Monologue: OpenAI Vs. Microsoft

In this week’s monologue, Ed Zitron walks you through OpenAI’s desperate attempts to lean on Microsoft to change the terms of their agreement, and how the entire AI bubble may rest on this negotiation. 

WSJ: OpenAI and Microsoft Tensions Are Reaching a Boiling Point https://www.wsj.com/tech/ai/openai-and-microsoft-tensions-are-reaching-a-boiling-point-4981c44f 
The Information: OpenAI Seeks New Financial Concessions From Microsoft, a Top Shareholder https://www.theinformation.com/articles/openai-seeks-new-financial-concessions-microsoft-top-shareholder?rc=kz8jh3
The Information: OpenAI Starts Selling ChatGPT at a Discount, Hurting Microsoft
https://www.theinformation.com/articles/openai-starts-selling-chatgpt-discount-hurting-microsoft?rc=kz8jh3
Data Center Dynamics: Crusoe secures $750m credit facility from Brookfield
https://www.datacenterdynamics.com/en/news/crusoe-secures-750m-credit-facility-from-brookfield/
The Information: Oracle CEO Says OpenAI’s Stargate Venture ‘Not Formed Yet’
https://www.theinformation.com/briefings/oracle-ceo-says-openais-stargate-venture-formed-yet?rc=kz8jh3

YOU CAN NOW BUY BETTER OFFLINE MERCH! Go to https://cottonbureau.com/people/better-offline and use code FREE99 for free shipping on orders of $99 or more.

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Episode Transcript

Speaker 1 (00:01):
A zone media greetums. I'm ed Zeitra and this is
your weekly better offline monologue. Earlier this week, a story
came out in The Wall Street Journal at tensions between
open ai and Microsoft are and I quote, reaching a

(00:23):
boiling point. Why well, let's give you some background. As
open ai tries to convert part of itself into a
for profit entity, all very annoying, but it would still
be controlled by the nonprofit board. It faces one big
obstacle it's deal with Microsoft. Back in twenty nineteen, Microsoft
invested a billion dollars into open ai, and as part
of that deal, OpenAI agreed to let Microsoft have full

(00:44):
access to rights to its pre agi intellectual property, which
means all of their intellectual property along with their research,
and the exclusive right to sell open AI's models to
their customers. Microsoft also, as a result of the deal,
owns forty nine percent of the future profits of open
ai and offers or offered It's unclear how these terms
are these days discounted rates on Azure four open ai,

(01:07):
Microsoft's cloud compute service, so open ai would pay less
than other customers to host their services. I should also
be clear that this deal means that Microsoft has almost
complete control over open AI's future, and without their blessing,
open ai cannot complete its conversion to a for profit entity.
In the event that that conversion fails, soft Bank is
able to pair the size of their investment in open

(01:28):
ai down to a mere twenty billion dollars according to
The Wall Street Journal, as opposed to the forty billion
dollars that open ai well needs. In simpler terms, open
ai has got ten billion dollars so far from SoftBank,
and if they don't become a for profit entity by
the end of twenty twenty five, they only get another
ten billion dollars rather than the thirty billion dollars that
they want, and will need to keep burning more money.

(01:50):
All very silly and actually existentially bad. I'm surprised people
aren't more freaked out about this. So open ai and
Microsoft are currently locked in negotiations, which I mean open
Ai is making arbitrary demands and Microsoft is saying no.
So as part of the conversation, according to the information,
open ai is asking for some very fucking stupid things
I'll list them. They want Microsoft to only have thirty

(02:12):
three percent of the new entity, as opposed to the
forty nine percent of profits they have already. They want
a lower Microsoft's revenue share, which is currently twenty percent
of open AI's revenue, to ten percent. Just they want that,
and they want to bar Microsoft from having access to
open AI's future intellectual property, in part due to open
AI's attempts to acquire coding startup Windsurf, which competes with

(02:34):
Microsoft's git hub copylom. What's funny is part of the
Information's story. They're like, yeah, Microsoft is said is part
of the current deal. They're totally fine with the acquisition.
What's really interesting as well is everyone reported the Windsurf deal,
which is about three billion dollars, is a done deal.
But at the time I was saying, hey, this hasn't
happened yet. It's been two months since people talked about it.
The Information says that Windsurfer said this deal was speculative.

(02:58):
Kind of weird, right, be cool if we had like
a kind of an analyst or a journalist who covered
tech and thought about it. Yeah. Anyway, you may be
wondering what it is that open ai is offering in
return for these concessions, and the answer is nothing. Understandably,
Microsoft is refusing to budge which has led to open
Ai considering making an outlandish antitrust complaint against them. It's

(03:21):
kind of like putting a gun to your own head
and threatening to release the hostages if your demands aren't met,
And if I'm honest, it's one of the most ridiculous
things I've seen a company do in the Valley. Later
in the week, the Information also report that open Ai
has been undercutting Microsoft and selling chat GPT to enterprise customers,
discounting chat GPT enterprise by ten to twenty percent for
customers buying additional products from open Ai, and that directly competes,

(03:44):
by the way, with Microsoft's Copylum. The Information also reports
that Microsoft has been losing deals to open Ai because
their finance side will only generally discount by five to
ten percent. They also add that the same has been
happening with enterprise deals over providing access to open AI's models,
which Microsoft also sells. This whole relationship is so goddamn stupid.
You've got two companies selling the same thing for some reason.

(04:07):
I don't even know why you'd buy from Microsoft. Doesn't
really make any sense to me other than and the
Information even says that companies like Fidelity buy it because
they're already buying crap from Microsoft. I just I think
about this and it makes me slightly annoyed because it's like,
this is not real business. Why would you have both

(04:31):
companies selling the same thing. And it's just because everyone
wants a monopoly these days. But it's all bad business.
They all lose money. It's all very silly. But another
tidbit from the information story is that and I quote
open aiyes, pricing power may not be as strong with
enterprises as it is with customers. This is a huge
deal because it means that open AI's future is tied

(04:52):
to the idea that they can sell and I shit
you not. These are their alleged projections over one hundred
billion dollars a year in subscription to consumers by twenty
twenty nine. I want to give you some scale as
to how fucking stupid this is. In twenty twenty four, Spotify,
the most popular music streaming app, made just under sixteen

(05:13):
billion dollars in revenue from subscriptions, and Netflix, the most
popular streaming service, made around thirty nine billion dollars from
the same Are you telling me that chat GPT is
going to become more successful than two netflixes and two spotifies.
Are you fucking insane? Anyway? This whole situation is completely ridiculous.
Open Ai does not have any real leverage here, and

(05:35):
the only possible way that they can lean on Microsoft
is to try and make them look bad, which would
require open Ai to piss off their number one infrastructure
provider and their number one financial backer by arbitrarily threatening
an antitrust case an obviously to the press. As a
means of dragging down Microsoft. Open Ai is attempted to
put pressure on a company that holds all the cards.

(05:56):
You see, Sam Alman's real talent is that open ai
has no not really had to commit anything to build
their company. Microsoft provides them with the infrastructure. Microsoft funded
them along with venture capitalists, private equity firms, and SoftBank.
Oracle is covering all the costs of the GPUs going
into the Stargate data center project in Abilene, which is
funded by a private equity firm that pays Crusoe, an

(06:18):
unproven data center builder, who has also taken out seven
hundred and fifty million dollars in a line of credit
to get the data center built. More egregiously, the Stargate
entity which SoftBank will have full financial responsibility for has
not even been formed, and from reports it doesn't even
sound like open Ai has signed a contract to use it.

(06:39):
It's so silly. The other side of this, though, is
that having everybody else own all of the problems means
that open ai doesn't really own anything, making them dependent
on literally everybody. Any delays to stargate are out of
open ais hands, as are any issues with their infrastructure,
as are any issues with their funding, and when bartering
with other companies, has little to offer other than discounts

(07:02):
on the software that loses the money all the time.
Sam Mormon's play here is that Microsoft is somehow dazzled
by the glory that is open Ai and wouldn't want
to take the reputational hit of scorning Silicon Valley's favorite
company and their clammiest founder. Samy's only hope is that
Satchynadella likes him enough to make major concessions for no
apparent reason, something that seems increasingly unlikely as they send

(07:25):
passive aggressive leaks to different media outlets. I should also
add that Microsoft's legal team is two thousand people. Two thousand.
I'm not kidding that is the team that if they
did an anti trust complaint that would take years and
years and years and years. Cannot be clear enough how
long that would take. They would be going up against
a company that has already won an anti trust case

(07:47):
back in the nineties and the two thousands. I think
open ais like fifty lawyers. Maybe they probably have an
outside firm as well. How the fuck is that meant
to work? I've had people suggest, oh, they could bribe Trump. No,
they though they can't. And also to what end a bailout?
How much money OpenAI constantly burns cash. It's more likely

(08:08):
Microsoft absorbs them, and the outcome of this event will
determine the entire future of the ai bubble. Though there
is a decent chance that Microsoft degrees to some concessions
and they work it out as a means of continuing
their strangle hold on open Ai. There's also a chance
that they just let open ai diet. After all, they
own all the IP and the research, as well as
housing all their infrastructure. They could just rip the open

(08:30):
ai stick could put a Microsoft sticker on it. Open
ai sends the Microsoft CHATGPT, dot Com goes to copilot.
They probably do chat GPT, buy Copilot or buy Microsoft.
Pretty easy, right. I understand why people don't think that
can happen, just because it would be so big, but
all the rails are there for it to occur. All

(08:51):
very silly. I also think this pissy back and forth
is a helpful distraction from open AI's core problem that
they've yet to ship a meaningful new product in some time,
and their entire future is based on consumer subscriptions, which
will require them to create meaningful consumer products, a thing
they've failed to do. I can't wait to see how
this shakes out. I feel bad for Silicon Valley, but

(09:13):
this is tremendous content