Beyond the selfies between Microsoft CEO Satya Nadella and OpenAI CEO Sam Altman, and the friendly conversations between the pair on stage, all is not well with Microsoft’s $13 billion AI investment. Over the past year, multiple reports have painted a picture of a Microsoft and OpenAI relationship that is straining under pressure.
As OpenAI battles for access to more compute power and less reliance on Microsoft, tensions have been rising during negotiations over the future of OpenAI’s business and its Microsoft partnership. Microsoft backed down on being the exclusive cloud provider for OpenAI earlier this year, but OpenAI still needs Microsoft’s approval to convert part of its business to a for-profit company. That’s led to a potentially explosive outcome.
OpenAI executives have now reportedly considered accusing Microsoft of anticompetitive behavior, which could mean regulators look even more closely at the terms of Microsoft and OpenAI’s contract for potential violations of antitrust laws. The Wall Street Journal reports that OpenAI’s potential acquisition of AI coding tool Windsurf is at the heart of the latest standoff, as OpenAI wants Windsurf to be exempt from its existing contract with Microsoft.
If OpenAI does wage a public war against its biggest partner, Google will be grinning from ear to ear. The Federal Trade Commission (FTC) opened an investigation into Microsoft last year under the Biden administration, and the Trump administration is reportedly pushing ahead with the antitrust probe — including looking at Microsoft’s AI investments and deal with OpenAI. Google already reportedly urged the FTC to kill Microsoft's exclusive deal with OpenAI, so regulators will be keen to hear directly from OpenAI. It’s more than ironic given that Microsoft's initial OpenAI investment was triggered by Google fears.
Microsoft’s partnership with OpenAI is complicated, and the pair are intertwined both technologically and financially. While it’s been widely reported that OpenAI shares 20 percent of its revenues with Microsoft, there are additional revenue-sharing agreements in place, according to sources who are familiar with the arrangement.
Microsoft receives 20 percent of the revenue OpenAI earns for ChatGPT and the AI startup’s API platform, but Microsoft also invoices OpenAI for inferencing services. As Microsoft runs an Azure OpenAI service that offers OpenAI’s models directly to businesses, Microsoft also pays 20 percent of its revenue from this business directly to OpenAI.
Microsoft also has an unreported revenue share related to OpenAI’s impact on Bing and Microsoft Edge. If Microsoft’s search and news advertising revenue grows by 15 percent year-over-year, Microsoft then pays a 10 percent revenue share to OpenAI. This revenue sharing deal scales up to 20 percent, depending on year-on-year growth.
These complicated revenue-sharing agreements show how difficult it will be for OpenAI to break from this partnership. Microsoft’s multibillion-dollar investments also entitle it to up to 49 percent of the profit generated by OpenAI’s for-profit arm. Given OpenAI is far from profitability and Microsoft has a share of OpenAI’s losses, the software giant is still years away from seeing those profit returns.
But OpenAI is trying to convince Microsoft to give up its entitlement to future profits in return for a stake in the reshaped OpenAI business. The Information reports that this could give Microsoft an approximately 33 percent stake, if it’s willing to give up the capped share of profits. Microsoft’s OpenAI contract also includes a clause that means it will relinquish its rights to OpenAI revenue and its AI models when the startup achieves AGI. This is also reportedly linked to OpenAI’s profits.
While OpenAI is keen to get access to more compute and a better deal, Microsoft has also been hedging its bets on OpenAI over the past 18 months.
The trouble all started when the OpenAI board fired Altman in November 2023. This immediately hit Microsoft’s stock price and had executives working overtime during a holiday period to try and salvage the situation. Even Nadella was directly involved in the discussions, and he announced that Microsoft would be hiring Altman, OpenAI cofounder Greg Brockman, and others “to lead a new advanced AI research team.”
The OpenAI board quickly backed down, and Altman was reinstated as CEO, but sources familiar with Microsoft’s AI efforts tell me that this messy incident shook the company’s confidence in OpenAI.
Nadella has been pushing Microsoft’s AI teams to move quickly on hosting OpenAI alternative models as part of its Azure AI Foundry business. Microsoft doesn’t have to share revenues from this business with OpenAI, as it’s set up as a way for developers to get access to a variety of AI models from different AI labs.
Engineers worked through the night to get DeepSeek’s R1 model ready for Azure AI Foundry earlier this year, something that Nadella pushed for. He also pushed for Microsoft to host xAI’s Grok 3 models recently, in a bid to be seen as the key host for popular or emerging AI models. Microsoft is in a race to build what it calls an AI “agent factory,” and it needs the best models to achieve this.
Microsoft might even create its own AI models to replace OpenAI ones. Mustafa Suleyman, the Google DeepMind cofounder who is now CEO of Microsoft AI, is overseeing Microsoft’s long-term efforts to replace OpenAI models. That’s a complicated project that’s not close to fruition yet, and Microsoft seems to be making more progress with small language models like Phi that can even run locally on Copilot Plus PCs.
Both Azure AI Foundry and Microsoft’s AI model experimentation are clearly a hedge against OpenAI, especially as the pair are increasingly on a path to competing for the same customers. Microsoft even listed OpenAI as a direct competitor for the first time last year, just months after OpenAI released GPT-4o, a faster model that it made free to all ChatGPT users. At the time, I wrote that OpenAI’s GPT-4o release surprised some people at Microsoft, because it undermined Microsoft’s own paid AI services on Azure, including speech and translation features.
OpenAI also sells ChatGPT Team and Enterprise to businesses, while Microsoft is trying to get businesses to buy Microsoft 365 Copilot licenses for its own AI efforts. During an internal town hall meeting earlier this year, Nadella said that he wants Microsoft to take inspiration from OpenAI so that its future cloud work “will look like ChatGPT.”
Whatever happens next in Microsoft’s complicated relationship with OpenAI, I fully expect Microsoft to continue aggressively striking deals that embrace rival AI models. As Nadella has proven time and time again since becoming CEO more than a decade ago, he loves a good partnership.
