⭕ What People Are Missing About Microsoft’s $10B Investment In OpenAI

Submitted by LesleyFair t3_10mhzhk in singularity

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Sam Altman Might Have Just Pulled Off The Coup Of The Decade

Microsoft is investing $10B into OpenAI!

There is lots of frustration in the community about OpenAI not being all that open anymore. They appear to abandon their ethos of developing AI for everyone, free of economic pressures.

The fear is that OpenAI’s models are going to become fancy MS Office plugins. Gone would be the days of open research and innovation.

However, the specifics of the deal tell a different story.

To understand what is going on, we need to peek behind the curtain of the tough business of machine learning. We will find that Sam Altman might have just orchestrated the coup of the decade!

To appreciate better why there is some three-dimensional chess going on, let’s first look at Sam Altman’s backstory.

Let’s go!

A Stellar Rise

Back in 2005, Sam Altman founded Loopt and was part of the first-ever YC batch. He raised a total of $30M in funding, but the company failed to gain traction. Seven years into the business Loopt was basically dead in the water and had to be shut down.

Instead of caving, he managed to sell his startup for $43M to the finTech company Green Dot. Investors got their money back and he personally made $5M from the sale.

By YC standards, this was a pretty unimpressive outcome.

However, people took note that the fire between his ears was burning hotter than that of most people. So hot in fact that Paul Graham included him in his 2009 essay about the five founders who influenced him the most.

He listed young Sam Altman next to Steve Jobs, Larry & Sergey from Google, and Paul Buchheit (creator of GMail and AdSense). He went on to describe him as a strategic mastermind whose sheer force of will was going to get him whatever he wanted.

And Sam Altman played his hand well!

He parleyed his new connections into raising $21M from Peter Thiel and others to start investing. Within four years he 10x-ed the money [2]. In addition, Paul Graham made him his successor as president of YC in 2014.

Within one decade of selling his first startup for $5M, he grew his net worth to a mind-bending $250M and rose to the circle of the most influential people in Silicon Valley.

Today, he is the CEO of OpenAI — one of the most exciting and impactful organizations in all of tech.

However, OpenAI — the rocket ship of AI innovation — is in dire straights.

OpenAI is Bleeding Cash

Back in 2015, OpenAI was kickstarted with $1B in donations from famous donors such as Elon Musk.

That money is long gone.

In 2022 OpenAI is projecting a revenue of $36M. At the same time, they spent roughly $544M. Hence the company has lost >$500M over the last year alone.

This is probably not an outlier year. OpenAI is headquartered in San Francisco and has a stable of 375 employees of mostly machine learning rockstars. Hence, salaries alone probably come out to be roughly $200M p.a.

In addition to high salaries their compute costs are stupendous. Considering it cost them $4.6M to train GPT3 once, it is likely that their cloud bill is in a very healthy nine-figure range as well [4].

So, where does this leave them today?

Before the Microsoft investment of $10B, OpenAI had received a total of $4B over its lifetime. With $4B in funding, a burn rate of $0.5B, and eight years of company history it doesn’t take a genius to figure out that they are running low on cash.

It would be reasonable to think: OpenAI is sitting on ChatGPT and other great models. Can’t they just lease them and make a killing?

Yes and no. OpenAI is projecting a revenue of $1B for 2024. However, it is unlikely that they could pull this off without significantly increasing their costs as well.

Here are some reasons why!

The Tough Business Of Machine Learning

Machine learning companies are distinct from regular software companies. On the outside they look and feel similar: people are creating products using code, but on the inside things can be very different.

To start off, machine learning companies are usually way less profitable. Their gross margins land in the 50%-60% range, much lower than those of SaaS businesses, which can be as high as 80% [7].

On the one hand, the massive compute requirements and thorny data management problems drive up costs.

On the other hand, the work itself can sometimes resemble consulting more than it resembles software engineering. Everyone who has worked in the field knows that training models requires deep domain knowledge and loads of manual work on data.

To illustrate the latter point, imagine the unspeakable complexity of performing content moderation on ChatGPT’s outputs. If OpenAI scales the usage of GPT in production, they will need large teams of moderators to filter and label hate speech, slurs, tutorials on killing people, you name it.

Alright, alright, alright! Machine learning is hard.

OpenAI already has ChatGPT working. That’s gotta be worth something?

Foundation Models Might Become Commodities:

In order to monetize GPT or any of their other models, OpenAI can go two different routes.

First, they could pick one or more verticals and sell directly to consumers. They could for example become the ultimate copywriting tool and blow Jasper or copy.ai out of the water.

This is not going to happen. Reasons for it include:

  1. To support their mission of building competitive foundational AI tools, and their huge(!) burn rate, they would need to capture one or more very large verticals.
  2. They fundamentally need to re-brand themselves and diverge from their original mission. This would likely scare most of the talent away.
  3. They would need to build out sales and marketing teams. Such a step would fundamentally change their culture and would inevitably dilute their focus on research.

The second option OpenAI has is to keep doing what they are doing and monetize access to their models via API. Introducing a pro version of ChatGPT is a step in this direction.

This approach has its own challenges. Models like GPT do have a defensible moat. They are just large transformer models trained on very large open-source datasets.

As an example, last week Andrej Karpathy released a video of him coding up a version of GPT in an afternoon. Nothing could stop e.g. Google, StabilityAI, or HuggingFace from open-sourcing their own GPT.

As a result GPT inference would become a common good. This would melt OpenAI’s profits down to a tiny bit of nothing.

In this scenario, they would also have a very hard time leveraging their branding to generate returns. Since companies that integrate with OpenAI’s API control the interface to the customer, they would likely end up capturing all of the value.

An argument can be made that this is a general problem of foundation models. Their high fixed costs and lack of differentiation could end up making them akin to the steel industry.

To sum it up:

  • They don’t have a way to sustainably monetize their models.
  • They do not want and probably should not build up internal sales and marketing teams to capture verticals
  • They need a lot of money to keep funding their research without getting bogged down by details of specific product development

So, what should they do?

The Microsoft Deal

OpenAI and Microsoft announced the extension of their partnership with a $10B investment, on Monday.

At this point, Microsoft will have invested a total of $13B in OpenAI. Moreover, new VCs are in on the deal by buying up shares of employees that want to take some chips off the table.

However, the astounding size is not the only extraordinary thing about this deal.

First off, the ownership will be split across three groups. Microsoft will hold 49%, VCs another 49%, and the OpenAI foundation will control the remaining 2% of shares.

If OpenAI starts making money, the profits are distributed differently across four stages:

  1. First, early investors (probably Khosla Ventures and Reid Hoffman’s foundation) get their money back with interest.
  2. After that Microsoft is entitled to 75% of profits until the $13B of funding is repaid
  3. When the initial funding is repaid, Microsoft and the remaining VCs each get 49% of profits. This continues until another $92B and $150B are paid out to Microsoft and the VCs, respectively.
  4. Once the aforementioned money is paid to investors, 100% of shares return to the foundation, which regains total control over the company. [3]

What This Means

This is absolutely crazy!

OpenAI managed to solve all of its problems at once. They raised a boatload of money and have access to all the compute they need.

On top of that, they solved their distribution problem. They now have access to Microsoft’s sales teams and their models will be integrated into MS Office products.

Microsoft also benefits heavily. They can play at the forefront AI, brush up their tools, and have OpenAI as an exclusive partner to further compete in a bitter cloud war against AWS.

The synergies do not stop there.

OpenAI as well as GitHub (aubsidiary of Microsoft) e. g. will likely benefit heavily from the partnership as they continue to develop GitHub Copilot.

The deal creates a beautiful win-win situation, but that is not even the best part.

Sam Altman and his team at OpenAI essentially managed to place a giant hedge. If OpenAI does not manage to create anything meaningful or we enter a new AI winter, Microsoft will have paid for the party.

However, if OpenAI creates something in the direction of AGI — whatever that looks like — the value of it will likely be huge.

In that case, OpenAI will quickly repay the dept to Microsoft and the foundation will control 100% of whatever was created.

Wow!

Whether you agree with the path OpenAI has chosen or would have preferred them to stay donation-based, you have to give it to them.

This deal is an absolute power move!

I look forward to the future. Such exciting times to be alive!

As always, I really enjoyed making this for you and I sincerely hope you found it useful!

Thank you for reading!

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References:

[1] https://golden.com/wiki/Sam_Altman-J5GKK5​

[2] https://www.newyorker.com/magazine/2016/10/10/sam-altmans-manifest-destiny​

[3] Article in Fortune magazine ​

[4] https://arxiv.org/abs/2104.04473 Megatron NLG

[5] https://www.crunchbase.com/organization/openai/company_financials​

[6] Elon Musk donation https://www.inverse.com/article/52701-openai-documents-elon-musk-donation-a-i-research​

[7] https://a16z.com/2020/02/16/the-new-business-of-ai-and-how-its-different-from-traditional-software-2/

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Comments

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GayHitIer t1_j636jy1 wrote

Good post thumbs up :)

Actual researched.

84

Alex_1729 t1_j6573uc wrote

Hi, what is LEV in your nick?

8

GayHitIer t1_j65ctte wrote

Longievity Escape Velocity, basically technological advancements allow us to live more than 100 years.

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Alex_1729 t1_j65u3mj wrote

Well, AI will be able to do that, no? But first, we need to figure out cancer and other diseases, as well as poverty, wars, fundamentalism, idiocy, and all kinds of stuff. I suppose all that falls under the same umbrella.

How did you get to that number?

−1

GayHitIer t1_j65vuf7 wrote

Aubrey De Grey said LEV could be reached by 2036 with a 50% chance.

Aubrey is probably the most trustworthy guy when it comes to anti age research.

He doesn't sell out or lie about his test results and seems to want the best for humanity. So I trust his prediction.

Yes, cancer will still be a problem, but nanotechnology might solve this down the road.

Though most of our problems could be fixed soon if agi/asi gets made, we will discover new things quicker and quicker.

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Geneocrat t1_j665d02 wrote

Well even we’re living to 200 my kids will say their dad heard it from gayhitler

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Alex_1729 t1_j67usrv wrote

Ah, I see. I suppose he has credibility even though he has the morality in check? Any books you can recommend about LEV in general?

>Though most of our problems could be fixed soon if agi/asi gets made, we will discover new things quicker and quicker.

I guess. But should be hold our breaths until that happens? As incredible as it sounds, I find it hard to live in the moment when we're about to change the entirety of our civilization. How does one do this? Meditation helps, but it's still a bit overwhelming. In the end, nobody knows and not everything will get fixed. We may even create bigger problems.

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GayHitIer t1_j67v7iq wrote

I haven't read any of his books, but I have heard ending aging by Aubrey De Grey is pretty good.

And yeah I mean I don't belive in a perfect utopia, but it can get much better than now in my opinion.

I just want to see what happens honestly like a roller-coaster ride I want to see what happens tomorrow.

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Alex_1729 t1_j67vm1a wrote

Me too. I wish we enter the age of implants soon. I really want one to help me speed up things and access more memory, but it will take time to test these, and complications may arise in the beginning. By the time it's safe to use I'll be an old man. So I try not to hope for anything, but live with what I have. But yeah, I'm hopeful for the next generation.

As far as aging, I've been taking care of myself well enough and it's no guarantee AGI will fix that. Then again, I may simply not know enough about this subject. In any case, thanks for sharing.

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kmtrp t1_j687r3s wrote

I think we'll harness our own biology before needing medical nanotech.

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RobleyTheron t1_j63qlzc wrote

This sub has gotten a little over saturated with impending AGI doom predictions, and I really appreciated an actually thoughtful and nuanced review of this deal.

I'm the CEO of an AI company, and the comment of AI's lower gross profit on average was very validating.

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LesleyFair OP t1_j63s6u4 wrote

Thank! I really appreciate it!
Glad you are finding value in the post.

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Geneocrat t1_j665m3o wrote

Agreed. I thought your stuff looked spammy at first but the content and analysis is really top notch. Just like ChatGPT I only fear your monetization strategy

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SoylentRox t1_j64veyb wrote

This is awesome.

And the moonshot upside is handled rather elegantly. Microsoft won't own the universe :)

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Kibubik t1_j64x72o wrote

I’m curious what company if you are able to share

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Ortus14 t1_j6605zo wrote

The control problem is still an issue. Compute cost decrease by 1000x a decade so, while something like GPT4 may be extremely expensive now, superhuman ASI could be ubiquitous this century, and the first ASI for the company that can afford it, could be reached within the next few decades.

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genshiryoku t1_j643mw8 wrote

I agree in AI models becoming commodities over time as has been seen with Stable Diffusion essentially disrupting the entire business model of paid image generation like Dall-E and Midjourney.

I completely agree with the investment case and burn rate of these AI companies not being worth it. And that just like historically with the industrial revolution. It won't be the AI companies benefiting from the creation of AI it will be the companies that can rapidly scale up their production with the use of AI.

It wasn't steam engine makers that benefited from the industrial revolution. It was factories that could quickly scale up with steam engine providing labor.

It won't be the AI companies benefiting from AI. It will be companies that have lots of intellectual workers that can quickly scale up with AI providing intellectual labor.

I actually expect law firms, medical field, schooling platforms and other almost purely intellectual firms to benefit the most from an economic windfall perspective.

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LesleyFair OP t1_j649679 wrote

Interesting take. Any concrete applications in mind that we could go and start? :)

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itzsnitz t1_j64wpyf wrote

Document / knowledge management.

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levoniust t1_j65n56k wrote

Knowledge management. Arguably one of the better things Google got popular on. The ability to quickly and reliably search for things on the internet.

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ArtemAung t1_j65jiwm wrote

IMO it'll be much more decentralized with lots of smaller companies and individuals benefiting the most.

World tends to swing back and forth between decentralized and heavily centralized order of things. 90-s and early 2000s was decentralized invention explosion. 2010s were when most successful startups capitalized on their success and maximized their potential. But this approach today is hitting significant diminishing returns - hence all the layoffs. It's too centralized, too large, too slow to react.

Right now the world is right after it's peak centralization and swinging right back towards decentralization and rapid change of landscape again like in 90s and 2000s.

You see hundreds of thousands of small startups having millions of ideas on how to do things that are much more capable today because of stagnation brought on by excessive centralization and because technology today require significantly less labor, but more ideas.

And this trend will continue. At least during this decade.

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SoylentRox t1_j64vpu0 wrote

>I agree in AI models becoming commodities over time as has been seen with Stable Diffusion essentially disrupting the entire business model of paid image generation like Dall-E and Midjourney.

Ehhhhhhhhhh

So the basic technology to make an ok model, yes. But it's quite possible that 'machine learning rockstars', especially if they get recursive self improvement to work, will be able to make models that have a 'moat' around them. Even if it's just because it costs 500m to train it and 500m to buy the data.

Then they can sell services that are measurably better than the competition...or hiring humans...

That sounds like a license to print money to me.

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Ok_Homework9290 t1_j66ieo4 wrote

>It will be companies that have lots of intellectual workers that can quickly scale up with AI providing intellectual labor.

>I actually expect law firms, medical field, schooling platforms and other almost purely intellectual firms to benefit the most from an economic windfall perspective.

I agree that AI will benefit those firms that you mentioned, but I don't think that that benefit will come at the expense of widespread automation at those organizations (IF that's what you mean), at least in the short and medium term.

Knowledge work (in general) is a lot more than just crunching numbers, shuffling papers, etc. Anybody who works in a knowledge-based field (or is familiar with a knowledge-based field) knows this.

AI that's capable of fully replacing what a significant amount of knowledge workers do is still pretty far out, IMO, given how much human interaction, task variety/diversity, abstract thinking, precision, etc. is involved in much of knowledge work (not to mention legal hurdles, adoption, etc).

Will some of these jobs dissappear over the next 5-10 years? 100%. There's no point in even denying that, nor is there any point in denying that much of the rest of knowledge work will undoubtedly change over the next time span and even more so after that, but I'm pretty confident we're a ways away from it being totally disrupted by AI.

My 2 cents.

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terminal_laziness t1_j63qyo2 wrote

If Microsoft is convinced that OpenAI is well on their way to AGI I wonder why they’d make a deal that caps their profit to “only” $150b. That’s only twice the profit they made last year…and at $13b invested that’s a high risk for a maximum 10x’er. Usually venture investing is looking for 100x + returns.

I’m guessing they intend to further develop the relationship and renegotiate terms in the event that OpenAI really does create AGI

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LesleyFair OP t1_j63s2h2 wrote

They might. Imho, they do not think OpenAI is close to AGI. However, their tools will become more powerful in the future.

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genshiryoku t1_j64ence wrote

There's no reason to assume AGI translates to profitability. If AGI is commodified then essentially all value will be captured by the hardware guys, not the AGI developers.

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terminal_laziness t1_j6528wg wrote

You’re right it’s definitely an assumption but if you’re the first to reach AGI, I could see there being insane benefits until things are commoditized.

For instance, imagine having an financial/investment analyst that’s 100-1000x more capable than the average human. Connecting patterns in the data that we just aren’t capable of seeing. My brother-in-law works as a data analyst for a PE fund that also does some public investing, and gathering and synthesizing that data is what informs their investment decisions for quarterly earnings reports. I imagine that a competent AGI could have a significant leg up in the accuracy of these long/short calls and that’s just one small example I just thought of

Edit: I realize that may not translate directly to what Microsoft is doing, but if their software suite is enhanced by AGI before any other company’s has, then at the very least they will have vastly superior products which would translate to profitability

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ScionoftheToad t1_j64ak2r wrote

Why do you think AGI would be so profitable?

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TwitchTvOmo1 t1_j64d1ff wrote

Is that a serious question? AGI would be like cavemen discovering fire.

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ScionoftheToad t1_j64fanw wrote

I don't doubt that it would be an important development. But how would Microsoft exploit AGI for profit?

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TwitchTvOmo1 t1_j64qrta wrote

Same way every corporation exploits someone else's invention for profit.

Idea think tanks. Identify a problem. Then come up with an idea (leveraged by that invention, in this case AGI) that solves the problem. Package that idea into a product (software or hardware). Sell product.

Now you might ask, "But isn't AGI GENERAL intelligence? Meaning that with just 1 product that utilizes AGI to its fullest, you will never need another product ever again?"

You're not wrong. But the conspiracist in me tells me companies might try to gimp AGI intentionally so they can have multiple "different" products using the same technology, instead of 1 holy grail of all products that you only sell once. The only hope of eliminating this conspiracy is... You guessed it, competition. As long as more than 1 company gets their hands on it, the "ultimate product" of AGI is unavoidable, as one company will always try to outdo the other's product.

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SoylentRox t1_j64w50r wrote

I have a better proposal to exploit this.

Build an AGI system smart enough to do the work of a "think tank" (your example). Have it do lots of demo work and prove it's measurably better than the human competition.

Sell the service. Why would you sell the actual AGI architecture/weights or hardware? Sell the milk not the cow lol.

AI/AGIs will probably always be 'rented' except for open source ones that you can 'own' by downloading.

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TwitchTvOmo1 t1_j64wsuc wrote

There are many ways to exploit it. The question is... Are we just gonna let that happen? Or are we going to demand that AGI is democratized? The history of the world so far is unfortunately not on our side. The means of production have always belonged to the rich. AGI will be the ultimate "means of production" if you wanna call it that. Will the rich get richer or will AGI solve inequality too?

Find out on the next episode of "capitalism vs AI"

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SoylentRox t1_j64yel3 wrote

I just mean "how do I make my money back and pay back the investors".

If we want a democratized AI we vote and get the government to pay for the compute and services of all those rockstars. The compute costs (which will likely soar into the sky, later systems this decade will probably burn billions in compute just to train) mean this isn't supportable by an open source model.

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Ok-Wrangler-1075 t1_j67s63f wrote

How wouldnt they? They can become a leader in any industry with it. They can design cutting edge products and replace their workforce at the same time meaning they would be able to price the products insanly low, nobody would be able to compete.

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SnooMarzipans432 t1_j63n0gg wrote

Interesting perspective.. hmm.

Anyways thanks , signed up.

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dr_set t1_j645o80 wrote

> Sam Altman Might Have Just Pulled Off The Coup Of The Decade

May be, but what he did for sure is put a ceiling on the company's potential and give it to Microsoft.

There was a chance that OpenAI could have replaced Google and be the next tech Titan. That is the reason why google executives are in emergency mode.

Now, their best scenario is to give than win to Microsoft.

They could have tried to solve the compute problem by creating a client that used the power of the consumer's device in exchange for free usage, de-facto creating their own cloud and billing businesses at the same time. It was a long shot, but one that had a lot more freedom and a lot more upside. They chose to go safe at the expense of capping their future.

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LesleyFair OP t1_j648lyf wrote

Thanks for your input. Imho, distributing compute load to consumer devices is not as easy as it sounds.

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dr_set t1_j64g4d5 wrote

Agree, it's a very long shot and you'll need to target specific segments, like gamers to get the power of their GPU's to make it worth while. But I would gladly permanently give them 1 or 2 GBs of memory my 32, 100 GB of disk space (your average AAA game space) and let them use my overpowered GPU while I'm not gaming if they let me access ChatGPT as an assistant on my desktop with a simple combination of keys and to play with Dall-E in similar manner with no limits and no queues.

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ebolathrowawayy t1_j64aj9h wrote

Did you not read the part where after a certain amount is paid back, OpenAI regains control of 100% of the shares?

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dr_set t1_j64f74i wrote

Assuming they make that money, but it doesn't say how. For example, if they get a chunk of The Office sales or Bing's revenue to do so. Sure as hell is not going to be selling 42 dollars pro licenses, specially when you can use the tech in Bing and Office.

What is 100% sure is that Microsoft gets all the benefits of OpenAI for those products for a long time, even forever if they don't find a good revenue model outside Microsoft.

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AwesomeDragon97 t1_j653co9 wrote

Won’t happen. Making a deal with Microsoft is like making a deal with the devil.

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genshiryoku t1_j63y8d5 wrote

I really appreciate this high quality post. Especially the margin comparison of SaaS vs AI companies.

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wren42 t1_j64ajn6 wrote

Open AI is not open anymore, and hasn't been for some time now. The not for profit closed and switched to a for profit corp and has been taking investor money ever since. They stopped sharing research with the public scientific community, dropped their mission statement, and started selling gpt as a product.

There is nothing at all open about openAI, they are owned by investors and will promote corporate interests like every other company. Do not trust them.

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muchcharles t1_j6530pm wrote

Didn't they just release Whisper for everyone, including the trained weights? And stable diffusion I think used their clip model initially.

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LarsPensjo t1_j642avw wrote

Nice write-up!

However, I don't think OpenAI is alone at this level. There are quite a few more, although OpenAI was first to make it publically available.

That means an OpenAI failure would just be a minor setback for the customers.

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toiruto t1_j644jff wrote

Great post! Keep these types of posts coming plz! Very informative

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koelti t1_j63gbed wrote

don't want to be rude because this seems well researched, but can you give a TL;DR? 😅

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LesleyFair OP t1_j63gwsu wrote

haha
You can jump to the last section. I discuss the deal there. If you are somewhat familiar with ML and the data economy, you can skip the first part.

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LarsPensjo t1_j642rfy wrote

Just ask ChatGPT. I got:

> Microsoft is investing $10 billion into OpenAI, an AI research company founded in 2015 by Elon Musk, Sam Altman, and other prominent figures in the tech industry. However, many in the community are frustrated with OpenAI's shift away from its original ethos of developing AI for everyone, free of economic pressures. There are fears that OpenAI's models will become fancy Microsoft Office plugins, leading to a loss of open research and innovation. The specifics of the deal suggest that there is more going on behind the scenes, and that Sam Altman, the CEO of OpenAI, may have orchestrated a major strategic move to secure the company's future.

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LarsPensjo t1_j643g3d wrote

I also asked ChatGPT what could be criticized from this text, and got the answer:

>One potential criticism of the text is that it appears to present a biased view of the Microsoft investment in OpenAI, suggesting that the CEO of OpenAI, Sam Altman, has orchestrated a "coup of the decade" and that the specifics of the deal tell a different story from the community's frustration about OpenAI moving away from its ethos of developing AI for everyone, free of economic pressures. Additionally, the text also presents a rosy picture of Sam Altman's background, giving the impression that he is a strategic mastermind and influential figure in Silicon Valley without providing any counterarguments or criticism of his actions or decisions.

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Retro_Gamer t1_j643tqp wrote

Excellent post! Great engagement style, was fun to hear you last out the story. Keep it up I’ll subscribe now :)

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LesleyFair OP t1_j648zfy wrote

Thanks! Glad, you found it useful and I am happy to have you aboard!

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truthwatcher_ t1_j64f1cj wrote

This was an interesting read even though I knew just of the parts already but to see it all so well summarised really shows how exciting the following years might be

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Sieventer t1_j64mgbq wrote

Why I feel this post has help from ChatGPT

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LesleyFair OP t1_j64rgpd wrote

Dunno. It's gotta be my mechanistic of writing...

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darkjediii t1_j650ha8 wrote

Ive heard that chatGPT is burning $3m a day on compute time. Part of the $1b investment that Microsoft made before was the agreement that they would use their data centers exclusively.

Basically the $10b will be the same thing, OpenAI paying it all back to MS.

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muchcharles t1_j652n0u wrote

You should probably mention Microsoft's margin on those cloud credits. Their $10b investment didn't cost them $10b. Their return is capped at much more than 10X, seemingly using Azure cloud credits as a way of working around OpenAI's maximum profit corporate bylaws.

And if OpenAI nets enough profit for a future multi trillion dollar valuation, what is OpenAI's margin? The non margin part will partly (mostly?) be cloud bills with Azure exceeding the $10billion credits by a lot. Part of the investment was Azure exclusivity. If they become Azure's #1 customer, MS can set the pricing to whatever they want to claw back more as long as they drop their other customers (assuming this is an AGI scenario).

Basically OpenAI's profit cap is laundered and bypassed into MS cloud bills and MS is the defacto owner of OpenAI through that laundering system if OpenAI becomes huge but needs lots of compute.

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visarga t1_j65kutg wrote

Could also be possible that models become 2x or 10x more efficient. GPT-3 was not optimised for cost, just for performance.

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irobot42 t1_j66czh4 wrote

Human written articles are so predictible

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sjnromw t1_j66jrou wrote

Damn, we don't get posts like this often enough. Cheers!!

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CapriciousFatal t1_j66ovx6 wrote

Brilliant, thank you, I appreciate the sources

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Jeklah t1_j63meik wrote

posting to remind to read later

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ArgentStonecutter t1_j645dig wrote

I don't think they need to develop something in the direction of AGI, which is good because they don't seem to be working on it. Their machine learning spinoffs are much more useful and potentially profitable than actual AI.

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LesleyFair OP t1_j648t0z wrote

Fair comment! I agree, they do not need any AGI-esque thing. The "thing" just needs to be truly useful and they are out of the deal.

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natepriv22 t1_j64prx8 wrote

Uh no. If a company developes AGI, they will become the most important company in history.

If you can't imagine what an actual AGI would be like and what their effect on society would be (nobody can accurately predict that of course), then you cannot make this claim about profits.

What if the AGI decides it likes OpenAI and thats the company that should get the first sci fi level fusion reactors. When talking about AGI you just cannot seriously make this kind of a prediction imo.

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ArgentStonecutter t1_j64r7go wrote

You have a really romantic view of what an AGI is.

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natepriv22 t1_j64rkys wrote

How so?

I have to admit I've never heard this kind of response before. AGI is when an AI will be able to answer in such an unexpected way lol.

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ArgentStonecutter t1_j656714 wrote

AGI is an artificial general intelligence. It's an intelligence capable of acting as a general agent in the world. That doesn't imply that it's smarter than a human, or capable of unlimited self improvement, or answering any question or solving any problem. An AGI could be no smarter than a dog, but if it's competent as a dog that would be a huge breakthrough.

A system capable of designing a cheap fusion reactor doesn't need general intelligence, it could be an idiot savant or even not recognizably an intelligence at all. From the point of view of a business, it should be an oracle, simply answering questions, with no agency at all. General intelligence is likely to be a problem to be avoided as long as possible, you don't want to depend on your software "liking" you.

Vinge's original paper talked about a self-improving AGI but people seem to have latched on to the AGI part and ignored the self-improving part. He was talking about one that could update its fundamental design or design successively more capable successors.

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ripper2345 t1_j64h9fp wrote

Wow. Sweet deal! This is the gold:

> First off, the ownership will be split across three groups. Microsoft will hold 49%, VCs another 49%, and the OpenAI foundation will control the remaining 2% of shares. > > If OpenAI starts making money, the profits are distributed differently across four stages: > > - First, early investors (probably Khosla Ventures and Reid Hoffman’s foundation) get their money back with interest. > - After that Microsoft is entitled to 75% of profits until the $13B of funding is repaid > - When the initial funding is repaid, Microsoft and the remaining VCs each get 49% of profits. This continues until another $92B and $150B are paid out to Microsoft and the VCs, respectively. > - Once the aforementioned money is paid to investors, 100% of shares return to the foundation, which regains total control over the company.

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Alex_1729 t1_j6548s3 wrote

I can't wait for the AGI. I was recently reading WaitButWhy's post about the AI and it fired me up again. Just ChatGPT is really incredible, and I haven't even used other services that much.

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Clevererer t1_j65e10y wrote

So what's the TL;DR on what people are missing?

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kbalint t1_j65t77t wrote

I miss the old android office logo :(

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iamtheonewhorox t1_j66ilge wrote

One of the few well-written, well-considered and informative posts on this sub or anywhere else on Reddit!

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iamtheonewhorox t1_j66is99 wrote

Thanks ChatGPT for a well-written, informative post and the OP for providing the posting hardware interface.

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Parabola_Cunt t1_j66it1m wrote

Thoughtful writing, OP! Well written.

Here is the big “if” with your entire argument about this being a good deal for Open AI: that is a HUGE AMOUNT of money to repay to Microsoft and VCs. We’re talking years and years of consistently high/increasing profitability and market domination before the rights are back to Open AI exclusively.

Does anyone really think OpenAI is going to be the dominant AI in 5 years? 10 years? Do you not think Microsoft or a competitor will siphon the tech during that time? It’s a huge bet on themselves, and a huge bet against others to not catch up.

My point is: I wouldn’t put too much value in the “they’ll get it back” aspect at the end of all this. Microsoft knows it’ll be a widely replicated, aged piece of old meat at that point.

But outside of that aspect, I agree with the rest of your points. Logical all around.

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user4517proton t1_j67o10f wrote

I doubt OpenAI could have continued on donations given the large costs for the networks they need for GPT 4 and beyond. I think Microsoft has done good to allow as much freedom for OpenAI while gaining benefits from the money they provide.

The real kicker will be if OpenAI and Microsoft can topple Google, something that is much needed these days.

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TheDavidMichaels t1_j66n56w wrote

they sold out. just another evil tech company now. sad really. they real picked the most disgusting of companies to work with. so sad. good post, i do not share any of you optimism

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No_Ninja3309_NoNoYes t1_j63qx9b wrote

Why do you care about OpenAI? Why do you care about Microsoft? Do you think the open source community will profit? Do you think that the average citizen of the world will profit?

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_a_a_a_a_a_a_ t1_j636y1k wrote

Why do you spam this in every single community even if it's barely related?

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LesleyFair OP t1_j6382oj wrote

I would argue it is related. The financial future of OpenAI has huge a impact on the development of machine learning

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TeamPupNSudz t1_j64ao05 wrote

There's still a fine line between posting insightful content and being a blog-spammer. I appreciate most of your posts and consider you one of the better content creators here and in /r/machinelearning, but I'd urge some restraint in the way you go about shot-gunning it across all of Reddit. Like, this obviously does not belong on /r/TIL and /r/python.

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Frumpagumpus t1_j63aara wrote

mods are capricious, some may allow it through some may not (and whether it is relevant or not is only weakly correlated, here it is fairly relevant), one of his motives is he is trying to promote his newsletter.

in terms of quality of the post though i would say it is definitely top 2% of content on the sub though so, why not

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GayHitIer t1_j63bnmm wrote

Still better than baseless, researchless, opinions.

I will take this over twitter quotes from some random nutjob.

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GayHitIer t1_j638pyn wrote

Finance is really important if we want the singularity sooner.

Capitalism is fueling the singularity, without incentive it would take much longer.

1