According to sources, Microsoft had struck a deal to receive almost half of OpenAI’s financial returns. (File)

As global regulators scrutinize Microsoft Corp’s $13 billion investment in OpenAI, the software giant has a simple argument that it hopes will resonate with antitrust regulators: It doesn’t own a traditional stake in the buzzy startup and therefore can not saying it controls it.

When Microsoft negotiated an additional $10 billion investment in OpenAI in January, it opted for an unusual arrangement, people familiar with the matter said at the time.

Instead of buying part of the state-of-the-art artificial intelligence lab, the company struck a deal to receive nearly half of OpenAI’s financial returns until the investment is repaid up to a predetermined cap, one of the people said. The unorthodox structure was invented because OpenAI is a for-profit, limited liability company housed within a nonprofit organization.

However, it is not clear whether regulators see a difference. On Friday, Britain’s Competition and Markets Authority said it was gathering information from stakeholders to determine whether collaboration between the two companies threatened competition in the United Kingdom, home of Google’s AI research lab Deepmind. The U.S. Federal Trade Commission is also examining the nature of Microsoft’s investment in OpenAI and whether it may violate antitrust laws, according to a person familiar with the matter.

The investigation is preliminary and the agency has not yet launched a formal investigation, said the person, who did not want to be identified because the matter is confidential.

Microsoft did not report the transaction to the agency because the investment in OpenAI does not constitute control of the company under U.S. law, the person said. OpenAI is a non-profit organization and acquisitions of non-corporate entities are not reported under US merger law, regardless of value. Agency officials are analyzing the situation and evaluating their options.

“While details of our agreement remain confidential, it is important to note that Microsoft does not own an interest in OpenAI and is only entitled to a share of the profit distributions,” a Microsoft spokesperson said in a statement. Earlier Friday, Microsoft President Brad Smith said, “The only thing that has changed is that Microsoft will now have a non-voting observer on the OpenAI board.” He described the relationship with OpenAI as “very different” than the full one DeepMind acquired by Google in the UK.

“Our partnership with Microsoft allows us to continue our research and develop safe and useful AI tools for everyone, while remaining independent and competitive. Their non-voting board observer does not give them any managerial authority or control over the operations of OpenAI,” an OpenAI spokesperson said in a statement.

From the beginning, Microsoft and OpenAI tried to make clear the independence of the two companies. Microsoft hoped to reassure investors and customers that the company is not overly reliant on one partner. OpenAI didn’t want employees, customers and other investors to think it was just an outpost of Microsoft based in Redmond, Washington. That careful positioning was upended last month by the firing of OpenAI CEO Sam Altman and the startup’s near-implosion.

The Altman imbroglio demonstrated both Microsoft’s lack of control and influence. Microsoft was only informed after a few minutes that the OpenAI board intended to announce Altman’s removal, and its executives were not consulted in the decision. Nevertheless, Microsoft CEO Satya Nadella, along with other investors, played a key role in forcing the board to reverse its decision. At one point, Microsoft said it would task Altman and his OpenAI colleagues to create a new Microsoft AI unit.

After Altman was reinstated as CEO, Microsoft executives discussed whether it made sense to take a seat on the OpenAI board, people familiar with the matter said at the time. On the one hand, executives feared that a board seat or observer position might attract the attention of regulators. On the other hand, Microsoft wanted to keep a better eye on its partner and protect its investments – an imperative that prevailed despite the risks.

Ultimately, Microsoft could face a whole host of regulatory problems. The regulatory authorities in Europe are also paying attention, said a spokesman for the European Commission. In order for a transaction to be reportable to the Commission under the EU Merger Regulation, it must involve a permanent change of control. Although this transaction was not officially notified, the commission was already following the situation before the management unrest, the spokesman said.

Last month, Germany’s competition authority said it would not subject Microsoft’s OpenAI investment to merger review. But the regulator said they were only holding back because OpenAI had no significant business in Germany. After reviewing the transaction and discussions with the companies, the regulator concluded that the investment would give Microsoft a “significant competitive influence” on the AI ​​company, which could warrant scrutiny in the future if OpenAI increases its activities in Germany.

The partnership raises competition issues if Microsoft limits its own AI research and development or if the investment prevents OpenAI from working with the tech giant’s rivals, said Jennifer Rie, an antitrust analyst at Bloomberg Intelligence. Antitrust regulators may also have concerns about Microsoft’s board observer because it would provide Microsoft with additional information about OpenAI’s plans, even if the company has no rights to influence the decisions.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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