Key Points
Microsoft changed its agreement with OpenAI.
While it loses some exclusivity, this looks like a good deal for the company.
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Microsoft's (NASDAQ: MSFT) investment and partnership with OpenAI are likely to go down as one of the best tech investments ever. Its initial $1 billion investment in 2019 and the subsequent $12 billion it poured into the ChatGPT maker not only gave the company a stake in the then non-profit, but also gave it exclusive access to its intellectual property and AI models. Microsoft promptly integrated OpenAI's models throughout its entire product line-up, while Azure also became the sole cloud computing provider for the large language model (LLM) maker.
However, such an arrangement couldn't last as artificial intelligence (AI) exploded, and the two companies have adjusted the agreement over time. The first time occurred when OpenAI decided to restructure to create a for-profit subsidiary. Microsoft got a 27% stake in the for-profit arm of OpenAI and $250 billion in additional Azure commitments from the LLM maker. It also maintained its revenue-sharing agreement and retained the rights to OpenAI's models and products through 2032.
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In late April, the companies once again changed the structure of their deal. This was most likely sparked by Amazon's February agreement to invest $50 billion in OpenAI in exchange for $100 billion in cloud commitments over eight years, and for Amazon Web Services to be the exclusive provider of its new agentic AI platform, Frontier. However, that deal could have run afoul of its agreement with Microsoft, and the software giant considered suing. However, the two companies settled their differences by reaching a new agreement.
As part of the new deal, Microsoft will forego its exclusive license and allow OpenAI to deliver AI models and products through any cloud provider. In exchange, it will no longer pay OpenAI a share of revenue when enterprise customers access OpenAI models through Azure's API. Meanwhile, it will still get paid a 20% cut, subject to a cap, when Azure customers buy a ChatGPT subscription.
Will the new agreement be good for Microsoft's stock in the long term?
I believe Microsoft is once again getting a good deal. The new agreement will boost Microsoft's margins and should help drive profits.
While it loses exclusivity to OpenAI's licenses, this isn't necessarily a bad thing. It still owns a 27% stake in the company and remains its primary cloud provider. However, by removing the exclusivity clause, it really sets up OpenAI to grow and be funded by other cloud providers, which should benefit Microsoft, given its large ownership stake in OpenAI.
Microsoft will also be better off diversifying away from OpenAI, which it has been doing through an agreement with Anthropic. All in all, this looks like a win-win for the company and its stock.
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Geoffrey Seiler has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
