Microsoft & OpenAI's Landmark AGI Deal Collapses

The long-standing, frequently re-evaluated agreement between OpenAI and Microsoft has seen its exclusivity further diminish. What began as a partnership, described by some as a "situationship," now reflects a reduced level of commitment, marked significantly by the official removal of a crucial clause pertaining to artificial general intelligence (AGI), which has historically shaped the trajectory of their collaboration.

Microsoft formally announced several significant amendments to its enduring agreement with OpenAI this past Monday. Under the revised terms, Microsoft retains its role as OpenAI's "primary cloud partner," ensuring that OpenAI's products will initially deploy on Azure, unless Microsoft is unable or unwilling to provide the requisite capabilities. Crucially, OpenAI is now empowered to "serve all its products to customers across any cloud provider." This strategic shift allows OpenAI to aggressively pursue its objective of attracting enterprise clients, especially as it reportedly gears up for an initial public offering, thereby enabling potential collaborations with major players like Amazon or Google and alleviating prior compute limitations that have occasionally strained relations with Microsoft. It appears Microsoft will continue to receive a share of the revenue from these external engagements.

A particularly noteworthy development is the termination of the contract's "AGI clause." This provision had previously stipulated various conditions contingent upon either company achieving "artificial general intelligence"—a broadly defined industry concept generally referring to AI systems capable of matching or exceeding human intelligence across a diverse spectrum of tasks.

This modification directly affects the revenue-sharing agreement, which was originally intended to persist until an AGI declaration. Under the new terms, revenue-share payments from OpenAI to Microsoft are now scheduled to conclude by 2030. While these payments will maintain "the same percentage," they are now "subject to a total cap," a departure from their previous perpetual nature. Furthermore, these payments will now continue and then cease "independent of OpenAI’s technology progress," a phrase that, by any reasonable interpretation, encompasses the achievement of AGI. This effectively marks the end of the previous revenue-sharing structure.

This represents the second renegotiation concerning this particular clause. In October, when OpenAI underwent its contentious transition to a for-profit structure, it required Microsoft's approval. During the process of securing this endorsement, the two entities forged a new agreement. Prior to these October contractual adjustments, Microsoft would have forfeited its rights to OpenAI's technology upon the latter's attainment of AGI. However, Microsoft's intellectual property rights for OpenAI's models and products were subsequently extended through 2032, encompassing models even after an independent panel theoretically declared AGI had been achieved.

Currently, the framework lacks an independent panel, and there is no longer "if-this-then-that" conditional language dictating outcomes should AGI be declared. Consequently, OpenAI may never be obligated to publicly announce its achievement of this significant milestone. Furthermore, Microsoft's license to OpenAI's models and products, which extends through 2032, has now become non-exclusive, opening the door for other competitors to engage.

Previously, Microsoft held approximately 27 percent ownership in the public benefit corporation, calculated on an "as-converted diluted basis, inclusive of all owners." While the updated terms affirm that "Microsoft continues to participate directly in OpenAI’s growth as a major shareholder," they do not explicitly detail Microsoft's current ownership stake, though there is no indication that it has been altered.

Significant pressure rests upon OpenAI to accelerate its path to profitability. Both OpenAI and its rivals have been expending substantial investor capital in their pursuit of enhanced computing power and the realization of AGI. OpenAI has publicly committed to a full focus on enterprise solutions and coding, aiming to leverage these as primary revenue generators. This strategic pivot has involved systematically eliminating what it terms "side quests," such as the Sora project and planned erotica features for ChatGPT. Additionally, the company has undertaken a restructuring of its science department. This newly revised agreement with Microsoft represents yet another step in this overarching strategy.