Microsoft, OpenAI discuss contract details, with focus on startup’s tech – report

Microsoft (NASDAQ:MSFT) is in advanced discussions to sign a deal that could give it ongoing access to vital OpenAI technology, an agreement that would remove a major hurdle to the AI startup’s efforts to become a for-profit organization, Bloomberg News reported citing people with knowledge of the matter.

The companies have talked about new terms that would let Microsoft use OpenAI’s latest models and other technology even if the ChatGPT decides it has reached its goal of building artificial general intelligence, or AGI, the report added.

AGI refers to the hypothetical intelligence of a machine that has the ability to understand or learn any intellectual task that a human can.

Microsoft and OpenAI did not immediately respond to a request for comment from Seeking Alpha.

Under the current agreement, OpenAI reaching AGI is seen as a major mark, at which point Microsoft would lose some rights to OpenAI technology.

Negotiators have been meeting regularly and an agreement may come together in some weeks. Earlier this month, Microsoft’s CEO Satya Nadella and OpenAI CEO Sam Altman discussed the restructuring at the Allen & Co. conference in Sun Valley Idaho, the report noted.

However, the deal is not finalized and could hit new hurdles, according to the report.

Discussions over OpenAI’s future as a profit-company have been going on for months. Microsoft, which backed OpenAI with about $13.75B and has the right to use the startup’s intellectual property, is the biggest holdout among OpenAI’s investors, the news agency reported previously. At issue is the size of Microsoft’s stake in the newly configured company.

The discussions have since broadened into a renegotiation of their relationship, with Microsoft looking to avoid suddenly losing access to OpenAI’s technology before the end of the current deal, which ends in 2030, according to the report.

OpenAI wants a larger part of the revenue currently shared with Microsoft, and is seeking adjustments to Microsoft’s access to its intellectual property, the report added. Microsoft is seeking continued access to OpenAI technology after the current contract expires in 2030.

There are concerns for OpenAI. The company wants to make sure that its business is well-positioned with whatever share of revenue and equity Microsoft receives in part to guarantee its nonprofit will be well-resourced with a significant stake in OpenAI, the report noted.

The startup also wants the ability to offer customers different products made on top of its models even if Microsoft has access to the same technology. OpenAI wants to be able to find a way to provide its services to more customers, including government providers, not all of which are on Microsoft’s cloud computing platform Azure, according to the report.

In addition, OpenAI is looking to guarantee that Microsoft abides by strict safety standards when deploying the company’s technology, especially as it gets closer to AGI.

OpenAI publicly defines AGI as “highly autonomous systems that outperform humans at most economically valuable work.” The current contract has separate clauses related to that mark, which can be triggered by technical or business milestones, the report noted.

OpenAI’s board has the right to decide when the company has reached AGI on a technical level. Under this scenario, Microsoft would lose access to technology developed beyond that point, as per the report.

The business milestone would be reached when OpenAI has shown it can get to about $100B in total profits for investors including Microsoft — giving it the wherewithal to repay the return Microsoft is entitled to under the current agreement. In this scenario, Microsoft would lose its rights to OpenAI technology, including products developed before that trigger, the report added.

The U.S. software giant has the right to decide on the business milestone, but if the two companies do not agree over the claim, they could end up in court. Another provision in the current contract restricts Microsoft from pursuing AGI technology itself, the report noted.

Microsoft had agreed to waive some intellectual property rights related to OpenAI’s $6.5B acquisition of io, the startup co-founded by iPhone designer Jony Ive, the report stated.

However, Microsoft was less inclined towards OpenAI’s proposed acquisition of AI coding startup Windsurf. That deal did not go through, in part because of the tension with Microsoft, the report added.

Windsurf sells coding tools that compete with Microsoft’s products and it did not want Microsoft to access to its intellectual property, a clause that OpenAI was unsuccessful in getting Microsoft’s agreement on, the report noted.

Later Windsurf’s co-founders and a small group of employees agreed to join Alphabet’s (GOOG) (GOOGL) Google in a $2.4B deal.

The companies have been negotiating Microsoft’s ownership in a restructured OpenAI, with the two companies discussing an equity stake for Microsoft in the low- to mid-30% range, the report noted.

The Financial Times had previously reported on discussions related to the stake. However, if Microsoft thinks the stake and other changes to the contract are not enough, the company is willing to end the talks and stick with the current contract terms, the report added.