Microsoft’s $650 Million Inflection AI Deal Under Regulatory Scrutiny
Microsoft's investment in Inflection AI is the subject of a CMA merger probe. Photo by Artur Widak/NurPhoto via Getty Images.
Key Takeaways
- The UK’s competition watchdog has opened a formal merger probe into Microsoft’s $650 million investment in Inflection AI.
- The Competition and Markets Authority (CMA) could ultimately block the deal.
- Microsoft’s AI investment strategy is being increasingly scrutinized over antitrust concerns.
When Microsoft invested $650 million in Inflection AI in March, it drew criticism for being an acquisition in disguise after the Big Tech firm secured privileged access to Inflection’s AI models and poached most of its employees.
Now, the UK’s Competition and Markets Authority (CMA) has launched a formal probe to investigate the deal.
An Acquisition in Disguise
While the $650 million arrangement with Microsoft would see Inflection’s investors reimbursed 1.5 times what they paid for their stake, the AI startup technically still exists as an independent entity. But seeing as the entirety of its staff and products were shifted to Microsoft, critics have argued that the deal is a corporate takeover in all but name.
As the agency responsible for maintaining free and competitive markets in the UK, the CMA launched an initial investigation into the deal in April. The decision to open a formal merger inquiry indicates that the competition watchdog has concluded that the arrangement constitutes a “relevent merger situation.”
As reported by the Guardian, a Microsoft spokesperson said: “We are confident that the hiring of talent promotes competition and should not be treated as a merger.”
However, the CMA isn’t the only authority scrutinizing Microsoft’s increasingly wily investment activity. Commenting on the Inflection deal in April, the EU Commissioner for Competition
Margrethe Vestager said: We have registered that this is happening and also registering that it’s happening in a way so that it escapes our scrutiny from our usual boxes.”
Meanwhile, Microsoft’s $13 billion investment in OpenAI is under investigation on both sides of the Atlantic. (Although the Big Tech company has sought to downplay antitrust concerns by making a show of OpenAI’s independence.)
How do UK Merger Rules Work?
Mergers are subject to CMA oversight if a) the business being taken over has a UK annual turnover of at least £70 million, or b) the combined businesses have at least a 25% share of any reasonable market.
The next important deadline is September 11, when the competition watchdog will decide whether to proceed to a Phase 2 investigation.
Phase 2 merger investigations are more in-depth and bring in relevant stakeholders to address potential antitrust concerns.
If the CMA concludes that Microsoft’s investment unfairly stifles competition, it has the power to block the deal. Over the years, the agency has forced companies to abandon or rewind deals in various markets, including air travel (Ryanair and Aer Lingus), news media (Fox and Sky), supermarkets (Sainsbury’s and Asda), and digital platforms (Meta and Giphy).
Buying Out the Competition
Scrutiny of Microsoft’s investments in AI startups doesn’t just concern the unorthodox nature of its merger-but-not-a-merger strategy. Thanks to a string of investments in AI startups, the Silicon Valley giant is fast establishing Azure as the go-to marketplace for AI models.
The Inflection deal came after Microsoft signed a 15 million euro agreement with Mistral AI in February. Both transactions secured the firm exclusive distribution rights to Mistral and Inflection’s Large Language Models (LLMs).
If the Big Tech company’s AI game plan started in earnest with its close partnership with OpenAI, almost every move, it has made in the space since can be characterized as an attempt to buy out foundation models that threaten to take market share from GPT-4.
With a handful of exceptions – Claude, Google’s Gemini and a few open-source models – the house of Azure is rapidly absorbing every and any LLM that might potentially undermine Microsoft’s AI dominance.
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