these days discounted rates on Azure four open ai, Microsoft's cloud compute service, so open ai would pay less

than other customers to host their services. I should also be clear that this deal means that Microsoft has almost complete control over open AI's future, and without their blessing, open ai cannot complete its conversion to a for profit entity. In the event that that conversion fails, soft Bank is able to pair the size of their investment in open ai down to a mere twenty billion dollars according to The Wall Street Journal, as opposed to the forty billion

dollars that open ai well needs. In simpler terms, open ai has got ten billion dollars so far from SoftBank, and if they don't become a for profit entity by the end of twenty twenty five, they only get another ten billion dollars rather than the thirty billion dollars that they want, and will need to keep burning more money. All very silly and actually existentially bad. I'm surprised people

aren't more freaked out about this. So open ai and Microsoft are currently locked in negotiations, which I mean open Ai is making arbitrary demands and Microsoft is saying no. So as part of the conversation, according to the information, open ai is asking for some very fucking stupid things I'll list them. They want Microsoft to only have thirty three percent of the new entity, as opposed to the

forty nine percent of profits they have already. They want a lower Microsoft's revenue share, which is currently twenty percent of open AI's revenue, to ten percent. Just they want that, and they want to bar Microsoft from having access to open AI's future intellectual property, in part due to open AI's attempts to acquire coding startup Windsurf, which competes with Microsoft's git hub copylom. What's funny is part of the Information's story. They're like, yeah, Microsoft is said is part

of the current deal. They're totally fine with the acquisition. What's really interesting as well is everyone reported the Windsurf deal, which is about three billion dollars, is a done deal. But at the time I was saying, hey, this hasn't happened yet. It's been two months since people talked about it. The Information says that Windsurfer said this deal was speculative. Kind of weird, right, be cool if we had like a kind of an analyst or a journalist who covered

tech and thought about it. Yeah. Anyway, you may be wondering what it is that open ai is offering in return for these concessions, and the answer is nothing. Understandably, Microsoft is refusing to budge which has led to open Ai considering making an outlandish antitrust complaint against them. It's kind of like putting a gun to your own head and threatening to release the hostages if your demands aren't met, And if I'm honest, it's one of the most ridiculous

things I've seen a company do in the Valley. Later in the week, the Information also report that open Ai has been undercutting Microsoft and selling chat GPT to enterprise customers, discounting chat GPT enterprise by ten to twenty percent for customers buying additional products from open Ai, and that directly competes,

by the way, with Microsoft's Copylum. The Information also reports that Microsoft has been losing deals to open Ai because their finance side will only generally discount by five to ten percent. They also add that the same has been happening with enterprise deals over providing access to open AI's models, which Microsoft also sells. This whole relationship is so goddamn stupid. You've got two companies selling the same thing for some reason.

I don't even know why you'd buy from Microsoft. Doesn't really make any sense to me other than and the Information even says that companies like Fidelity buy it because they're already buying crap from Microsoft. I just I think about this and it makes me slightly annoyed because it's like, this is not real business. Why would you have both companies selling the same thing. And it's just because everyone wants a monopoly these days. But it's all bad business.

They all lose money. It's all very silly. But another tidbit from the information story is that and I quote open aiyes, pricing power may not be as strong with enterprises as it is with customers. This is a huge deal because it means that open AI's future is tied to the idea that they can sell and I shit you not. These are their alleged projections over one hundred billion dollars a year in subscription to consumers by twenty twenty nine. I want to give you some scale as

to how fucking stupid this is. In twenty twenty four, Spotify, the most popular music streaming app, made just under sixteen billion dollars in revenue from subscriptions, and Netflix, the most popular streaming service, made around thirty nine billion dollars from the same Are you telling me that chat GPT is going to become more successful than two netflixes and two spotifies. Are you fucking insane? Anyway? This whole situation is completely ridiculous.

Open Ai does not have any real leverage here, and the only possible way that they can lean on Microsoft is to try and make them look bad, which would require open Ai to piss off their number one infrastructure provider and their number one financial backer by arbitrarily threatening an antitrust case an obviously to the press. As a means of dragging down Microsoft. Open Ai is attempted to put pressure on a company that holds all the cards.

You see, Sam Alman's real talent is that open ai has no not really had to commit anything to build their company. Microsoft provides them with the infrastructure. Microsoft funded them along with venture capitalists, private equity firms, and SoftBank.

Oracle is covering all the costs of the GPUs going into the Stargate data center project in Abilene, which is funded by a private equity firm that pays Crusoe, an unproven data center builder, who has also taken out seven hundred and fifty million dollars in a line of credit

to get the data center built. More egregiously, the Stargate entity which SoftBank will have full financial responsibility for has not even been formed, and from reports it doesn't even sound like open Ai has signed a contract to use it. It's so silly. The other side of this, though, is that having everybody else own all of the problems means that open ai doesn't really own anything, making them dependent

on literally everybody. Any delays to stargate are out of open ais hands, as are any issues with their infrastructure, as are any issues with their funding, and when bartering with other companies, has little to offer other than discounts on the software that loses the money all the time. Sam Mormon's play here is that Microsoft is somehow dazzled by the glory that is open Ai and wouldn't want to take the reputational hit of scorning Silicon Valley's favorite

company and their clammiest founder. Samy's only hope is that Satchynadella likes him enough to make major concessions for no apparent reason, something that seems increasingly unlikely as they send passive aggressive leaks to different media outlets. I should also add that Microsoft's legal team is two thousand people. Two thousand. I'm not kidding that is the team that if they did an anti trust complaint that would take years and years and years and years. Cannot be clear enough how

long that would take. They would be going up against a company that has already won an anti trust case back in the nineties and the two thousands. I think open ais like fifty lawyers. Maybe they probably have an outside firm as well. How the fuck is that meant to work? I've had people suggest, oh, they could bribe Trump. No, they though they can't. And also to what end a bailout?

How much money OpenAI constantly burns cash. It's more likely Microsoft absorbs them, and the outcome of this event will determine the entire future of the ai bubble. Though there is a decent chance that Microsoft degrees to some concessions and they work it out as a means of continuing their strangle hold on open Ai. There's also a chance that they just let open ai diet. After all, they own all the IP and the research, as well as housing all their infrastructure. They could just rip the open

ai stick could put a Microsoft sticker on it. Open ai sends the Microsoft CHATGPT, dot Com goes to copilot. They probably do chat GPT, buy Copilot or buy Microsoft. Pretty easy, right. I understand why people don't think that can happen, just because it would be so big, but all the rails are there for it to occur. All

very silly. I also think this pissy back and forth is a helpful distraction from open AI's core problem that they've yet to ship a meaningful new product in some time, and their entire future is based on consumer subscriptions, which will require them to create meaningful consumer products, a thing they've failed to do. I can't wait to see how this shakes out. I feel bad for Silicon Valley, but this is tremendous content