Microsoft prepares for OpenAI’s next model as their relationship strains

If the stars align, we should see OpenAI’s next ‘Orion’ AI model by the end of the year.

by Tom Warren

Oct 25, 2024, 1:45 AM UTC

Photo of Satya Nadella standing in front of a sign that reads Microsoft loves OpenAI

Image: Microsoft

Tom Warren is a senior editor and author of Notepad, who has been covering all things Microsoft, PC, and tech for over 20 years.

Microsoft is getting ready to host OpenAI’s next model, just as reports emerge describing unprecedented tension in their complex relationship.

We just exclusively revealed that Orion, OpenAI’s next model, is set to be released by the end of the year. A source familiar with Microsoft’s AI plans tell me that engineers inside the company have been preparing to host OpenAI’s Orion model in recent weeks.

Most of the engineers involved in the project haven’t been briefed on the exact details of OpenAI’s model plans in an effort to keep the model secret before an official announcement is made. Microsoft declined to comment for this story.

I understand OpenAI has requested access to more of Microsoft’s servers that host Nvidia’s more powerful H100 GPUs, instead of the A100 GPUs that OpenAI has largely been using so far. Nvidia’s H100 chip improves AI inferencing performance and is better at training AI models, making it an ideal candidate for a next-generation OpenAI model.

While Microsoft engineers prepare server capacity for OpenAI’s Orion model, there are signs that the once-close relationship between the two companies has hit a rocky patch. At the center of the tension is the costly computing power and server capacity required to build and run OpenAI’s models. The New York Times reports that OpenAI has been complaining that Microsoft isn’t providing the AI startup with enough computing power to achieve its aim of artificial general intelligence (AGI) — software with human-like intelligence.

OpenAI has been trying to renegotiate the multibillion-dollar deal it secured with Microsoft nearly two years ago as a result. The original deal turned Microsoft into the exclusive cloud partner for OpenAI. Microsoft’s Azure cloud services power all OpenAI workloads across products, API services, and research. The New York Times reports that Microsoft agreed to an exception in the contract to allow OpenAI to sign a $10 billion deal with Oracle for additional AI servers earlier this year. OpenAI’s deal with Oracle was positioned publicly in June as a way to “extend the Microsoft Azure AI platform” as Microsoft continues to provide the software that runs on Oracle’s hardware.

Microsoft has also been balancing how much GPU power it allocates to OpenAI against its own demands internally and for its paid AI services through Azure OpenAI. Business Insider reported earlier this year that Microsoft is planning to stockpile up to 1.8 million GPUs by the end of 2024, but I’m told that Microsoft wants to get closer to 3 million by the middle of 2025.

Microsoft’s reliance on OpenAI models has positioned it as a leader in the AI era through products like Microsoft 365 Copilot and GitHub Copilot. The partnership has also benefited OpenAI with its ChatGPT launch, but it does mean Microsoft could lose out in the long term. A key tenet of Microsoft’s partnership with OpenAI stipulates that if the startup achieves AGI, Microsoft will no longer have access to OpenAI’s technologies. That could put Microsoft at a competitive disadvantage if OpenAI achieves AGI in the future or even if one of OpenAI’s many competitors manages to get there first. Microsoft’s OpenAI investment was originally triggered by fears that it was years behind Google’s AI efforts, so it’s unsurprising that the company would be hedging its bets with OpenAI.

Another complicated part of Microsoft’s OpenAI relationship is how its giant investment translates into equity in a for-profit company. OpenAI started off life as a nonprofit organization, but it’s quickly transitioning into a for-profit corporation after closing funding rounds that value it at $157 billion. The Wall Street Journal reports that both Microsoft and OpenAI have hired investment banks to advise them on governance rights and how much of the restructured OpenAI that Microsoft will own.

Microsoft has invested more than $13 billion in OpenAI since 2019, and it’s entitled to up to 49 percent of the for-profit arm of OpenAI’s profits once Microsoft is made whole on its initial investment, according to The Wall Street Journal. Beyond profit, I understand that Microsoft is currently entitled to a part of OpenAI’s revenue, too. These close ties will make it difficult during Microsoft and OpenAI’s equity negotiations, particularly as antitrust regulators have been increasingly looking at Microsoft’s investments in OpenAI.

For all the close ties, OpenAI and Microsoft also look increasingly like they’re competing with each other. Microsoft listed OpenAI as a direct competitor for the first time in an SEC filing in August, just months after OpenAI released GPT-4o, a faster model that it made free to all ChatGPT users. The GPT-4o release surprised some people at Microsoft, according to sources, because it undermined Microsoft’s own paid-for AI services on Azure, which include speech and translation features.

GPT-4o includes real-time translation and greatly improved speech capabilities, and it’s half the price and twice as fast as GPT-4 Turbo. The surprise release had Azure customers wondering why they’d pay extra for Microsoft’s AI services when GPT-4o can do it faster and better.

OpenAI also sells ChatGPT Team and Enterprise to businesses, while Microsoft tries to tempt them into buying Copilot licenses powered by OpenAI’s various models. OpenAI’s continued transition to a for-profit company will surely complicate this competition further.

Microsoft also appears to be trying to delicately balance its OpenAI relationship and the company’s own ambitions to build competitive AI models. Mustafa Suleyman, the Google DeepMind cofounder who is now CEO of Microsoft AI, is overseeing Microsoft’s long-term efforts to replace OpenAI models, according to The New York Times.

Microsoft is now preparing new APIs for search, vision, and speech recognition that will connect to OpenAI’s GPT-4o model, according to a source. These new APIs could launch as soon as Microsoft’s Ignite conference in November. How Microsoft positions them will be an interesting test for its increasingly complex OpenAI relationship.

The pad:

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Thanks for subscribing and reading to the very end. I am still interested in what you want to see in Windows 12? You can reach me via email at [email protected].

If you’ve heard about any of Microsoft’s other secret projects, you can also speak to me confidentially on the Signal messaging app, where I’m tomwarren.01. I’m also tomwarren on Telegram if you’d prefer to chat there.

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