Breakingviews: Microsoft’s AI bet: heads I win, tails I also win

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An illustration projected on a screen shows a robot hand and a human one moving towards each others during the "AI for Good" Global Summit at the ITU in Geneva
An illustration projected on a screen shows a robot hand and a human one moving towards each others during the "AI for Good" Global Summit at the International Telecommunication Union (ITU) in Geneva, Switzerland, June 7, 2017.

NEW YORK, Jan 10 (Reuters Breakingviews) - Microsoft (MSFT.O) is mulling a heads-I-win, tails-I-also win, AI deal. A mooted $10 billion investment, reported by Semafor, in the maker of the popular ChatGPT, could reshape Microsoft’s software business. Even if it flops, CEO Satya Nadella will slow a rival, and possibly regain much of its investment.

The $29 billion price tag placed on OpenAI is high, but defensible. The company aims to grow sales to $1 billion next year, according to a Reuters report. That would value the firm at 29 times 2024 revenue. Enterprise software group Snowflake (SNOW.N) is trading at 13 times 2024 revenue, but it’s growing nowhere near OpenAI’s rate. And the investment is a pittance compared to Microsoft’s market capitalization of $1.7 trillion and $107 billion of cash on hand.

The financial potential of artificial intelligence, though, is vast and probably bigger than all current software spending. Designing a better search engine, one that intuitively knows exactly what users are looking for, would be a major threat to Google Owner Alphabet’s (GOOGL.O) $1.1 trillion valuation. The next step could be AI programs that quickly write better software and design more effective drugs, creating even bigger potential markets. Moreover, the biggest uses for new IT platforms often emerge after experimentation in the wild.

Of course, the odds are OpenAI will fade away, as most tech firms do. Even then, Microsoft’s investment may not be wasted. Alphabet has spent about $100 billion on research and development, betting hard on such products over the past three years alone, and will grow its spending by 13% annually in the next three years, Morgan Stanley reckons. By locking up a promising firm, and scarce researchers, Microsoft may prevent Alphabet from winning, and may force it to raise spending.

Clever dealmaking cuts Microsoft’s risk further. OpenAI already runs on Microsoft’s Azure cloud platform thanks to a 2019 agreement between the two. The proposed investment means OpenAI can grow its business faster, which also benefits Azure, a part of Microsoft that investors value highly. Furthermore, the new agreement gives Microsoft 75% of OpenAI’s profit until its investment is recouped.

Tech bets may be coin flips, but this one is worth taking.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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CONTEXT NEWS

Microsoft is in talks to invest $10 billion into OpenAI, the creator of ChatGPT, according to Semafor. The investment would value the artificial intelligence firm at $29 billion.

As part of the deal, Microsoft would receive 75% of OpenAI’s profit until it has recouped its investment, after which it will retain a 49% stake in the firm, Semafor said, citing unnamed sources.

In 2019, Microsoft invested $1 billion in OpenAI. The firm agreed to run its service on Microsoft’s Azure web services platform.

Editing by John Foley and Sharon Lam

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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