Microsoft, Open AI and a case of Open Innovation

People are going gaga over ChatGPT, OpenAI AI, fascinated by technology and more especially, how Satya Nadella and 微软 are challenging 谷歌 in the realm of search! Fair enough. However, the question we all should be asking is how did they pull it off? What is that we could learn from it?

Before we go further, a little thought experiment

Let us say you are in Google, and your team has built something similar to all these new buzz and trends of chatGPT and Open AI. What are all the odds that you will get sponsorship and support to launch, scale it up, integrate it with current offerings? You can be 100 percent sure that it will be zero. To be clear it is not about Google. It is about any big corporation who is an incumbent with large market share. Disruptive Innovation is a big challenge in any major corporation. There are lot of reasons on why it is a challenge. The major and big reason simply boils down to this: "A rising corporate star who leads a risky innovation that ends up failing will pay a huge price to his career growth prospects than the executive who kills a potential winner"

Now, another but different thought experiment.?

Let us say you are in Microsoft. You and your team have an idea for building something similar to chatGPT and Open AI in the context of search. What are all the odds that you will get more resources in terms of money, people, time and corporate support to make it happen? Again, you can be sure, that it will be zero. Why? If you have five sales folks, you pay huge incentive to the one who brings in more sales. You allocate more money and resources and focus on what is going good. Anyone and everyone would question your capital allocation strategy, if you invest in something that is not generating huge revenues, something that has a longer time horizon. If in doubt, just look at the efforts at Meta(Facebook) to transform themselves in to a virtual/augmented reality company. [What kind of roles got eliminated during their lay off]

Wait a minute. Hold on. So companies can't innovate? Don't innovate? The above hypothetical (but closer to reality) scenarios are to illustrate, how and why Internal innovation, especially game changing and disruptive innovation is difficult. As well, to say, Open Innovation offers a path that is relatively least resistant.

Deconstruct the playbook

Now let us go ahead and deep dive in to the chronology of the OpenAI and Microsoft partnership and the potential playbook for others.

All the leading thinkers, smart folks, movers and shakers, even competitors come together and start a company. As they are smart, they also structure it as non-profit and a for profit subsidiary and hire the best folks and pay them good salaries. Remember, it is more of a research company backed by corporates, run by startup folks.?

Everyone from the AI industry contributes, leverage the best resources available and push the frontier and industry together.

As a donor, Microsoft, contributes the resources, (please, we will be happy to let you run on Azure)(Oh, Azure is where we run algos and models and let us optimize it for them). As things move forward, Microsoft moves faster to strengthen the partnership, gets an head start, leverages it better, as well raises the stakes of the investment.

Why not in-house?

Well, if Microsoft could invest such huge amounts of money, why not do it in-house? As we saw little earlier, one, in big corporates, money is not the only thing required to get things done. In fact it is the easiest one to get. More than money, head count, support and politicking to stay away from anti-innovation are the hoops one has to jump through to succeed. It is better off to innovate outside by giving money and support and move fast when it reaches critical stage. At that time, even the internal teams want to jump on the bandwagon and leverate the momentum.Sometimes it might be difficult for a huge corporate to attract talent to work on hard and challenging problems.

So why continue to invest but not acquire?

One, at least in this context of Open AI, Open AI has huge potential to grow. It is too early to get acquired. Post acquisition, integration and nurturing would be more arduous. In addition, the potential application of AI would be above and beyond the scope of the interests of Microsoft. Those applications could also give a good financial returns, open doors beyond and hence it would make more sense to strengthen the interest and yet at the same time keep the options open.

So how is this different from Corporate Venture Investing?

Corporate Venture Investing is definitely part of an open Innovation strategy. However, when one looks at such partnerships or investments from the venture investment lens, sometimes, people apply the traditional venture investing metrics and start worrying about financial returns, financial value creation in a short time horizon and miss out on the big picture and forget why they are doing it in the first place. The strategic value creation, getting a glimpse in to future well ahead of others and potentially securing the future.

One word of caution

In all the above, things could have gone wrong at multiple instances. For e.g the technology might not have been developed to this extent, even the evolution may not have aligned with the strategy of Microsoft, the tech could have negative repurcussions, Microsoft could have dropped the ball in leveraging and integrating (just the way how internal innovations suffer the challenge of crossing the chasm to go to market) However, the cost of failure and challenges are relatively far less compared to other potential options.

One more last word of caution

Few decades back, IBM too faced a similar conundrum. They wanted to enter the PC market fast and quick. Rather than building the OS, the heart of the PC all by themselves or in-house, they relied on a small upstart in seattle to build it for them. Same open Innovation principles, it would be difficult for us to build it here, let us leverage the outside help. Thanks to the oversight by the legal team who didn't enforce an exclusivity clause, that open innovation initiative sowed the seeds for the rise of Microsoft. (To set the history right, the term, "Open Innovation" was yet to be coined, when the IBM Microsoft thing happened)

Takeaways

• Have a good Innovation Strategy and operational plans
• Ensure, Open Innovation is part of your overall Innovation game plan
• Remember Open Innovation doesn't mean just investing money. It is about making good bets, raising your bets, having a good understanding of how well, it could be aligned with your strategy and roadmap and capability to integrate. (support in times of people, time and energy to make it happen)