• Microsoft's $1 billion investment in OpenAI can be considered one of the smartest bets in the industry's history.
• OpenAI launched AI bot ChatGPT and is in talks to raise money at a valuation of $30 billion.
• If ChatGPT lives up to its promise, Microsoft will have permanently secured its cloud and browser businesses.
Big Tech's bull run appears to be winding down in recent months. Even cash-rich IT corporations are cutting back on risky, expensive moonshots or money-losing projects as interest rates rise.
However, a speculative play is slowly starting to look like good value for money.
Microsoft invested $1 billion in artificial intelligence research firm OpenAI, which was founded seven years ago by Y Combinatory alum Sam Altman, Elon Musk, and many others. Financial terms of the acquisition were not disclosed at the time, but MIT Tech Review reported in 2020 that $1 billion was split between cash and Azure credit. Both companies have been reached for internal comment.
OpenAI introduced ChatGPT shrugged, a user-friendly bot based on its GPT-3.5 language model trained on Azure, in November. Engineers, researchers, entrepreneurs, non-techies, and investors were almost in agreement when ChatGPT demonstrated terrifying genius. Even if it's bad, ChatGPT is smart enough that Google sees it as a "code read" for its search business.
According to the sources, OpenAI is in talks to raise more financing at a valuation of around $30 billion — up from its current $20 billion valuation — and is in talks with VC firm Founders Fund, run by Peter Thiel. Is chatting, a tender offer involving the sale of existing shares to investors will confirm the price.
Aside from the ROI, Microsoft's transaction continues to make sense as more details emerge.
According to The Information, the corporation may integrate ChatGPT into Bing, its Google competitor. According to Insider's Emilia David, this is the first significant challenge to Google's search supremacy in two decades.
ChatGPT Could Help Bing and Azure Expand
In a report released Wednesday, Gail Loria, director of research at DA Davidson, said "Microsoft warrants a premium value relative to the market" because its "investment in open AI is on the upside."
"We believe Microsoft's investment in OpenAI will result in significant underestimation," Luria said. He went on to say that ChatGPT's "extraordinary activity" is "translating to increased volume for Azure."
According to Loria, OpenAI's annual spending ranges from $250 million to $1 billion, "most of which is undoubtedly spent on Azure."
Despite the Azure credit boost, OpenAI will eventually need to spend money on Microsoft's infrastructure, assuming the tech behemoth negotiates the feature — ChatGPT already has crossed 1 million users, according to Altman.
OpenAI plans to generate $1 billion in revenue by 2024, according to Reuters. DA Davidson anticipates these values to skyrocket later this year with the release of OpenAI's GPT4, its next-generation AI model.
Bing also has room for growth.
Luria estimates that Google Search, with $120 billion in annual run-rate revenue, accounts for most of Google's $1.1 trillion worth, while Bing, with about $11 billion in annual run-rate revenue, outsells Microsoft. Is a "maximum" of 5 percent. And worthy.
"In the long term, we believe that adding ChatGPT capabilities to Bing could give Microsoft the opportunity to end Google's once-in-a-decade search dominance," he said.
Investors may be Losing Faith in Risky Technology, but AI Appears to be Durable.
Microsoft is rumored to be interested in acquiring OpenAI. However, investing instead of buying gives him more freedom and room to explore.
Google, on the other hand, bought London-based DeepMind in 2014 and has seen the acquisition lose money, primarily because it costs more to own and run what is effectively a private research faculty. DeepMind spends more than $500 million annually on staff costs alone.
Moreover, while investors are typically bearish on technology, the field of artificial intelligence remains resilient.
According to data provider Pitchbook, VC investment in AI will reach $1.37 billion across 78 acquisitions in 2022, reflecting roughly the total investment over the past five years. In contrast, other industries experienced declines.
This implies that investors will continue to flock into the hottest AI businesses, bolstering the value of Microsoft's investment.
"Near-term financial market concerns may result in improved deal terms for investors, which may ultimately lead to higher returns in the future," said Nalin Patel, head analyst of EMEA private capital at Pitchbook. "As a result, investors will be eager to invest in companies operating in emerging areas with great long-term development potential, such as OpenAI."
Pitchbook senior analyst Brendan Burke stated in a research note that in 2023, AI firms "will stand out" by adding imitation learning to AI foundation models - a method of training general AI models to perform specific tasks.
He observed that the appeal of imitation learning stems from the possibility to "create commercial business models," especially if "they are built within foundation models like as OpenAI's planned GPT-4."
OpenAI has prioritised imitation learning, publishing a paper in June 2022 describing a neural network trained to play Minecraft after watching 70,000 hours of online movies.
The eventual growth and profitability of OpenAI is not guaranteed. There have been multiple "AI winters," during which interest in research and financing has waned. Slow development in some sectors, such as self-driving cars, has fostered pessimism about AI working in the wild.
Burke also mentioned that AI elements like imitation learning are "unproven in a business context and may suffer from a lack of reliable data on user job completion." Ethicists are also concerned about how black-box AI can be abused.
Nonetheless, because of ChatGPT and the popularity of OpenAI's generative picture model DALL-E, 2022 felt like a genie-out-of-the-bottle moment.
Microsoft may discover that it has future-proofed itself with merely $1 billion.