Microsoft and OpenAI — Antitrust Laws in Mergers and Acquisitions in Artificial Intelligence
By William Zhang ’28
From helping struggling students with their English essays to writing briefs for lawyers, generative artificial intelligence (AI) has seemingly penetrated every aspect of everyday life (1). For large tech companies such as Google, Meta, Apple, and Microsoft, this represents a massive business opportunity. Google released Gemini in March of 2023, whereas Meta’s Meta AI research laboratory has been working on artificial intelligence since 2015, and Apple’s Apple Intelligence launched just a few weeks ago on October 28th, 2024. Microsoft, however, has taken a different approach to their AI development and has, since 2019, instead invested over ten billion dollars in OpenAI, the developer of ChatGPT (2). These investments have raised concerns about violations of antitrust regulations, which seek to prevent anti-competitive practices in mergers and acquisitions. While these investments have not yet been found to formally violate antitrust laws, they raise valid concerns that Microsoft’s influence and partnership with OpenAI could discourage competition by further strengthening Microsoft’s dominant position.
On July 22, 2019, Microsoft announced a one billion dollar investment into OpenAI. While OpenAI wouldn’t give up any equity in the deal, they agreed to three terms: “[OpenAI and Microsoft will] jointly build new Azure AI supercomputing technologies, OpenAI will port its services to run on Microsoft Azure, and Microsoft will become OpenAI’s preferred partner for commercializing new AI technologies (3).” Microsoft and OpenAI’s first commitment to “jointly build Azure AI,” Microsoft’s business oriented AI tool, doesn’t immediately raise any antitrust legal issues. Other than developing the product, OpenAI has no obligation to promote Azure AI or to use it in their own products. However, the second two terms are far more convoluted.
If OpenAI “runs on Microsoft Azure”, Microsoft’s cloud computing platform, Microsoft will have leverage over OpenAI even without owning equity. By hosting OpenAI on Microsoft Azure, Microsoft can threaten to withhold its platform from OpenAI, giving Microsoft the ability to pressure OpenAI into making certain decisions. However, this leverage is much less formal and quantifiable than, for example, having a seat on OpenAI’s board or owning equity, and thus much harder to prove in a legal sense.
The final stipulation that Microsoft becomes OpenAI’s preferred partner for commercializing new AI technology also raises antitrust issues. While the deal doesn’t define “preferred partner,” it could mean that OpenAI prioritizes Microsoft products if they decide to integrate ChatGPT into an operating system or monetize OpenAI products in any way. This would allow Microsoft to gain an edge over other competitors and potentially acquire a monopoly position in the AI sector.
The partnership between Microsoft and OpenAI goes further though. On January 23, 2023, over three years later, Microsoft announced that they were extending their partnership with OpenAI by investing another ten billion in the company, in addition to an undisclosed amount in 2021 (rumored to be two billion). This deal once again involved no equity, ensuring that Microsoft does not formally own any portion of OpenAI. However, Microsoft is now listed as having a “minority economic interest” in OpenAI and is rumored to be entitled to forty-nine percent of the profits from OpenAI’s for-profit arm (4). Microsoft Azure has also become OpenAI’s exclusive cloud provider, forcing OpenAI to rely on Microsoft for data storage and computational infrastructure (5). Additionally, in November 2023, when OpenAI CEO Sam Altman was ousted by the OpenAI board, Microsoft pressured the board to reinstate Altman under the threat of offering jobs to both Altman and all OpenAI employees to rebuild OpenAI within Microsoft (6). After the reinstatement of Altman, Microsoft took a non-voting seat on the board of OpenAI, which it relinquished seven months later (7). Microsoft’s successful pressuring of the OpenAI board to reinstate Altman suggests that Microsoft does indeed play a meaningful role in OpenAI’s operations.
However, despite over 13 billion dollars invested, there are no overt antitrust issues with Microsoft’s relationship with OpenAI as Microsoft has no formal operational control over OpenAI. Nevertheless, in January 2024, antitrust regulators in the European Union suggested that Microsoft’s financial backing of OpenAI could violate European merger regulations and sent out a call for contributions on the topic (8).
Article 19, a British international human rights organization, published a joint response alongside many of its peers to the European Commission’s call to contributions regarding OpenAI and Microsoft (9). They reiterated a conclusion that a German competition authority, the Bundeskartellamt, reached on September 25, 2023, which suggests that Microsoft has had material competitive influence over OpenAI since 2019. Article 19’s report alleges that Microsoft has acquired “decisive influence” over OpenAI as defined by Article 3(2) of the EU Merger Control Regulation, pointing to OpenAI’s exclusivity clause with Microsoft Azure in the 2023 deal as evidence.
The products of OpenAI and Microsoft also appear to be intricately intertwined, as Microsoft provides data for the OpenAI model, Codex, which in turn powers Microsoft’s CoPilot, Microsoft’s AI companion tool. Article 19 argues that this partnership gives both companies a competitive advantage as Microsoft can boost the visibility of OpenAI products while OpenAI’s models allow Microsoft to provide better services to its consumers.
Article 19 also accuses Microsoft of deliberately constructing their deal with OpenAI to appear as an innocent partnership rather than an true acquisition in order to avoid running afoul of antitrust merger regulations. They suggest that the European Commision should look into the practical execution of the partnership rather than the legal structure. Despite this, the EU dropped the inquiry into Microsoft and OpenAI in April of 2024, concluding that Microsoft’s financial backing does not constitute an acquisition and is therefore not subject to merger regulations (10). This conclusion was based on the fact that Microsoft does not hold enough power over OpenAI to infringe on antitrust laws and their combined market power does not make the AI market uncompetitive.
Meanwhile, in January, 2024, the Federal Trade Commision (FTC) in the United States opened an investigation on AI investments by tech companies and issued 6(b) orders to both Microsoft and OpenAI, forcing them to file “reports or answers in writing to specific questions” about its business practices (11). Although this investigation has not yet concluded, the deal between Microsoft and OpenAI could easily be found to violate many of the Merger Guidelines outlined by the FTC and the US Department of Justice (DOJ). For example, guideline 6 states that “mergers can violate the law when they entrench or extend a dominant position,” and Microsoft’s partnership with OpenAI certainly “entrenches or extends” Microsoft’s dominant position in the software market with Windows. Another potential violation would be of guideline 7, which states that “when an industry undergoes a trend toward consolidation, the agencies consider whether it increases the risk a merger may substantially lessen competition or tend to create a monopoly (12).” It could be argued that the technology industry as a whole is moving towards consolidation. In a competitive market, OpenAI would be challenging the dominant positions of Microsoft, Google, and Apple, and yet OpenAI appears to be relying on heavy investments from Microsoft to raise capital, demonstrating the lack of competitiveness in the technology industry.
While the European Union’s investigation was dropped, the American FTC’s investigation is still ongoing. The legal questions surrounding the deals between Microsoft and OpenAI have the potential to change merger and acquisition law. If Microsoft deliberately engineered the terms of the deal to avoid formal operational control over OpenAI while obtaining intangible leverage, lawmakers will need to carefully consider how antitrust laws could prevent this kind of pseudo-acquisition from promoting informal consolidation in the future. Another pressing issue is whether Microsoft acquiring OpenAI poses an actual legal antitrust concern, as some analysts predict that Microsoft will formally acquire OpenAI in the near future (13). Finally, from a broad economic perspective, one must also consider why artificial intelligence has not brought about more competition. Contrary to market expectations, it seems that the advancement of AI has consolidated the power of previously established industry giants, such as Microsoft. Such consolidation could potentially inhibit future innovation by limiting market entry. Therefore, it is up to legal scholars and government officials to ensure antitrust laws encourage innovation by preventing consolidation. Thus the results of investigations and litigation surrounding Microsoft’s deal with OpenAI will have lasting implications on the future of antitrust laws and technological innovation as a whole.
Endnotes
(1) Jack Litke. “AI Gone Awry: A Case Study on Generative AI in Legal Filings,” Yale Undergraduate Law Journal, accessed November 17, 2024, https://www.yaleundergraduatelawjournal.com/yulj-blog/case-study-generative-ai
(2) “OpenAI Investment History,” Pitchbook, accessed November 12, 2024, https://my.pitchbook.com/profile/149504-14/company/profile#investors
(3) “OpenAI forms exclusive computing partnership with Microsoft to build new Azure AI supercomputing technologies,”Official Microsoft Blog, July 22, 2019, https://news.microsoft.com/2019/07/22/openai-forms-exclusive-computing-partnership-with-microsoft-to-build-new-azure-ai-supercomputing-technologies/
(4) Sean Endicott. “OpenAI sneaks out website update, no longer lists Microsoft as minority owner,” Windows Central, December 19, 2023, https://www.windowscentral.com/microsoft/openai-sneaks-out-website-update-no-longer-lists-microsoft-as-minority-owner
(5) “Microsoft and OpenAI extend partnership,” Official Microsoft Blog, January 23, 2023, https://blogs.microsoft.com/blog/2023/01/23/microsoftandopenaiextendpartnership/
(6) Charles Duhigg. “The Inside Story of Microsoft’s Partnership with OpenAI,” The New Yorker, December 1, 2023, https://www.newyorker.com/magazine/2023/12/11/the-inside-story-of-microsofts-partnership-with-openai
(7) Hayden Field. “Microsoft’s decision to give up OpenAI board observer seat doesn’t quell key concerns,” CNBC, July 11, 2024, https://www.cnbc.com/2024/07/11/microsoft-giving-up-openai-board-observer-seat-doesnt-settle-concerns.html
(8) Foo Yun Chee. “Microsoft's OpenAI investment could face EU merger probe, EU regulators say,” Reuters, January 9, 2024, https://www.reuters.com/technology/microsofts-openai-investment-risks-eu-merger-probe-eu-regulators-say-2024-01-09/
(9) “EU: Submission to European Commission on Microsoft-OpenAI ‘partnership,” Article 19, January 30, 2024, https://www.article19.org/resources/eu-submission-to-european-commission-on-microsoft-openai-partnership/
(10) Foo Yun Chee and Yuvraj Malik. “Microsoft-OpenAI deal set to dodge formal EU merger probe, sources say,” Reuters, April 17, 2024, https://www.reuters.com/technology/microsofts-13-bln-openai-deal-avoid-formal-eu-probe-bloomberg-news-reports-2024-04-17/
(11) “Federal Trade Commission Act,” 15 USC Chapter 2, Subchapter I: Federal Trade Commission. September 26, 1914, https://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title15-chapter2-subchapter1&edition=prelim
(12) “Merger Guidelines, ”U.S. Department of Justice and the Federal Trade Commission. December 18, 2023, https://www.ftc.gov/system/files/ftc_gov/pdf/2023_merger_guidelines_final_12.18.2023.pdf
(13) Collins, Barry. “Microsoft Will Buy OpenAI Within Three Years, Analyst Predicts,” Forbes, Oct 8, 2024, https://www.forbes.com/sites/barrycollins/2024/10/08/microsoft-will-buy-openai-within-three-years-analyst-predicts/
