Is Microsoft taking a Huge Gamble with a $10 Billion Investment in OpenAI?

In a recent article in Semafor, Liz Hoffman and Reed Albergotti reported rumors that Microsoft has been negotiating a $10 billion investment with the OpenAI parent company of ChatGPT. This AI-based app has received acclaim recently.

This will value OpenAI, the maker of ChatGPT, at $29 billion with the additional investment, according to people familiar with the matter. Although it is uncertain if the agreement has been finalized, documents that have been sent to investors in recent weeks suggest that the closing of the deal is expected by the conclusion of 2022.

According to sources, Microsoft’s investment would be included in a complex agreement where it will get 75% of OpenAI’s earnings until it recovers the investment. After that point is reached, the shareholding structure will revert to a system that displays the ownership of OpenAI, with Microsoft having 49%, other investors having 49%, and OpenAI’s nonprofit parent having 2%.

Maximum Benefit Cap

There is also a maximum benefit cap that differs for each set of investors, which is uncommon for venture deals in which investors are expecting a return that is 20 to 30 times the capital. The provisions and the investment amount can still change, and the contract could be dissolved.

The worth of $29 billion for OpenAI is a large figure considering the company has not yet determined its business model, and the $10 billion is a significant cost for Microsoft’s shareholders.

Nevertheless, Microsoft’s investment is not a risk as ChatGPT is losing money with each user engaging with its chatbot. Most of this money will be spent on Microsoft’s cloud business, which is attempting to be similar to AWS.

If OpenAI finds a way to make money from products like ChatGPT and Dall-E, a tool for image creation. Microsoft will get 75% of the income until it recuperates its initial investment. Moreover, by working together with OpenAI on Microsoft Cloud, Microsoft will be at the front of the upcoming decade’s most significant consumer technology. (NYT Karen Weise, Cade Metz, Jan 2023)

Healthy Competition for Google

This is a great success for Microsoft because its competitor, Google, has been helping to pioneer the technology employed by OpenAI. According to The Information, Microsoft was also in discussions to incorporate some of those features into its other products.

Microsoft is taking a risk by investing $10 billion in OpenAI to remain ahead of other companies using the same AI algorithms as products like ChatGPT. OpenAI could face intense competition from companies like Stability AI.

It has not been established how these new AI firms will protect their “moats” and “network effects” to keep adversaries away. Making money in consumer technology is difficult without these things. We asked ChatGPT to write a story from the perspective of a Wall Street analyst about Microsoft investing $10 billion in OpenAI.

Learn more about what Microsoft is doing in the marketplace

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