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Microsoft's $13 Billion Wager On OpenAI Has Enormous Potential But Also A Lot Of Unpredictability

Microsoft's $13 Billion Wager On OpenAI Has Enormous Potential But Also A Lot Of Unpredictability
In 2019, Microsoft made its initial $1 billion investment in OpenAI, although the deal attracted no more notice than the typical corporate venture round. The startup market was scorching, and among the many industries generating enormous valuations were aircraft, sophisticated logistics, electric vehicles, and artificial intelligence.
The market is considerably different now, three years later.
Following the collapse of public market multiples for high-growth, loss-making tech businesses, startup funding has plummeted. Artificial intelligence, more precisely generative AI, which is used to describe systems that generate automated text, visual, and audio replies, is an exception.
The hottest private firm is OpenAI. The San Francisco-based business launched ChatGPT in November, a chatbot that quickly gained popularity due to its capacity to create responses that resembled those of real people to customer inquiries on virtually any subject.
Formerly a little-discussed investment by Microsoft, it is now a hot topic in venture capital circles and among public shareholders who are attempting to understand what it means for the prospective value of their stock. According to reports, Microsoft has invested a total of $13 billion in OpenAI, and the business is now valued at about $29 billion.
This is due to the fact that Microsoft isn't just throwing OpenAI a huge check. As the sole source of computer power for OpenAI's research, products, and programming interfaces for developers, it is also the arms dealer. Startups and large corporations, including Microsoft, are scrambling to integrate their products with OpenAI, which implies that Microsoft's cloud servers will be handling a ton of workloads.
The technology is being included by Microsoft into its Azure cloud, Bing search engine, sales and marketing applications, GitHub coding tools, and Microsoft 365 productivity suite. According to Michael Turrin, an analyst at Wells Fargo, Microsoft might see an increase in revenue of over $30 billion per year, with nearly half coming from Azure.
What does that imply for the larger structure and investment by Microsoft?
“It’s so good that I have investors asking me how they pulled it off, or why OpenAI would even do this,” Turrin said in an interview.
The financial ramifications, however, are anything from simple.
OpenAI was established as a charity in 2015. When two senior executives announced the creation of OpenAI LP, a "capped-profit" business, they altered the structure in 2019. The startup's initial investors aren't allowed to profit by more than 100 times their investment under the present system, while later investors like Microsoft receive smaller returns.
Microsoft will receive a portion of OpenAI LP's income up to the agreed-upon maximum when its investment is repaid, with the remaining funds going to the nonprofit organization, according to an OpenAI spokesman.
There were no comments available from Microsoft on the issue
In a 2019 Reddit comment, Greg Brockman, a co-founder of OpenAI and one of the blog post's authors, stated that the system "feels commensurate with what they could make investing in a pretty successful startup (but less than what they'd get investing in the most successful startups of all time!)" for investors.
In Silicon Valley, where maximizing returns has long been seen to be of the utmost importance, this paradigm is unusual. Elon Musk, one of the creators and early sponsors of OpenAI, also finds it difficult to understand. Musk has expressed his concerns about OpenAI's unusual organizational structure and its potential effects on AI on multiple occasions this year, particularly in light of Microsoft's level of ownership.
″OpenAI was created as an open source (which is why I named it ‘Open’ AI), non-profit company to serve as a counterweight to Google, but now it has become a closed source, maximum-profit company effectively controlled by Microsoft,” Musk tweeted in February. “Not what I intended at all.”
If OpenAI is successful, according to Brockman's Reddit post, it "could create orders of magnitude more value than any company has to date." Microsoft would gain since it is a significant OpenAI investor.
Aside from its investment, Microsoft's reliance on OpenAI has the potential to significantly change its fortunes in AI, where it has openly struggled and failed to establish a significant business on its own. Microsoft removed its Tay chatbot from Twitter, Cortana from the Windows taskbar, and the Clippy assistant from Word.
Microsoft hasn't revealed the size of its AI business, in contrast to industries like advertising or security, although CEO Satya Nadella stated in October that income from its Azure Machine Learning service has increased for four consecutive quarters.
Nadella may now boast about his involvement with OpenAI, if nothing else. A month after ChatGPT was introduced, he made the following remarks at Microsoft's annual shareholder meeting in December:
“When I think about Azure, one of the things that we have done, in fact, in the context of even ChatGPT, which today is one of the more popular AI applications out there, guess what? It’s all trained on the Azure supercomputer.”
Microsoft hosted a news conference in February at its Redmond, Washington, headquarters to introduce new AI-powered improvements to its Edge browser and Bing search engine. One of the featured speakers was Altman.
Since then, things have been rocky because the Bing chatbot has engaged in several widely publicized and unsettling interactions with users and gave some inaccurate information when it first launched. Microsoft was somewhat lucky that Google's launch of its rival Bard AI program was unimpressive and that staff members described it as "rushed" and "botched."
Despite some early setbacks, there is a palpable eagerness among tech industry professionals for emerging solutions built on large language models, or LLMs.
The brain of OpenAI's bot is an LLM named GPT-4 that has developed the ability to write words with a lifelike tone of voice through training on a variety of online knowledge sources. GPT-4 and all other OpenAI models are exclusively licensed to Microsoft, according to an OpenAI spokesman.
There are numerous further LLMs accessible.
Google said last month that select developers had received early access to an LLM called PaLM.
Startups like AI21 Labs, Aleph Alpha, Cohere, and Google-backed Anthropic, which has chosen Google as its "preferred" cloud provider, all offer their own LLMs. Dario Amodei, co-founder of Anthropic and former vice president of research at OpenAI, has voiced similar fears about the unchecked potential of AI as Altman and Musk have.
Anthropic declared its purpose to assist society while also pursuing financial gain in 2021 by registering as a public-benefit corporation in Delaware.
“We were and are focused on developing innovative structures to provide incentives for safe development and deployment of AI systems and will have more to share on this in the future,” an Anthropic spokesperson told CNBC in an email.
One thing is certain: it's still early in the industry.
Although he referred to OpenAI as the leading LLM supplier, Quinn Slack, CEO of code-search firm Sourcegraph, said he hasn't seen evidence that the OpenAI agreement has provided Microsoft a significant advantage.
“I don’t think people should look at Microsoft and say they’ve totally locked up OpenAI and OpenAI is doing their bidding,” Slack said. “I truly believe people there are motivated to build amazing technology and make it as widely used as possible. They view Microsoft as a great customer but not someone that’s controlling. That’s good, and I hope it stays that way.”
There are many detractors of OpenAI. The technology is "biased, deceptive, and a risk to privacy and public safety," according to the nonprofit Center for Artificial Intelligence and Digital Policy, which requested that the Federal Trade Commission prevent OpenAI from issuing additional commercial editions of GPT-4 late last month.
Microsoft, which does not have a board seat on OpenAI, would be the obvious buyer when looking at potential exits for OpenAI given its close connection. But due to worries about AI and Microsoft restricting competition, that kind of arrangement would probably draw regulatory attention. Microsoft might dodge Hart-Scott-Rodino evaluations from American competition regulators by continuing to invest in OpenAI but refraining from taking ownership of the company.
“I’ve gone through it. It’s painful,” said David Zilberman, a partner at Norwest Venture Partners.
According on its current valuation, an eventual IPO is OpenAI's more likely course, according to Scott Raney, managing director at Redpoint Ventures.
According to data from PitchBook, OpenAI is expected to earn $200 million this year, growing 150% from 2022, and $1 billion in 2024, or a 400% increase.
“When you raise at a $30 billion valuation, it’s kind of like, there’s no turning back at that point,” Raney said. You’re saying, “Our plan is to be a big independent standalone company.”
A representative for OpenAI stated that neither an IPO nor an acquisition are in the works.

Christopher J. Mitchell

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