FTC has opened an antitrust investigation into Microsoft’s AI deal

FTC has opened an antitrust investigation into Microsoft's AI deal

The commission has issued subpoenas to the internet behemoth and an AI company, questioning whether their collaboration dodged a mandatory government assessment.

The Federal Trade Commission is examining whether Microsoft structured one of its most recent transactions with an artificial-intelligence firm to evade a regulatory antitrust probe.

In March Microsoft acquired Inflection AI’s co-founder and nearly all of its workers, and agreed to pay the business approximately $650 million as part of a licensing fee to resell its technology. Investors in Inflection were assured that the proceeds from sales would be used to repay them over time

Companies must report purchases valued at more than $119 million to federal antitrust enforcement agencies, who have the authority to assess the deal’s impact on competition.

If an inquiry reveals that a merger or other investment would significantly diminish competition or result in a monopoly, the FTC or the Justice Department, which share antitrust authority, can file a lawsuit to prohibit it.

The FTC has already sifted through AI investments made by major corporations such as Microsoft and Alphabet, which owns Google.

Lina Khan, FTC Chair, has expressed concern that tech behemoths may someday purchase or dominate the most promising AI applications, giving them a firm hold on systems with humanlike abilities to speak, create art, and write code.

According to a person familiar with the case and records reviewed by The Wall Street Journal, the FTC is now looking into Microsoft’s contract with Inflection to learn how and why they arranged their relationship.

The commission recently issued civil subpoenas to Microsoft and Inflection for documents dating back approximately two years.

The commission is investigating whether Microsoft negotiated a deal that would give it ownership of Inflection while avoiding an FTC examination of the transaction according to the individual.

If the FTC determines that Microsoft should have reported and sought government review of its arrangement with Inflection, it may take enforcement action against Microsoft.

Officials could seek a court to punish Microsoft and halt the acquisition while the FTC performs a comprehensive examination into the deal’s impact on competition.

A Microsoft spokesperson stated that the business is confident in its compliance with antitrust rules Microsoft’s agreements with Inflection provided “the opportunity to recruit individuals at Inflection AI and build a team capable of accelerating Microsoft Copilot” according to a spokesperson, referring to the company’s own AI chatbot. She stated that Inflection continues to operate as an independent firm.

Tech companies occasionally buy firms to obtain their talent, a practice known as a “acquihire.” In Microsoft’s case, the company acquired Inflection’s specialist team of AI researchers without buying the company outright.

Inflection AI, headquartered in the San Francisco Bay Area, created one of the world’s largest enormous language models and applied that technology to create Pi, an AI chatbot.

Inflection is a digital startup that develops and provides access to huge language models. The others are OpenAI, the creators of ChatGPT, and Google.

Microsoft invested in both OpenAI and Inflection. In January, the FTC launched a comprehensive inquiry into Microsoft’s investment in OpenAI and Alphabet’s involvement with Anthropic an OpenAI rival created in 2021 by former OpenAI personnel.

Mustafa Suleyman, co-founder of Inflection, and his former colleagues at Microsoft formed a new subsidiary named Microsoft AI to develop AI products for customers. This includes AI helpers for Bing, the search engine, and Windows.

Inflection is continuing operations under a new management team, but has shifted its focus away from Pi, a consumer device and toward services for corporate clients.

Ted Shelton, Inflection’s new chief operating officer, said he was unaware of the FTC probe. However he clarified that Microsoft did not buy Inflection. “We are a completely independent company,” Shelton explained. “Microsoft has no investment in our company.”

Shelton said that Inflection’s major backers are now entrepreneur Reid Hoffman and venture capital firm Greylock Partners.

The hires resembled Microsoft’s previous effort to employ Sam Altman, the CEO of OpenAI after his board of directors fired him in November. Altman has returned as CEO of OpenAI following a five-day dispute with the board. The filmmakers said Altman was not totally truthful in his interactions with them.

OpenAI’s nonprofit board oversees a for-profit arm with external investors.

Microsoft invested approximately $13 billion in OpenAI, claiming 49% of any profits it generated.

News Corp, which owns the Wall Street Journal, has formed a content licensing agreement with OpenAI.

Deepa Seetharaman contributed to this article.

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