OpenAI and Microsoft: Symbiotic or future frenemies?

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OpenAI has built momentum by closing a big partnership with Apple, a channel deal with PwC and a series of enterprise wins. These events put an exclamation point on the enterprise traction that OpenAI is seeing directly and raised a big question: Will OpenAI eventually compete with its primary investor Microsoft?

Let's start with the big stuff. Apple's WWDC keynote outlined the company's generative AI strategy, which melds on-device processing, private cloud and a partnership with OpenAI .?OpenAI will be a big part of iPhone queries that need to go to the cloud even though Bloomberg reported there is no money being exchanged. In other words, OpenAI is like an NFL Super Bowl halftime performer—it’s all about the exposure, marketing and distribution. Rest assured, that Apple has its own large language models (LLMs) to ensure it is closest to the customer experience, but OpenAI is in the mix.

That Apple partnership, however, only highlighted other recent data points. Consider:

• OpenAI is using Oracle Cloud Infrastructure (OCI) for more capacity to complement its Microsoft Azure compute.
• The company landed a big deal with PwC , which will adopt ChatGPT Enterprise throughout consulting giant, and resell OpenAI to clients. PwC will be the first reseller of ChatGPT Enterprise and its largest user of the product. Once an enterprise lands one big consulting firm others follow.
• Oscar Health partnered with OpenAI for automated documentation and claims processing . That deal highlights how OpenAI is expanding into new verticals like education and regions, notably India and Japan .
• Moderna said in April it is using OpenAI ChatGPT Enterprise to build custom models across its business.

The big takeaway from these deals is that enterprises are going direct to OpenAI . Plenty of enterprises are exposed to OpenAI via Microsoft. The Microsoft-OpenAI partnership has made OpenAI the biggest ingredient brand since Intel.

It's clear that OpenAI doesn't intend to be just an ingredient brand. Yes, Microsoft is a huge OpenAI investor, but the latter has bigger ambitions and a looming IPO at some point. Naming Sarah Friar CFO and Kevin Weil chief product officer only drives home that OpenAI is building out its management team ahead of an IPO.

What's next? Okta CEO Todd McKinnon said something that a few observers have been wondering on CNBC . McKinnon noted that Microsoft is effectively outsourcing its best AI R&D to OpenAI. Microsoft could become more like a consultancy than an innovator. I'm not sure that's exactly fair given Microsoft has been rolling out its own models and more choice, but McKinnon's perception isn't that surprising.

After all, we at Constellation Research have been debating this topic. Microsoft went with OpenAI to be first to market and the bet went swimmingly. The long run may look different for both sides.

My bet: OpenAI will increasingly compete with Microsoft to some degree, but the software and cloud giant will benefit either way since it is an investor. Over time, OpenAI and Microsoft will more resemble frenemies. The partnership will be a great business school case study a few decades from now. The frenemy outcome looks even more likely when you consider that regulators are sniffing around OpenAI and Microsoft. Looking like competitors could suit both companies in the near term.

R "Ray" Wang , CEO of Constellation Research, said: "For OpenAI to be taken seriously, Microsoft must let it partner with the entire ecosystem or face threats of anti-trust. The symbiotic relationship today was born out of Microsoft's desire to catch up and leap ahead in AI. But going forward, Microsoft is making investments to build its own capabilities. It would behoove Sam Altman to just partner with Microsoft.? For AI to succeed, the approach Meta is taking will ultimately win - open source, open, and part of a larger ecosystem for data collectives."

Barry Briggs, analyst with Directions on Microsoft and former CTO of Microsoft's IT org, said: "Tiny OpenAI has not one but three tigers by the tail, managing multibillion dollar relationships with not only Microsoft but Apple and Oracle as well. With growing demands from each of these mega players, OpenAI will, over time, be forced to navigate its own course among them – which may result in its “special relationship” with Microsoft becoming more distant. Microsoft in turn, hardly a wallflower in AI, has not only created its own language models but has already started partnering with other firms, Mistral being an example. Symbiotic? Maybe. Exclusive? Hardly."

A few notes from the news of the week

Oracle's move to partner with Google Cloud and take on OpenAI workloads highlights how Oracle Cloud Infrastructure has become a preferred architecture for AI workloads. OCI's gains come from a bevy of reasons aside from architecture including access to GPUs, extra capacity and the ability to drop into other cloud provider facilities without taking up too much space. Oracle CTO Larry Ellison even indicated that OCI would be open to an AWS partnership. Go figure. Ellison is now a cloud diplomat.

Databricks' annual conference featured a bevy of items and some interesting customer use cases from Block and General Motors . The move into business intelligence may be the most notable going forward and improvements to data warehousing.

Nvidia CEO Jensen Huang also showed up at the keynote with Databricks CEO Ali Ghodsi and delivered a few interesting nuggets:

• Huang argued that open source LLMs "were probably the most important events this year" because it enables enterprises to better leverage genAI.
• GenAI will have the most impact on customer service. "Customer service represents probably several trillion dollars’ worth of expenses and every company is deciding between the chatbot or the customer service agent. It is partly about the fact that you could automate but it's mostly about the data flywheel," said Jensen. "You want to capture the engagement for the data flywheel. We're going to have proactive customer support."
• AI factories shouldn't be built near populations where the energy grid is already challenged. "Earth has a lot more energy," said Huang. "It's just in the wrong places."

Constellation Research released its BT150 class for 2025 . The list of CXOs is stellar. I'm looking forward to chatting with them about their projects and innovations in the pipeline. Speaking of innovation, enter your top projects into the SuperNova Awards .

From our underwriter:

• Hitachi Vantara Chief Product Officer Octavian Tanase recently riffed on building a secure data infrastructure in hybrid cloud and AI environments . Tanase said enterprises need to be proactive with building data protection and cyber resilience. Tanase said: "Building an unbreakable data infrastructure is a complex challenge. There are many internal and external variables involved and we will never be able to control all of them. However, it is possible to get to a place that is “secure” within the context of a landscape that is continually and rapidly changing."

NOTEBOOK:

??? Stock splits are the new humble brag for AI giants. Broadcom followed Nvidia with its own 10-for-1 stock split as the company gained from the AI infrastructure build out and delivered a strong second quarter .

??Don't forget the non-technical costs with generative AI projects as there are a bevy of ongoing maintenance to consider, said Lori Walters, Vice President, Claims and Operations Data Science at The Hartford . Speaking at an Amazon Web Services (AWS) financial services event Walters provided several takeaways about generative AI efforts and how they fit into the broader picture. Simply put, genAI projects require human costs, expertise and ongoing maintenance that are often overlooked.

? A BCG report based on a survey of 200 CMOs across Asia , Europe and North America found that 80% of respondents said generative AI is improving automation, speed and productivity. Three out of five respondents said they will invest at least $10 million annually on AI and genAI over the next three years.

?? CFOs are growing cautious as just 26% of respondents in Deloitte's latest CFO Signals survey think it's a good time to take risks. CFOs were split on whether the US equity market was undervalued or overvalued even as the S&P 500 is at record highs. Deloitte was surprised by that data, but it's pretty simple: 7 stocks drive the S&P 500 and if they were equally weighted the index has gone nowhere. The survey validates what enterprise software CEOs have been saying about longer buying cycles .

?? Splunk added genAI tools to its platform , Fortinet acquired Laceworks and Apple outlined its long-awaited AI strategy .

?????? Gallup survey found that 20% of employees experienced a lot of loneliness . That percentage for fully remote workers was 25%, 16% for fully on-site and 21% for hybrid. Gallup said 34% of employees are thriving in their overall wellbeing.

??Research Center found that the majority of Facebook, Instagram and TikTok users say keeping up with news is not the reason they use the sites . X users say the news is a reason they use the site. Nevertheless, users of all four social platforms see news on all four platforms.

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