Microsoft’s OpenAI ties face potential E.U. merger probe

Microsoft Corp.’s $13 billion investment into OpenAI Inc. risks a full-blown investigation by European Union deals watchdogs, after a mutiny at the ChatGPT creator laid bare deep ties between the two companies.

The European Commission said on Tuesday that it’s examining whether Microsoft’s involvement should be vetted under the bloc’s merger rules – paving the way for a formal probe and even a potential unwinding if it’s found to hamper fair competition. The E.U. move, part of a broader look at artificial intelligence, follows a similar step by the U.K.’s Competition and Markets Authority.

“Virtual worlds and generative AI are rapidly developing,” said Margrethe Vestager, the EU’s antitrust commissioner.

“It is fundamental that these new markets stay competitive, and that nothing stands in the way of businesses growing and providing the best and most innovative products to consumers.”

Microsoft has benefited richly from its outlay on OpenAI.

By integrating OpenAI’s products into nearly every corner of its core businesses, the software giant quickly established itself as the undisputed leader of AI among big tech firms. Rival Alphabet Inc.’s Google has been racing to catch up since.

Microsoft stock initially fell 0.8% to $371.71 at 10:10 a.m. in New York but closed at $375.39, up 0.3%.

The company declined to immediately comment beyond pointing to its statement last month on the U.K.’s move. Microsoft said then that since 2019 it has “forged a partnership with OpenAI that has fostered more AI innovation and competition, while preserving independence for both companies.”

The recent firing – and subsequent rehiring – of Sam Altman as chief of OpenAI exposed how inextricably linked the two companies have become. Microsoft shares fell immediately after OpenAI’s board ousted Altman. Microsoft Chief Executive Officer Satya Nadella personally helped negotiate and advocate for his return to the company – at one point offering to hire Altman himself, along with other employees at OpenAI who wanted to leave.

OpenAI’s board eventually agreed to reinstate Altman. The company then named a three-person interim board and added Microsoft as a nonvoting observer.

In December, the UK’s competition watchdog announced that the saga led it to check whether Microsoft’s investments should be examined further. The CMA said it will look at whether the balance of power between the two firms has fundamentally shifted to give one side more control or influence over the other. Bloomberg News also previously reported that the U.S. Federal Trade Commission has made queries into the ties between the firms.

Moves to examine Microsoft’s investments into OpenAI put the U.S. tech giant under the antitrust microscope once again in Europe. Its acquisition of video-game giant Activision Blizzard was initially blocked by the UK’s CMA before the British agency made a U-turn to wave it through with conditions in October. The E.U. had cleared the deal with behavioral remedies in May.

At the core of the partnership between Microsoft and OpenAI is the massive amounts of computer power required to keep the worldwide boom in generative AI going. Running the systems behind tools such as ChatGPT and Google’s Bard has sent demand for cloud services and processing capacity soaring. OpenAI, for example, has become a major customer of Microsoft’s cloud business.

In turn, all three of the world’s biggest cloud-computing providers – Microsoft, Amazon.com Inc., and Google – have become active investors in AI startups.

On Tuesday, the EU’s antitrust enforcers also announced a call for feedback on competitive issues that may arise in the field of generative artificial intelligence and virtual worlds.

“We are inviting businesses and experts to tell us about any competition issues that they may perceive in these industries, whilst also closely monitoring AI partnerships to ensure they do not unduly distort market dynamics,” Vestager said.

The Brussels-based commission added that venture capital investment in AI in the E.U. is estimated at more than €7.2 billion in 2023 and the size of the virtual worlds market in Europe is estimated to have reached more than €11 billion. The exponential growth is likely to have a major impact on how businesses compete, the authority said.