Microsoft takes $3.1B hit from OpenAI investment amid growing rivalry

Microsoft reported a $3.1 billion hit to its first-quarter net income due to its massive investment in OpenAI, bringing the software giant’s total commitment to $13 billion with $11.6 billion already funded. This financial impact underscores the high stakes of Microsoft’s AI strategy as the partnership evolves from pure collaboration into a complex relationship mixing cooperation with increasing competition.

What you should know: The $3.1 billion charge represents an “equity method investment” that reduced Microsoft’s earnings per share by 41 cents, though net income still rose to $24.67 billion year-over-year.

• Microsoft now holds approximately 27% of OpenAI’s for-profit arm on an as-converted diluted basis, valued at $135 billion.
• Under OpenAI’s new corporate structure, the nonprofit OpenAI Foundation maintains a controlling 26% stake, while current and former employees and investors hold 47%.

The big picture: What began as a straightforward partnership has transformed into a relationship where Microsoft and OpenAI are simultaneously collaborators and competitors across multiple AI markets.

• Microsoft added OpenAI to its official list of competitors over a year ago, alongside Amazon, Apple, Google, and Meta.
• The companies now compete in AI offerings, search, and news advertising, particularly after OpenAI announced its SearchGPT prototype.

Key commercial terms: OpenAI has committed to purchasing $250 billion worth of Azure cloud services from Microsoft under their updated agreement.

• Microsoft will no longer have right of first refusal as OpenAI’s compute provider, marking a shift toward a more arms-length commercial relationship.
• This arrangement ensures Microsoft benefits from OpenAI’s growth while allowing the AI company greater flexibility in its infrastructure choices.

Strategic implications: Despite the competition, Microsoft continues leveraging OpenAI’s models to power AI features across its product portfolio, though the company is developing alternatives.

• In August, Microsoft began publicly testing a homegrown AI model that could enhance its consumer Copilot assistant.
• CEO Satya Nadella called the relationship “one of the most successful partnerships and investments our industry has ever seen” during the earnings call.

What they’re saying: “We continue to benefit mutually from each other’s growth across multiple dimensions,” Nadella said, emphasizing the ongoing value despite the evolving competitive dynamics.

By the numbers: Microsoft’s Azure cloud division, which benefits significantly from AI demand, grew revenue 40% in the quarter, exceeding analyst estimates and remaining the company’s primary growth driver.