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Microsoft’s OpenAI Investment Sparks EU Merger Probe Fears

Last Updated January 16, 2024 1:34 PM
Giuseppe Ciccomascolo
Last Updated January 16, 2024 1:34 PM

Key Takeaways

  • Microsoft’s $13 billion investment in OpenAI is under scrutiny by the European Union (EU).
  • EU aims to see if it merits further investigation for possible breaches of merger rules.
  • Investors in MSFT stock snubbed the news.

Microsoft’s $13 billion investment into OpenAI is facing the potential of a full-blown European Union merger probe. This is because the EU wants to see  if it merits further investigation for possible breaches of merger rules.

The EU is concerned about the level of control that Microsoft might have over OpenAI. For the bloc, this could stifle competition in the development of artificial intelligence (AI) technology. In particular, the EU is worried that Microsoft could use its position to influence OpenAI’s research priorities and prevent it from developing artificial intelligence (AI) that could compete with Microsoft’s products.

EU May Launch A Probe

Microsoft Corp.’s $13 billion investment in OpenAI Inc. faces potential scrutiny from European Union antitrust authorities following internal conflicts at the ChatGPT creator that unveiled extensive connections between the two companies.

The European Commission announced  on Tuesday, January 9, 2024, that it is assessing whether Microsoft‘s engagement should undergo review under the bloc’s merger rules, raising the possibility of a formal investigation and potential intervention if deemed detrimental to fair competition.

This EU action aligns with a broader examination of artificial intelligence and echoes a similar move by the UK’s Competition and Markets Authority.

EU’s antitrust commissioner Margrethe Vestager said: “Virtual worlds and generative AI are rapidly developing. It is fundamental that these new markets stay competitive, and that nothing stands in the way of businesses growing and providing the best and most innovative products to consumers.”

Sector Dominance Under Review

In December, the UK’s competition watchdog initiated an examination into Microsoft’s investments. It assessed whether a significant shift in the power balance between Microsoft and OpenAI warrants further scrutiny. The US Federal Trade Commission has also reportedly probed the ties between the two companies.

Central to the Microsoft-OpenAI partnership is the substantial computing power essential for sustaining the global surge in generative AI. This surge, driven by tools like ChatGPT and Google’s Bard, has propelled demand for cloud services and processing capacity, with OpenAI emerging as a major customer for Microsoft’s cloud business.

The world’s top three cloud-computing providers – Microsoft, Amazon.com, and Google – have actively invested in AI startups as a result.

On Tuesday, January 9, 2024, the EU’s antitrust enforcers invited  feedback on competitive concerns in generative artificial intelligence and virtual worlds. They emphasized  monitoring AI partnerships to prevent undue market distortions. They also stated that venture capital investment in AI in the EU exceeded €7.2 billion in 2023. And the European virtual worlds market surpassed €11 billion. The exponential growth is anticipated to significantly impact business competition.

Microsoft Stock Reaction

At the time of writing (January 16 2024), Microsoft (MSFT) stock is up by 0.6% at $359.75 in the pre-market, showing a 5.0% positive trend after the news came out on January 9, 2024.

Across the whole of 2023, Microsoft’ shares surged by 57%. This represented a stark contrast to the 29% decline in 2022. This turnaround was driven by the transformative impact of artificial intelligence (AI) on the company’s fortunes.

While an improving economic landscape played a role, the primary catalyst for Microsoft‘s gains was the rise of artificial intelligence. The year commenced with buzz around ChatGPT, created by OpenAI, which quickly became the fastest-growing consumer application in history. Within two months of its launch, the chatbot attracted 100 million active users.

Microsoft had initially invested $1 billion in OpenAI in 2019, before increasing its stake to $13 billion. The integration of generative AI across Microsoft’s products and services marked the beginning of an AI gold rush.

Copilot Development

These capabilities paved the way for the development of Copilot, a digital assistant designed to enhance productivity across Microsoft’s core programs. Copilot streamlined tasks such as summarizing emails, drafting responses, outlining meetings, searching spreadsheets, creating presentations in PowerPoint, and coding. The success of Copilot saw approximately 40% of Fortune 100 companies participating in Microsoft’s early access program.

In an interview  late last year, CFO Amy Hood expressed confidence that the next-generation AI business would be the company’s fastest-growing $10 billion business in history.

Nadella Defends The Partnership

Microsoft Corp CEO Satya Nadella defended the company’s multi-billion-dollar investment in ChatGPT developer OpenAI. He spoke out amid EU and UK probes into potential merger concerns. Speaking at a Bloomberg-organized event at the World Economic Forum in Davos, Nadella emphasized that AI’s recent strides were a result of Microsoft’s risk-taking.

Nadella said: “If we want competition in AI against some of the players who are completely already integrated, I think partnerships is one avenue of, in fact, having competition.”

He added: “I’m sure the regulators will look at it and say, ‘is this a pro-competition partnership or not?’ And to me, I think it’s a no-brainer.”

He underscored the current focus on stability in the partnership. He also expressed confidence in mitigating AI risks during upcoming elections, including those in the US, where Microsoft is headquartered.

Microsoft’s CEO added: “If Microsoft had not taken the highly risky (decision) – and this is now all conventional wisdom – but when we made those investments, when we backed OpenAI, went all in on a particular form of computing that led to all of these breakthroughs, it would have not been what we had.

“And more importantly, the incumbents would have been the winners.”

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