The UK’s Competition and Markets Authority (CMA) has opened an inquiry into Microsoft’s extensive partnership with the leading AI firm OpenAI, the developers of the popular chatbot ChatGPT. The regulator is gathering initial evidence on whether the collaboration constitutes an acquisition of control by Microsoft over OpenAI which could dampen competition.

In an Invitation to Comment (ITC) released on December 8th, the CMA highlighted OpenAI’s central role in accelerating the artificial intelligence sector and called its alliance with the cloud computing giant Microsoft “a close, multi-faceted relationship between two firms with significant activities in FMs [foundation models] and related markets.”

Recent OpenAI Governance Changes Trigger Scrutiny

The CMA directly cited recent developments in OpenAI’s governance, some involving Microsoft (MSFT), as the catalyst to review if a pseudo-merger has occurred behind the scenes. The most prominent incident involved the ousting and swift reinstatement of OpenAI’s CEO Sam Altman last month.

Microsoft’s CEO Satya Nadella personally advocated for Altman’s return. In addition, as part of the turmoil’s resolution, Microsoft gained a non-voting board observer seat at OpenAI.

The influential role that Microsoft had in OpenAI’s management changes appears to have alarmed regulators. The CMA is seeking input on whether Microsoft has attained “material influence, de facto control, or more than 50% of the company’s voting rights” over OpenAI through their extensive and still evolving partnership.

Microsoft’s President Affirms that They Have Little Influence on OpenAI’s Internal Affairs

OpenAI relies on Microsoft cloud infrastructure to train and run its advanced AI models while Microsoft integrates OpenAI’s products into its ecosystem to further enhance the. With Microsoft dominating the UK cloud market alongside Amazon (AMZN) and Google, the CMA worries that the partnership could weaken competition in multiple corners of the tech sector.

Sorcha O’Carroll, the CMA’s Senior Director for Mergers, stressed that information gathering comes “in advance of launching any phase 1 investigation.” However, the CMA’s language and targeting of the partnership’s structure signals clear competition concerns in this strategic and emerging segment of the industry.

O’Carroll further stated that the CMA “has been closely monitoring the impact of partnerships and strategic agreements which could result in weakening of competition in the development or use of FMs [foundation models].”

Meanwhile, Microsoft’s President Brad Smith quickly defended the collaboration’s independence, contrasting it with Google’s DeepMind acquisition which transferred full control to the former corporation. Smith said that “the only thing that has changed is that Microsoft will now have a non-voting observer on OpenAI’s board. He categorized this move as something “very different from an acquisition.”

OpenAI’s Mutiny Exposed Extent of Microsoft Influence

Last month’s temporary removal of Altman as OpenAI head initially blindsided Microsoft, sending its shares falling over fears of lost influence. Nonetheless, Microsoft’s central role in swiftly restoring Altman and reshaping OpenAI’s board stunned regulators.

As senior Microsoft executives negotiated Altman’s return, they even offered to hire him to lead a new Microsoft AI-focused division if his OpenAI reinstatement failed. This willingness to integrate OpenAI’s co-founder and provide financial resources to subsidy his endeavors and leadership signaled a deeper level of integration between the two parties.

Nadella himself admitted recently in an interview with CNN that “there is no OpenAI without Microsoft leaning in, in a deep way, to partner with this company on their mission.”

The reason that justified Altman’s unexpected ousting remains unclear and a new board has been formed already, primarily made up of people who have high sympathy for the tech leader. In regulators’ eyes, Microsoft’s decisive impact on OpenAI leadership changes crossed lines that went beyond an independent collaboration.

UK Prioritises Maintaining AI Innovation Competition

The CMA established an AI unit last year to monitor the technology’s impact on consumers and competition. Its consultation speaks of “risks for competition and consumer protection” if collaboration between AI heavyweights is turned into consolidation or dominance of strategic tech sectors.

The regulator aims to foster “sustained competition between AI developers” and ensure market access for smaller firms to “deliver innovation, growth, and responsible practices across the sector.”

Letting two titans in cloud and AI infrastructure seamlessly coordinate through a complex partnership could weaken future business incubation initiatives. The CMA wants feedback on their alliance to understand if it dampens other companies’ incentives to innovate in the field.

With the British government investing heavily in domestic AI research and applications, keeping this arena competitive is a top priority. Allowing the Microsoft/OpenAI nexus to harness too much influence before clear rules are set could be a disadvantage to the Kingdom’s interests.

Ongoing Monitoring of Tech Alliances

The CMA says that it is “continuing to progress its cloud infrastructure market investigation” and will provide an update soon on this to understand how companies could use acquisitions and mergers to strengthen their computing power and data processing capacities.

Clearly, the regulator is wary of a trend where giants slowly mingle operations through alliances that escape merger oversight yet still manage to gain control over governance and strategic decisions of the companies they claim to only support and partner with.

The CMA plans to receive comments from interested parties from 8 December to 3 January 2024. Based on its findings, the regulator will ultimately determine if there are merits to launch a deeper investigation into the matter.

This proceeding comes only a few weeks after Microsoft finally won the regulator’s nod to proceed with its acquisition of Activision-Blizzard in the country after initially opposing the transaction due to fears that it could harm UK consumers.