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The information is reporting on the latest tensions between Microsoft and OpenAI, but we're going to look at how all of that potential drama and infighting actually impacts development in the broader AI space. Welcome back to the AI Daily Brief.
One of the most foundational relationships that has shaped AI for the last couple of years is, of course, the relationship between Microsoft and OpenAI. Microsoft invested a huge amount of capital in OpenAI, both before and after the launch of ChatGPT, a move that ended up inspiring a lot of non-traditional relationships between these frontier labs and their deep-pocketed Big Tech peers. This sort of relationship was really important, as it created a source of capital that was beyond the ability of the traditional Venture Capital establishment to provide. What's more, it put the latest frontier models right in the direct line of sight of enterprises through integration with Azure.
And yet, at the same time, it's a complicated relationship. The Information recently published a long piece about the latest updates in that foamy relationship, which seems to be getting potentially even a little bit more, more sour now. What makes this update all the more interesting is that it also suggests that Microsoft is making some progress on its goal for independence.
What I want to do today is both one, look at these latest updates, but two, try to understand and game out what it might mean for the rest of the AI space more broadly. By way of background, it's important to recognize how the key inflection point moment of Sam Altman's firing and then rehiring has shaped everything subsequently. At the time, you might remember one of the ways that Sam Altman was able to get power back was that Microsoft was going to create a new division where he could effectively recreate OpenAI from within Microsoft. The preponderance of OpenAI staffers were planning on going with him, and that ultimately forced the board to reverse their decision. Throughout the whole proceeding, Satya Nadella said that Microsoft was agnostic about how it played out; that they'd be happy to continue working with OpenAI as it was before or as this new reconstituted thing internally. However, it was clearly a wake-up call for Microsoft around the potential volatility of having such a reliance on OpenAI as a partner.
Now, at the time, part of the challenge was that the terms of their agreement had this very strange, pretty loose provision in there that the deal would be broken and Microsoft would no longer have preferential access to OpenAI models once AGI was achieved. Of course, it wasn't clear what AGI being achieved meant; that was a decision that was left up to OpenAI's board. However, after this period where OpenAI's board seemed so capricious, it's very clear that Microsoft felt like they had to start asserting their independence more quickly. That led next to the hiring of Mustafa Suleyman and a big part of the team from Inflection AI. Suleyman, who had also co-founded Google DeepMind before leaving Google and founding Inflection, was basically tasked with doing exactly what Altman would have done had he actually come over: build a new division inside Microsoft that not only managed the relationship with OpenAI, although that was part of it, that also built their own models.
Much has been cataloged about the challenge that Mustafa Suleyman has had in reorganizing Microsoft's internal teams, moving people around from different divisions in the company. There have been some high-profile departures and public sniping, although it's not clear that there's particularly more of this going on than any of these big foundation labs with the effectively revolving door of talent. The new part of this report from The Information is, first, that the relationship got more tense after OpenAI showed Microsoft its first reasoning model, 01. Suleyman apparently wanted more information around how OpenAI actually worked, but OpenAI didn't want to give it to them. The Information writes, raising his voice, Suleyman told OpenAI employees, including Mira Murati, then OpenAI's chief technology officer, that the AI startup wasn't holding up its end of the wide-ranging deal it has with Microsoft. The call then ended abruptly. This is a lot more tense than we've seen previously reported. It's one thing to see that each side is making moves to express some independence from one another; it's another to hear about a fight internally where OpenAI was actively refusing to tell Microsoft the key technical details of its latest innovations.
The other part of The Information update, however, is that AI researchers in that Microsoft division have now completed the training of a family of Microsoft models that they claim are performing "nearly as well as leading models from OpenAI and Anthropic." The team is also apparently training reasoning models, which could compete directly with 01 and 03. The new family of models is called MɑiA, probably short for Microsoft AI, and according to this reporting, the team at Microsoft is already experimenting with swapping out their MɑiA models for the OpenAI models that are currently in Microsoft Copilot. This would be a huge shift, of course, for Microsoft. So far, the only models they've released are the Phi series of models, Phi, that were much smaller models designed for on-device use that weren't directly competing with OpenAI.
After The Information started reporting this, Bloomberg picked it up as well, leading a Microsoft spokesperson to give a non-answer, saying, "As we've said previously, we're using a mix of models, which includes continuing our deep partnership with OpenAI, along with models from Microsoft AI and open-source models."
So what is actually going on here? First of all, there is clearly a push for independence and, more specifically, a push for self-reliance. As I've said ever since Altman's firing, this just makes sense from Microsoft's standpoint. It would be a breach of fiduciary responsibility, in my opinion, for them not to be thinking about how to get more independence. That's why I've never thought that it's actually speaking out of both sides of their mouths when this sort of stuff is happening privately, but publicly they're saying that the relationship is still important. I think that both of those things can be true at the same time. The challenge for Microsoft, of course, is that while it's great that they finally have some internal models that are starting to get up into the range of OpenAI publicly available models, that still puts them fundamentally behind. That doesn't make it viable realistically for them to swap out OpenAI's models. In point of fact, so to the extent that Microsoft is trying to carve a path of self-reliance, they still have a lot of work ahead of them.
One interesting additional note, however, is that I wonder a little bit around whether that divergence isn't about either party not trusting the other or there being anything fundamentally wrong with the actual business relationship as it's constituted now, but whether there is, to some extent, also a separate rating of priorities. On this note, last week, Suleyman posted on Twitter: "The future is conversational. You'll talk with sites, not scroll or search them. Two-way communication, not one-way consumption." He then shared a blog post all about this called "Transforming the Future of Audience Engagement." The piece kind of makes it seem like Suleyman is interested in building the voice agent interface underpinning a new set of products in the future, whereas it feels like, to me, OpenAI is moving more towards building specific consumer products that actually keep them owning the relationship with the customer. For example, it seems to me like all the hints that we're getting is that OpenAI is going to move fairly aggressively into the agent space, not just by having models that underpin other agents, by specifically delivering experiences for consumers and for the enterprise around specific agents like sales agents. In other words, take something like Deep Research, but make it for a very specific use case, a very specific function inside the enterprise, and actually own the customer that way.
Now, there's a whole separate conversation to be had around why that might be an interesting strategy for OpenAI, given the commoditization that's happening at the foundation model layer, but in any case, one thing that I think is worth keeping an eye on is whether this isn't just about two companies that don't trust each other anymore, but two companies who had totally aligned objectives for some time, but whose prioritization is changing in the way that prioritization sometimes changes. In any case, I do think that there are implications for the industry. In short, these two companies being wrapped up in each other means that they have more incentive and more latitude to get involved with others, and given how big these two companies are, them having more space to get involved with other companies can have some pretty dramatic impacts.
Take, for example, this news that OpenAI is doing a deal with CoreWeave. CoreWeave is, of course, a much-hyped AI cloud provider that is preparing to go public, and Reuters is reporting that OpenAI has signed a $1 billion, 5-year cloud services deal that will involve not only OpenAI buying compute from them but receiving $350 million worth of equity in a private placement around the company's IPO. Now, for CoreWeave, this is a great deal because, to the extent that they have an Achilles' heel during this IPO, it's that their customer base is extremely concentrated. In 2024, Microsoft accounted for 62% of CoreWeave's revenue. TechCrunch seemed to view this as 5D chess, pointing out that OpenAI will now own a decent chunk of one of Microsoft's major suppliers of AI compute. I'm not totally sure that that's the correct read on the situation. Microsoft has signaled a slowdown in data center leases, which coincided with OpenAI breaking their exclusive cloud deal with Microsoft. It strikes me that this deal could represent OpenAI stepping into Microsoft's shoes as the anchor customer for CoreWeave and cutting out the now increasingly disinterested middleman.
Another set of relationships that have opened up for OpenAI outside of Microsoft is their partnership with Oracle and SoftBank. The first deals are emerging for the buildout of Project Stargate with the three partners. The first new data center project is already underway at their first site in Texas. Bloomberg reports that the site is expected to house 64,000 Nvidia H100s and 200s, the top-of-the-line version of their next-generation Blackwell chip. Installation will occur in phases, with 16,000 chips expected to be ready to power up by the summer. Sources say that the full buildout should be completed by the end of next year. Frankly, some are saying that these numbers seem a little low for what was built as a civilization-defining project, with Sam Altman talking about building monuments in the desert. Then again, no data centers are running Blackwell chips at scale at this stage, so we don't know how much more powerful they'll be. Still, xAI's Colossus data center is running a 100,000-count network of Nvidia's previous generation H100 chip, and their plans are to build that site to host a million chips in a gigantic supercluster. Meta has similarly large ambitions. In January, Mark Zuckerberg announced plans to build a 2-gigawatt data center large enough to "cover a significant part of Manhattan." The company intends to end the year with 1.3 million GPUs in their data center fleet. Now, of course, Project Stargate is planned across several additional sites, so I think it's important not to read too much into this right now.
Ultimately, the point is this: the base case is that the Microsoft and OpenAI partnership will continue well into the foreseeable future. It might evolve and change; it's already less exclusive than it once was, but I think that these companies are going to leverage each other, even if there's some tension in meetings behind closed doors. At the same time, it's pretty clear that at this point, both companies are charting independent paths. The opportunity is simply too big for them to be constrained to each other, and that always would have been the case ultimately. Net-net, I think it's very positive for the wider AI world that these two companies are operating independently. It creates more space for opportunity and partnership, and competition tends to benefit everyone else. I wouldn't go so far as to say that that should make us cheer for the drama, but it also definitely means I'm not stressing about it. Anyways, guys, that is going to do it for today's AI Daily Brief. Until next time, be safe and take care of each other. Peace.