New deal with Microsoft values OpenAI at $500 billion

Microsoft and OpenAI reached a deal to allow the ChatGPT maker to restructure itself into a public benefit corporation, valuing OpenAI at $500 billion and giving it more freedom in its business operations.

The deal removes a major constraint on raising capital for OpenAI that has existed since 2019, when it signed a pact with Microsoft that gave the tech giant rights over much of OpenAI's work in exchange for costly cloud computing services needed to carry it out.

As its ChatGPT service exploded in popularity, those limitations became a notable source of tension between the two companies.

Microsoft will still hold a stake of about $135 billion, or 27 per cent, in OpenAI Group PBC, which will be controlled by the OpenAI Foundation, a nonprofit, the companies said.

The Redmond, Washington-based firm has invested $13.8 billion in OpenAI, with Tuesday's deal implying that Microsoft had generated a return of nearly ten times its investment.

Microsoft shares rose 2.5 per cent, sending its market value above $4 trillion again.

The deal keeps the two firms intertwined until at least 2032 with a massive cloud computing contract and with Microsoft retaining some rights to OpenAI products and AI models until then even if OpenAI reaches artificial general intelligence (AGI), the point at which AI systems can match a well-educated human adult.

With more than 700 million weekly users as of September, ChatGPT has exploded in popularity to become the face of AI for many consumers after OpenAI's founding as a nonprofit AI safety group.

As the company grew, the Microsoft deal constrained OpenAI's ability to raise funds from outside investors and secure computing contracts as the crush of ChatGPT users and its research into new models caused its computing needs to skyrocket.

"OpenAI has completed its recapitalization, simplifying its corporate structure," Bret Taylor, the OpenAI Foundation's board chair, said in a blog post. "The nonprofit remains in control of the for-profit, and now has a direct path to major resources before AGI arrives."

Microsoft's previous 2019 agreement had many provisions that rested on when OpenAI reached that point, and the new deal requires an independent panel to verify OpenAI's claims it has reached AGI.

"OpenAI still faces ongoing scrutiny around transparency, data usage, and safety oversight. But overall, this structure should provide a clearer path forward for innovation and accountability," said Adam Sarhan, CEO of 50 Park Investments.

Gil Luria, head of technology research at DA Davidson, said the deal "resolves the longstanding issue of OpenAI being organized as a not-for-profit (organization) and settles the ownership rights of the technology vis-à-vis Microsoft. The new structure should provide more clarity on OpenAI's investment path, thus facilitating further fundraising."

Microsoft also said that it has secured a deal with OpenAI where the ChatGPT maker will purchase $250 billion of Azure cloud computing services.

In exchange, Microsoft will no longer have a right of first refusal to provide computing services to OpenAI.

Microsoft also said that it will not have any rights to hardware produced by OpenAI. In March, OpenAI bought longtime Apple design chief Jony Ive's startup io Products in a $6.5 billion deal.