On November 17, OpenAI fired Sam Altman as CEO. By November 19 — after Altman failed to win back his job — Microsoft hired him and former OpenAI president Greg Brockman to run a new advanced AI research lab. Microsoft also said it was committed to its partnership with OpenAI, according to the Wall Street Journal.
What does this mean for Microsoft investors? The market is optimistic. After falling about 1.6% on Friday after word of Altman’s firing, Microsoft stock recovered any lost value by Monday morning — up 2.5% in pre-market trading to a record high of $379.18 per share, the Journal reported.
But these leadership changes raise investing questions — the answers to which could affect the value of Microsoft’s Generative AI strategy. Here are some that come to mind:
- Will Emmett Shear, former chief executive of Twitch and now interim CEO, be able to sustain the rapid growth OpenAI enjoyed under Altman?
- Can Altman’s new position at Microsoft result in faster releases of more powerful versions of ChatGPT and otherwise accelerate the software company’s growth?
If Shear cannot keep up the pace, the value of Microsoft’s 49% OpenAI stake could grow more slowly. What’s more, intellectual property considerations have the potential to limit what Altman — and other former OpenAI employees joining him — can apply to Microsoft’s Generative AI business.
Microsoft and Altman expressed optimism. The software giant said, “it was committed to its partnership with OpenAI and would move quickly to provide Altman and Brockman with ‘the resources needed for their success,’ ” the Journal reported. “The mission continues,” Altman wrote on X — reposting a tweet from Microsoft CEO Satya Nadella.
Microsoft Hires Sam Altman
Between Friday and Sunday, Sam Altman went from being fired from OpenAI — the San Francisco-based large language model developer in which Microsoft has invested more than $13 billion for a 49% stake — to a new role as head of Microsoft’s advanced AI research lab, according to the New York Times
OpenAI’s board fired Altman because it apparently could not supervise him properly. A memo signed by each of OpenAI’s board members — Adam D’Angelo, Helen Toner, Ilya Sutskever, and Tasha McCauley — said, “Sam’s behavior and lack of transparency in his interactions with the board undermined the board’s ability to effectively supervise the company,” the Times reported.
Over the weekend, Altman tried unsuccessfully to win back his job as OpenAI CEO. Microsoft and venture-capital firm Thrive Capital pressured the OpenAI board members to return Altman to his job; however, they did not change their minds due to “Altman’s insistence that the current board resign,” the Journal reported.
It is not exactly clear what Altman will do at Microsoft. Altman and Brockman will lead an advanced AI research team “alongside unspecified colleagues,” the Journal reported. Microsoft will provide “the resources needed for their success,” Nadella posted on X late Sunday.
Altman’s strengths strike me as the ability to attract outstanding talent, to persuade investors to part with their capital, and to communicate with government officials — possibly helping to shape their approach to regulating Generative AI.
Microsoft could be better off if Altman and Brockman can bring in more talent to Microsoft — possibly including OpenAI employees who resigned in the wake of Altman’s firing.
However, key questions remain:
- Will Microsoft continue to rely on OpenAI for creating new GPT versions or will that responsibility shift to Altman’s new team at Microsoft?
- Will Altman’s talent for raising capital and talking with world leaders still be as useful within Microsoft?
- Will Altman’s new team at Microsoft invent new GPT models that surpass the ones OpenAI launches under new leadership?
OpenAI Hires A New Interim CEO
When Altman lost his job at OpenAI, the startup’s board temporarily replaced him with an interim CEO, Mira Murati, who previously served as the company’s chief technology officer, noted the Journal.
On Sunday, OpenAI replaced Murati — who also will remain as the company’s CTO — with Shear. He has garnered mixed reviews. Shear was a video gamer who “led Twitch through its transformation from an upstart platform called Justin.tv to a behemoth that was acquired by Amazon
Shear — who stayed at Amazon until 2023 — was viewed as competent. Yet critics perceived him to be too focused on cost-cutting and making the money-losing site profitable, noted the Times.
From Microsoft’s perspective, Shear could slow OpenAI’s growth trajectory, which might lower the value of the software giant’s 49% stake in the startup. That’s because Shear “publicly advocated for a slower rollout of AI” prior to joining OpenAI, reported the Financial Times.
Of course, it remains to be seen how long Shear will remain at OpenAI and whether he can hold on to its talented employees and maintain its growth.
How Microsoft’s Generative AI Strategy Will Change
In my view, the changes at OpenAI and Microsoft will not alter what I see as Microsoft’s four competitive advantages in Generative AI. However, I do think the potential value of Microsoft’s 49% stake likely will be less significant than it was under Altman’s leadership.
The good news is Microsoft’s software industry dominance could enable its ChatGPT-powered Copilot service to boost the company’s revenue by $35 billion.
How so? As I noted in an October 2023 piece on Forbes, analysts from investment firm New Enterprise Associates wrote, “Unlike with the prior shifts, incumbents do not need to re-architect their entire products to adopt this new platform shift. In addition, this shift favors companies with bigger, proprietary data sets which can give an edge to more established companies.”
I do not expect the changes at OpenAI to alter NEA’s estimate that Copilot could add $35 billion to Microsoft’s revenue assuming 10% of the company’s 482 million customers would pay $60 a month for the service.
The bad news is Microsoft’s 49% stake in OpenAI could take longer to reach $100 billion. As I wrote last month, Oppenheimer & Co. analyst Timothy Horan estimated Microsoft’s 49% stake in OpenAI could be worth $100 billion.
In October, OpenAI was expected to generate an estimated $1 billion in 2024 revenue. I am guessing Altman’s departure could slow the company’s growth. That should diminish the value of OpenAI and make rival LLM providers — such as Anthropic and Cohere — relatively more appealing to investors.
Where Microsoft Stock Goes Next
There is considerable uncertainty about where Microsoft’s stock will go next. Nevertheless, I see Microsoft’s sources of advantage in Generative AI as robust. Here is why:
- Many sources of Generative AI revenue. Generative AI increases demand for Microsoft’s Azure cloud services and its Copilot service could increase the prices the company charged for its Microsoft Office 365 suite.
- High switching costs with a large customer base. Microsoft’s high share of the market raises the costs for customers seeking to switch to another supplier. This makes it easier for Microsoft to introduce Generative AI services to its existing customers.
- Access to excellent Generative AI technology through partnerships. Despite leadership changes, Microsoft’s significant stake in OpenAI gives the software giant access to ChatGPT, the most popular Generative AI chatbot. Microsoft’s partnerships with consulting firms also provide access to corporate decision makers.
- A clear head start over rivals in monetizing Generative AI. Microsoft benefited from the perception among investors that the company was ahead of its rivals in the race to monetize Generative AI. Perhaps hiring Altman will enhance that perception.
I don’t know how high Microsoft stock will rise. However, I expect hiring Altman to give Microsoft more options to capitalize on its lead in Generative AI.
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