Microsoft is "devouring" AI unicorn startup Inflection AI, with the majority of Inflection AI employees, including the co-founders, having joined Microsoft.
On March 19, Microsoft announced the establishment of Microsoft AI, a division that will integrate Microsoft's consumer AI efforts as well as products like Copilot, Bing, and Edge. Mustafa Suleyman, co-founder of Inflection AI, has taken on the role of CEO (Chief Executive Officer), reporting directly to Microsoft CEO Satya Nadella. The other co-founder of Inflection AI, Karen Simonyan, serves as its Chief Scientist.
Inflection AI's latest valuation exceeds $4 billion, making it the third-largest generative AI unicorn company in the United States after OpenAI and Anthropic.
At the same time, according to media reports, Microsoft will pay $650 million to Inflection AI, with $620 million allocated for non-exclusive technology licensing and the remaining $30 million to settle Inflection AI's lawsuit against Microsoft for poaching its employees.
This move by Microsoft has already attracted the attention of relevant U.S. authorities and some investors. According to media reports, they believe Microsoft is doing this to avoid antitrust scrutiny. Microsoft has not publicly responded to this.
Founded in 2022, Inflection AI was co-founded by DeepMind co-founder Mustafa Suleyman, DeepMind Chief Researcher Karén Simonyan, and venture capitalist and Microsoft board member Reid Hoffman. In May 2023, the company released its first chatbot, Pi, which can engage in personalized conversations with users through apps or web pages, WhatsApp, Instagram, and Facebook. The company has disclosed that Pi currently has 1 million daily active users and 6 million monthly active users.
Since its inception, Inflection AI has completed two rounds of financing. The first round in May 2022 saw venture capital firms like Greylock, founded by Reid Hoffman, invest $225 million. The second round in June 2023 involved investments of $1.3 billion from Microsoft and NVIDIA, among others. According to media reports, after Microsoft's $650 million investment, the first-round investors will receive about a 1.5x return on their investment, and the second-round investors will see a return of about 1.1x.
After most employees joined Microsoft, co-founder Reid Hoffman will remain at Inflection AI as a director. The company's new CEO is Sean White, who previously served as the Chief Research and Development Officer of the open-source software community Mozilla. Regarding future development, Inflection AI stated in a release that it will transition from a consumer-facing business model to one focused on enterprise clients. The company will concentrate on creating, testing, and fine-tuning customized generative AI models for business clients, while the service of Pi will not change immediately. To facilitate the expansion of its user base, Inflection AI will host its proprietary large model, Inflection-2.5, on cloud platforms like Microsoft Azure.Previously, Microsoft had invested a total of about 13 billion US dollars in OpenAI in 2019 and 2023, making it the exclusive partner of OpenAI and one of the first beneficiaries of the large model craze. However, following the "palace strife" incident at OpenAI in the second half of last year, Microsoft has been gradually reducing its reliance on this leading large model manufacturer. In February 2024, Microsoft announced a strategic partnership with the French startup Mistral AI, which became the second company to provide commercial language models on the Microsoft cloud platform after OpenAI, and Microsoft also invested 15 million euros in Mistral AI.
With the introduction of a large number of members from Inflection AI, the acquisition of technology licensing, and the hosting of Inflection-2.5, Microsoft's layout in the field of artificial intelligence will be further improved. However, unlike conventional investments and acquisitions to lay out artificial intelligence, Microsoft has obtained the technical talents and licensing of Inflection AI in a more tortuous way. Behind this is the game between American technology giants, including Microsoft, and increasingly strict technology antitrust supervision.
In recent years, the call for antitrust has been rising around the world. In the field of artificial intelligence, due to the rapid iteration of technology, technology can significantly improve the efficiency and innovation ability of enterprises. At the same time, the development and application of technology require a large amount of capital investment and data accumulation, which may lead to market power being concentrated in the hands of a few large companies with resource and technical advantages, thus forming or intensifying market monopoly.
Regulatory authorities are particularly concerned about large technology companies controlling emerging technologies through investment and cooperation, thereby gaining an unfair advantage in the market. Microsoft invested heavily in OpenAI at the early stage of the development of generative artificial intelligence technology and achieved a deep binding of business and OpenAI technology, making it a key target of American antitrust supervision.
On January 25th of this year, the Federal Trade Commission (FTC) of the United States issued an investigation order to five companies, including Microsoft and OpenAI, requiring them to provide information on recent investments and partners, hoping to reveal whether there are risks of distorting innovation and undermining fair competition in the field of artificial intelligence.
Earlier, on January 9th, the European Commission announced that it was reviewing Microsoft's investment in the generative artificial intelligence giant OpenAI to determine whether it needs to be reviewed according to the EU merger regulations. The EU merger regulations are the most important merger supervision legislation in the EU, aimed at ensuring that corporate mergers will not harm fair competition in the internal market of the EU.
The UK Competition and Markets Authority (CMA) began investigating the cooperation between Microsoft and OpenAI in December 2023 to determine whether this cooperation would affect the AI market competition in the UK. The German Federal Cartel Office (FCO) began reviewing the relationship between Microsoft and OpenAI last fall, and at that time, the FCO stated that the "cooperation" between Microsoft and OpenAI was not subject to the constraints of merger control, but also warned that if Microsoft increases its influence on OpenAI in the future, it must be reviewed again.
At present, these reviews are still in progress. However, for technology companies, they will be more cautious when considering regulatory risks in investment and cooperation.
Microsoft has also learned from previous antitrust lawsuits. In the 1990s, Microsoft used the market dominance of the Windows operating system to bundle software products, which was investigated by the FTC and sued by the Department of Justice. As a result, Microsoft once fell into a crisis of being split up. In the end, Microsoft paid billions of dollars in settlement fees and fines, prohibited participation in exclusive transactions that may harm competitors, and opened up some source code to get through the crisis.
This cooperation with Inflection AI is full of Microsoft's "caution" and "ingenuity". Microsoft obtained non-exclusive technology licensing and technical talents from Inflection AI through contract negotiation, which maintains the independence of Inflection AI as an enterprise. At the same time, Inflection AI's transformation to enterprise services, prioritizing the provision of API interfaces for users on Azure Cloud, can further attract traffic for Microsoft's cloud business. In addition, technology startups are often light in assets and heavy in talents. Microsoft's recruitment of the main members of Inflection AI can leverage the latter's experience in the consumer market to quickly implement Microsoft's consumer business.Despite this, some legal and industry experts have said that Microsoft's deal with Inflection AI might still trigger an antitrust investigation by US regulatory authorities.
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