OpenAI and Microsoft partnered up from a commercial standpoint. The history of the partnership started in 2016 and consolidated in 2019, with Microsoft investing a billion dollars into the partnership. It’s now taking a leap forward, with Microsoft in talks to put $10 billion into this partnership. Microsoft, through OpenAI, is developing its Azure AI Supercomputer while enhancing its Azure Enterprise Platform and integrating OpenAI’s models into its business and consumer products (GitHub, Office, Bing).
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Understanding the Microsoft-OpenAI deal
The deal between OpenAI and Microsoft might be quite peculiar, given the hybrid structure of OpenAI, which is both an LP and a non-profit entity.
Indeed, Microsoft seems to be in talks to put $10 billion into the partnership, after the $1 billion, which was invested, back in 2019 to secure the exclusive commercial license, to distribute OpenAI products.
The deal structure might be an injection of capital, or perhaps infrastructure support, by Microsoft, for $10 billion, which might give Microsoft the right to get 75% of OpenAI profits until it recoups its investment.
And after that, it might give Microsoft the right to a 49% profit share in the future until it reaches the cap (OpenAI is a for-profit, capped organization).
After that, all the profits are captured back by OpenAI.
How is Microsoft benefiting from the OpenAI investment?
OpenAI has built the foundational layer of the AI industry. With large generative models like GPT-3 and DALL-E, OpenAI offers API access to businesses that want to develop applications on top of its foundational models while being able to plug these models into their products and customize these models with proprietary data and additional AI features. On the other hand, OpenAI also released ChatGPT, developing around a freemium model. Microsoft also commercializes opener products through its commercial partnership.
Thus, to understand, in full, the OpenAI businessmodel, it’s critical to look at how the OpenAI/Microsoft partnership has worked so far and how it’s expanding.
Main Investor in the OpenAI LP
Microsoft is the main investor in the OpenAI LP, which is a for-profit, yet capped entity, created by the OpenAI foundation to gather capital from the private sector.
In 2019, the partnership strengthened, with Microsoft putting a billion dollars into the partnership.
This gave Microsoft various advantages.
In the meantime, by 2022, Microsoft was in talks to invest another $10 billion into the partnership.
Discussions closed, as Microsoft confirmed its multi-year, multi-billion dollars investment into OpenAI, which is moving along three pillars:
This multi-year, multi-billion dollar investment from Microsoft follows their previous investments in 2019 and 2021, and will allow us to continue our independent research and develop AI that is increasingly safe, useful, and powerful.
And it further explained:
We’ve worked together to build multiple supercomputing systems powered by Azure, which we use to train all of our models.
Learning from real-world use – and incorporating those lessons – is a critical part of developing powerful AI systems that are safe and useful.
In an effort to build and deploy safe AI systems, our teams regularly collaborate to review and synthesize shared lessons – and use them to inform iterative updates to our systems, future research, and best practices for use of these powerful AI systems across the industry.
Microsoft Azure AI Supercomputer
Microsoft’s business model is quite diversified, and it’s a combination of productivity (Office), cloud (Azure), gaming (Xbox), social media (LinkedIn), and advertising (Bing, LinkedIn).
And yet, Microsoft Azure, the cloud business unit, is a crucial element for that businessmodel.
Today, Azure is among the top players in the cloud industry, together with Amazon AWS.
In the last decade, cloud providers have enabled hundreds of startups. It’s not a secret that AWS, by the early 2010s, empowered a class of startups that later became prominent tech companies (Netflix, Uber, Slack, and many others).
Yet, from the 2020s, in the future, the cloud industry playfield has changed, and it’s skewed toward AI.
In other words, large generative models, like GPT-3 and forward, to be released in the first place, need a huge amount of computational power, which today can be provided only by a few players.
This paradigm of large, centralized cloud computing was spurred by the fact, that large language models, like GPT-3, in order to be pre-trained, required a massive effort in terms of scale.
Indeed, since 2017, most of the progress of large language models came as a result of scaling up parameters, dataset size, and, therefore, the computing power needed for these models to come to light in the first place.
From that perspective, AI models have further increased (exponentially) the need for supercomputers.
On the other hand, differentiating a cloud business to become the underlying infrastructure for AI is a critical component to make sure the cloud offering doesn’t get commoditized over time.
In fact, cloud players like Microsoft and Amazon have enjoyed high-profit margins in the last years, thanks to the lack of competition and their massive infrastructure.
Yet, in the next decade, with AI models taking over the world, cloud computing might get commoditized.
Unless you develop it around AI. Which is what Microsoft is doing via its Azure AI Supercomputing technology.
In other words, the partnership between OpenAI and Microsoft, since 2016, has given Microsoft Azure’s team an important sight into how to build supercomputers that could help AI companies to build custom AI models.
This is the first critical strategic advantage that Microsoft has gained from its partnership with OpenAI: The development of its cloud AI infrastructure.
The Microsoft AI Azure supercomputer might be the most valuable piece of infrastructure for Microsoft in the coming decade, as the partnership between OpenAI and Microsoft is further scaled, and as a whole industry developed around the need for an enterpriseplatform to customize these AI models.
Microsoft Azure Enterprise Platform
In addition, Microsoft Azure is integrating all OpenAI’s products within its business and enterprise platform.
This integration enables Azure to become the go-to enterpriseplatform for the development of custom AI models, which can be integrated into the workflow of any business.
As Microsoft highlighted in its 2022 financial releases:
When it comes to AI, we’re seeing a paradigm shift as the world’s large AI models become platforms themselves. And we are helping organizations apply the world’s most advanced coding and language models to a variety of use cases, such as writing assistance, code generation, and reasoning over data with our new Azure OpenAI Service.
Thus, within the Azure Enterprise Platform, it’s possible to find all the OpenAI’s capabilities integrated.
Both to speed up the development process via applications like Codex.
Or to enable the integration of AI into the workflow of companies, across the world.
Integration into Microsoft Business And Consumer Applications
Another key benefit of the partnership between Microsoft and OpenAI is the integration of these AI models within Microsoft’s business and consumer applications products.
Some examples comprise the release of GitHub Copilot, an AI-based tool to write code much faster by leveraging GPT-3.
Or the fact that Microsoft is looking into ways to integrate these AI models within its other products, like Bing and Office.
Another large bet Microsoft might make is about integrating these AI models within its AR interfaces (HoloLens) as general-purpose assistants that can make those devices much more valuable.
The AI App Store?
For years, we’ve been waiting for the next platform after Mobile.
While VR and Blockchain made a lot of buzz by delivering very few commercial use cases.
AI, with the release of generative models and products like GPT-3, DALL-E, Stable Diffusion, and lastly, ChatGPT, has shown the opposite path.
This has spurred a plethora of commercial applications on the web, with a bottom-up approach driven by the adoption of these tools by millions of users across the web quite quickly.
So the question is whether AI can become the next businessplatform after mobile.
Thus, one way for AI to become the next platform is by enabling a plethora of applications on the existing web infrastructure through its APIs, as explained above.
In the meantime, AI must also find its “natural” physical interface, beyond desktop and mobile, to create a whole new ecosystem.
A perfect physical interface for AI might be AR.
Indeed, one of the major difficulties of AR is the ability of this interface to adapt, in real-time, to the environment while simultaneously projecting enhanced worlds thourhg these devices.
AI, through large language models and large generative models, can, in part, speed up this process.
Imagine a multimodal AI model (think of it as a combination of ChatGPT and DALL-E on steroids) plugged into a smart glass device; it might make it much more helpful to the user and able, in real-time, to navigate the world, together with the user.
By combining AI as an interface with a hardware device like HoloLens, and an operating system, like Windows Holographic OS, can Microsoft and OpenAI create the next App Store for AR?
How does OpenAI corporate and organizational structure work?
OpenAI is an artificial intelligence research laboratory that transitioned into a for-profit organization in 2019. The corporate structure is organized around two entities: OpenAI, Inc., which is a single-member Delaware LLC controlled by OpenAI non-profit, And OpenAI LP, which is a capped, for-profit organization. The OpenAI LP is governed by the board of OpenAI, Inc (the foundation), which acts as a General Partner. At the same time, Limited Partners comprise employees of the LP, some of the board members, and other investors like Reid Hoffman’s charitable foundation, Khosla Ventures, and Microsoft, the leading investor in the LP.
Key Highlights:
Microsoft-OpenAI Partnership: The partnership between OpenAI and Microsoft began in 2016 and was consolidated in 2019 when Microsoft invested $1 billion. The partnership involves the development of AI technologies, including the Azure AI Supercomputer, integration of OpenAI’s models into Microsoft’s products, and enhanced Azure Enterprise Platform capabilities.
Financial Investment and Deal Structure: Microsoft is in discussions to invest an additional $10 billion into the partnership. The deal structure includes capital injection or infrastructure support, granting Microsoft certain profit-sharing rights until it recoups its investment. Afterward, Microsoft may retain a 49% profit share until a cap is reached, and the rest of the profits go back to OpenAI.
OpenAI’s Business Model: OpenAI’s business model consists of OpenAI APIs, ChatGPT, and the Microsoft/OpenAI Commercial Partnership. It offers API access for businesses to build applications on top of its models, and it also released ChatGPT following a freemium model. Microsoft further commercializes OpenAI’s products through their partnership.
Microsoft’s Benefits: Microsoft benefits from the partnership by gaining insight into building AI supercomputers, such as the Azure AI Supercomputer, to support the computation-intensive tasks required by large models. This technology positions Microsoft’s Azure as a crucial enterpriseplatform for AI development.
Integration and Applications: OpenAI’s capabilities are integrated within Microsoft’s Azure Enterprise Platform, providing tools like Codex to accelerate development. Microsoft also integrates OpenAI models into its business and consumer products, such as GitHub Copilot, Bing, and Office, expanding the reach and applications of AI.
AI in AR Interfaces: The partnership between Microsoft and OpenAI could extend to AR interfaces, such as Microsoft’s HoloLens. By combining AI models with AR devices and operating systems, they might create a new ecosystem of AI-driven applications, potentially establishing AI as the next platform after mobile.
OpenAI’s Corporate Structure: OpenAI’s organizational structure consists of two entities: OpenAI, Inc. (a Delaware LLC controlled by OpenAI non-profit) and OpenAI LP (a capped for-profit entity). OpenAI, Inc. acts as the General Partner of OpenAI LP, and Limited Partners include employees, board members, and investors like Microsoft.
Large language models (LLMs) are AI tools that can read, summarize, and translate text. This enables them to predict words and craft sentences that reflect how humans write and speak.
Prompt engineering is a natural language processing (NLP) concept that involves discovering inputs that yield desirable or useful results.
Like most processes, the quality of the inputs determines the quality of the outputs in prompt engineering. Designing effective prompts increases the likelihood that the model will return a response that is both favorable and contextual.
Developed by OpenAI, the CLIP (Contrastive Language-Image Pre-training) model is an example of a model that utilizes prompts to classify images and captions from over 400 million image-caption pairs.
OpenAI has built the foundational layer of the AI industry. With large generative models like GPT-3 and DALL-E, OpenAI offers API access to businesses that want to develop applications on top of its foundational models while being able to plug these models into their products and customize these models with proprietary data and additional AI features. On the other hand, OpenAI also released ChatGPT, developing around a freemium model. Microsoft also commercializes opener products through its commercial partnership.
OpenAI and Microsoft partnered up from a commercial standpoint. The history of the partnership started in 2016 and consolidated in 2019, with Microsoft investing a billion dollars into the partnership. It’s now taking a leap forward, with Microsoft in talks to put $10 billion into this partnership. Microsoft, through OpenAI, is developing its Azure AI Supercomputer while enhancing its Azure Enterprise Platform and integrating OpenAI’s models into its business and consumer products (GitHub, Office, Bing).
Stability AI is the entity behind Stable Diffusion. Stability makes money from our AI products and from providing AI consulting services to businesses. Stability AI monetizes Stable Diffusion via DreamStudio’s APIs. While it also releases it open-source for anyone to download and use. Stability AI also makes money via enterprise services, where its core development team offers the chance to enterprise customers to service, scale, and customize Stable Diffusion or other large generative models to their needs.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
