Microsoft Vs. Google: How The OpenAI Saga Affects Their Competitive Positions

Summary:

• OpenAI’s implosion affects Microsoft Corporation and Google’s competitive positions in a number of key markets. Search, AI-based services, and cloud are all likely to be impacted.
• I examine the likely short and long-term consequences of the OpenAI saga for Microsoft and Google.
• In the short term, Google’s competitive position is most likely improved while Microsoft’s is worsened.
• In the long term, things could go either way depending on the extent to which Microsoft manages to employ its ex-OpenAI workforce as well as OpenAI was doing.

Over the weekend, OpenAI’s board fired CEO Sam Altman, with president of the board Greg Brockman resigning in protest. Although OpenAI has been less than forthcoming about the exact reasons for the shake-up, it seems the move may be motivated by concerns about the safety of current and future AI systems. OpenAI may be looking to slow the development of GPT-5 and other AI products with a view to limiting potential harm.

Altman, along with numerous OpenAI employees, is now joining Microsoft Corporation (NASDAQ:MSFT) to lead an AI research group. Microsoft adds some highly-regarded people to its ranks, and OpenAI loses them. In a sense, OpenAI is getting “split up,” with one part becoming a part of Microsoft.

This turn of events has the potential to alter the competitive dynamics between Microsoft and Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL) aka Google in both the short and long terms. In the short term, Google’s competitive position is most likely improved while Microsoft’s is worsened. In the long term, things could go either way depending on the extent to which Microsoft manages to employ its ex-OpenAI workforce as well as OpenAI was doing. In this article, I explain the rationale underlying my position.

What Happens Next?

OpenAI seems to want to slow down development of its products, and at any rate this seems unavoidable if OpenAI loses a key part of its workforce. In the meantime, it also seems unavoidable that Microsoft will need some time to get the new research group started, resourced, and up and running. Then they will need more time to catch up to where OpenAI is currently. And so, both OpenAI and Microsoft’s progress in AI should be slowed by recent events.

Below I discuss how the competitive positions of Google and Microsoft could be affected, assuming no further major shifts.

Short-Term Impacts For Microsoft and Google

In the short term, the slowdown in progress should, overall, improve Google’s competitive position and worsen Microsoft’s. There are a few ways in which this is likely to happen:

• First, the competitive position for Google’s search business should be improved. Google’s search business is under threat from generative AI. Large language models (LLMs) combined with search functions-as with Bing Chat and ChatGPT with plugins-can be a useful alternative to traditional web search for some use cases. LLMs could steal some proportion of total search traffic, and Microsoft could take market share from Google if its LLM features (powered by GPT) outperform Google’s (powered by Google’s own LLMs). If development at OpenAI slows down and Microsoft’s in-house efforts take time to catch up, this could give Google some breathing space to get its own efforts up to speed (especially since Gemini is reported to be delayed by about a quarter). Microsoft’s close relationship with OpenAI has given it an early mover advantage, but the advantage could be eroded by recent events. Of course, the extent to which Google can keep up technologically remains to be seen, but a little more time to catch up with the competition can only help.

• Second, beyond the search business, Microsoft and Google’s outlooks for their AI-based products and services should also be affected. Both will soon offer a slew of AI-based features and services, several of which will compete against each other. For example, Google’s Bard chatbot competes against (Microsoft-backed) ChatGPT, and Google’s upcoming AI-based features for Workspace like Help Me Write will compete against similar features in Microsoft Co-Pilot. If progress on the underlying LLMs slows for Microsoft and OpenAI, this could help Google compete more effectively in these areas.

• Third, in the immediate future, the OpenAI saga could also have some impact on Microsoft and Google’s cloud businesses. If Microsoft still ends up providing GPUs to OpenAI (the likely scenario), then it will have to reproduce the infrastructure for its new in-house efforts under Altman. This could further tighten the availability of GPUs for cloud servers and improve the demand-supply situation in favor of higher prices—benefiting both Google and Microsoft. Of course, in this scenario Microsoft’s supply would be constricted and Google’s would remain unchanged.

Long-Term Impacts For Microsoft And Google

The long-term consequences of the OpenAI saga are more difficult to predict—things could go a few different ways. Here is what I think:

• The improved short-term position for Google could also help the company achieve better long-term outcomes if it is able to capitalize on the brief reprieve. It is still very early days in the AI revolution, so a small advantage today could snowball into a big advantage in a few years.

• Some analysts have noted that Microsoft may be better off with essentially getting ownership and control of a piece of OpenAI—that is, some of the workforce. Microsoft’s share price has increased accordingly. This view is reasonable, but I remain cautious. This entire episode could destroy a lot of value at OpenAI with no guarantee that this value will get adequately reproduced at Microsoft. Will OpenAI’s ex-employees be as effective and their work as good at Microsoft? Only time will tell—on one hand, they may have access to more resources, but on the other hand, it is a big change. Sometimes these things backfire. I think there is a good chance that Microsoft will be better off this way, but it is not a slam dunk yet in my opinion.

• Microsoft’s stake in OpenAI is now worth a lot less.

• How the long term goes for Microsoft will also affect the long term for Google. If Microsoft can reproduce OpenAI’s magic, then this could hurt Google in the long-term because Microsoft will then have direct control over the underlying LLMs and could use that to provide better AI-based products and services. But if Microsoft fumbles the transition then Google could benefit in the long-term.

• Google’s investment in Anthropic is now even more valuable. One of Anthropic’s major competitors (OpenAI) is imploding. In fact, it is now reported that OpenAI just sought a merger with Anthropic that was turned down. It is also reported that many OpenAI customers are now looking for alternatives, including Anthropic.

Takeaways

The OpenAI saga has significantly altered the short- and long-term competitive positions of Microsoft and Google. Although the full long-term consequences for Microsoft remain to be seen, I do think that Google clearly benefits here. Google’s price remains mostly unchanged at the time of writing, and I wonder if it should be a bit higher in light of these developments.

Of course, there is a lot still happening surrounding the OpenAI saga, so investors should continue to watch closely for further information and clues about Microsoft and Google’s futures in the AI space.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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