Microsoft's OpenAI partnership is fraying at the seams

Microsoft and OpenAI are engaged in tense negotiations that could unravel one of the most important alliances in AI and fundamentally reorder the industry.Why it matters: Microsoft has injected billions of dollars in OpenAI and made it a cornerstone of its AI strategy, but the companies have also remained rivals that, in many cases, offer competing AI services.State of play: The two companies have been in talks for months to amend their partnership, with OpenAI needing approval from Microsoft to move forward with the corporate restructuring it has promised recent investors it would make.Driving the news: The Wall Street Journal reported Monday that tensions have escalated between the two companies, with OpenAI considering a "nuclear option" of accusing Microsoft of violating antitrust laws.That's a risky gambit that could backfire as tighter government oversight could ultimately fall on OpenAI itself.Zoom in: The latest sticking point is over whether Microsoft would have access to the intellectual property behind Windsurf, the coding startup OpenAI reportedly acquired last month.Under their most recent agreement, signed in 2023, Microsoft has access to all of OpenAI's technology, including any it gets via acquisition. An exception could be made, but would have to be negotiated.OpenAI, meanwhile, has been floating the notion that both companies might save themselves some regulatory headaches if Microsoft doesn't have access to Windsurf, given it already owns GitHub, which makes a competing product. It's the latest in a series of issues that have cropped up between the companies, who find themselves in the position of being both partners and competitors.Zoom out: Ultimately, there are far larger issues at play than whether Microsoft has access to Windsurf's technology. OpenAI needs Microsoft's go-ahead for a restructuring that OpenAI wants to achieve soon in order to meet commitments it made to recent investors. That means translating Microsoft's current share of OpenAI profits, up to a certain point, into a specific stake in the company.Another big sticking point relates to a trigger in their existing deal that calls for Microsoft's access to be significantly curtailed once OpenAI has reached the threshold of artificial general intelligence. Right now Microsoft has extremely broad rights until AGI is reached and limited access beyond that point.And of course, there are lots of dollars on the table, from what stake Microsoft gets in OpenAI's operation, to how much server business OpenAI sends Microsoft's way to how much the two companies collaborate or compete for consumer and corporate subscriptions.Late Monday The Information reported that OpenAI wants Microsoft to forego its rights to future profits in exchange for a roughly 33% stake in the restructured company, according to a person who had spoken to OpenAI executives. Between the lines: There's a lot at play here and plenty of potential sticking points.Sources close to both companies indicate considerable hope that there is a deal that can make sense.Yes, but: Both companies are also eager to show each other — and the world — that they have alternative plans and are ready to play rough if need be.Microsoft has been expanding its own bench of AI talent, from its deal to bring in Mustafa Suleyman to the more recent move tapping Jay Parikh as head of a Core AI unit.It has also been expanding its offering of non-OpenAI models via Azure, most recently adding xAI's Grok to the mix.OpenAI, which once got all its compute capacity from Microsoft, has moved to diversify, first with its Stargate project with Oracle and SoftBank and more recently in a deal with Google to use its cloud as well.What they're saying: "We have a long-term, productive partnership that has delivered amazing AI tools for everyone," the companies said in a joint statement. "Talks are ongoing and we are optimistic we will continue to build together for years to come."

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