Microsoft's Nadella Is Building An AI Empire --- After OpenAI deal, the CEO spreads his bets in an attempt to dominate

 

"Chief Executive Satya Nadella bet the future of Microsoft on the potential of artificial intelligence when he forged a groundbreaking partnership with OpenAI, the creator of ChatGPT.

But Nadella is not content to simply rely on OpenAI to dominate in this new era. In recent months, he's been spreading his bets, turning the world's biggest company into the world's most aggressive amasser of AI talent, tools and technology. He has hunted down new partners around the globe and invested in a range of AI startups, including pouring $1.5 billion into an Abu Dhabi-based firm in April.

Nadella has also begun building what amounts to an in-house OpenAI competitor inside Microsoft -- potentially putting it on a collision course with its most important partner.

To lead Microsoft's AI efforts, he recruited Mustafa Suleyman, a longtime rival of OpenAI's co-founder, Sam Altman. Suleyman, who helped launch DeepMind, a pioneering AI research firm, and went on to co-found Inflection AI, an AI startup, has brought most of his team from Inflection with him to Microsoft.

The new employees have led the process to train their own artificial-intelligence model, built on technology developed at Inflection and designed to be on par with the OpenAI technology Microsoft depends on today. A person familiar with the matter said that some future Microsoft AI products could be switched from OpenAI technology to the model being developed by Suleyman's team.

Nadella's approach to AI is emblematic of his decade at the helm, during which he has repeatedly reinvented big parts of Microsoft, picking new partners and retooling the tech company. He has been able to spot when one-time company strengths became vulnerabilities and upend even his own strategies.

Nadella's moves have helped Microsoft leapfrog others -- most notably the longtime AI front-runner Google -- to release AI chatbots and workplace tools expected to change how people think and work. The question is whether these tactics will be enough to keep Microsoft ahead of the pack in artificial intelligence.

Google has dramatically overhauled its AI organization and put out products that rival those made by the OpenAI-Microsoft consortium, including an AI feature atop its dominant search engine. Meta Platforms has been investing billions into a powerful AI language model, Llama, that it is releasing for free under an open source license. Amazon has invested $4 billion in Anthropic, which it hosts on the largest cloud computing platform in the world.

This week, Apple announced it was integrating OpenAI's tech into its mobile operating system, further shaking up the competitive landscape for AI dominance.

Microsoft's rising status has made it a target for regulators and competitors. The Federal Trade Commission recently launched an investigation into whether Microsoft's Inflection deal was structured to avoid government antitrust review. That came on top of another FTC probe launched in January of other artificial-intelligence deals, including Microsoft's relationship with OpenAI.

Companies including the New York Times are suing Microsoft and OpenAI, alleging that they illegally trained their software on the media companies' content.

And despite a soaring stock price, company morale has struggled as outsiders have been brought in to reshape aspects of its technology.

Mikhail Parakhin, the previous head of Microsoft's Bing and advertising businesses, plans to leave the company after initially being assigned to report to Suleyman, according to people familiar with the matter. Saurabh Tiwary, who oversaw the team of AI engineers responsible for integrating OpenAI's tech into Bing, has already left for Google.

Microsoft said its retention rates are high and that some bumpiness is to be expected when companies make organizational changes.

While he has been trying to make Microsoft move more like a startup, Nadella has been the ultimate company lifer. The 56-year-old from Hyderabad, India, worked his way up through its Bing search and cloud infrastructure businesses over the last 32 years.

He was a surprise pick as CEO, taking over after years under Steve Ballmer when the company seemed stuck. It had grown bloated -- expanding costly divisions like hardware and Xbox -- and missed tech trends, such as the emergence of mobile phones. In the 14 years under Ballmer, Microsoft's share price fell more than 30%.

When Nadella took over in 2014, Microsoft was mired in infighting among siloed groups, current and former employees say. Projects were frequently divided across separate divisions with multiple leaders. Teams often didn't communicate with each other and fought for company resources.

Nadella pushed for more internal cooperation with fewer centers of power. He also embraced other tech giants more than any of his predecessors.

Among his first public appearances as CEO was a press briefing, where he took the stage to debut Microsoft Office for the iPad and iPhone. For years, the company had been dismissive of Apple's mobile devices, preferring to build its own hardware than strike a partnership.

Nadella's first few years on the job were marked by big acquisitions, including LinkedIn in 2016 for $26.2 billion and GitHub in 2018 for $7.5 billion. He would go on to do more than 300 deals worth over $170 billion in total.

These acquisitions infused the company with new blood. LinkedIn co-founder Reid Hoffman joined Microsoft's board of directors. LinkedIn's head of engineering, Kevin Scott, was given the newly created role of chief technology officer.

Scott fretted in a 2019 email to Nadella and then Chairman Bill Gates that the company's AI infrastructure was far behind Google's. And tools like Gmail autocomplete were getting "scarily good."

Microsoft's AI efforts had been spread among dozens of teams. The company had trouble recruiting top AI talent, said one Microsoft executive. Candidates would admit they were meeting with Microsoft as practice before going to places they would rather work -- usually Google.

In 2018, Nadella met OpenAI's Altman at the Allen & Co. conference in Sun Valley, Idaho. He was impressed with the startup's AI and thought it could expose Microsoft to more sophisticated tools.

When Microsoft invested $1 billion in OpenAI, it was controversial. Even Gates was initially skeptical that Microsoft needed to invest so much in an outside company when it had its own AI.

As part of the deal, OpenAI said it would exclusively use Microsoft's Azure cloud and Microsoft promised to invest in the expensive chips needed to meet OpenAI's voracious demand.

When Nadella saw an early demo of a chatbot built into Microsoft's Bing search engine, using OpenAI's technology, he asked his team what they needed to make it a hit product. Engineers told him that if millions of people were to use the chatbot, it would require every high-end chip the company had. That would mean taking the chips away from Microsoft's many other projects.

"What if I could get them for you?" he asked. Microsoft started purchasing enormous amounts of the GPU chips used for AI and invested another $10 billion in OpenAI in 2023.

The decision rippled through Microsoft. Many divisions felt the pinch to their budgets. The hardware group's leader, Panos Panay, decamped for Amazon to lead its Alexa division last fall. Ruben Caballero, the head of HoloLens, Microsoft's augmented reality project, has also left.

In February 2023, Nadella debuted the new Bing with a promise that with AI, Microsoft could finally make Google "dance." Microsoft integrated OpenAI's technology into its lineup, creating AI assistants that plug into its biggest software products.

The wisdom of Nadella's dependence on OpenAI came into doubt last fall after OpenAI's board ousted Altman in a coup. Nadella helped outmaneuver OpenAI's board by publicly offering to bring Altman to Microsoft. Altman was reinstated and Microsoft was given a nonvoting seat on the board.

The wrangling drew scrutiny from regulators, who began investigating the relationship between Microsoft and OpenAI. Microsoft has repeatedly stated that it has only a non-controlling stake in the revenue produced by OpenAI's for-profit arm.

News Corp, owner of The Wall Street Journal, has a content-licensing partnership with OpenAI.

Altman's image as a controversial celebrity CEO has ruffled feathers. Some employees worried that the media storm after actress Scarlett Johansson claimed that OpenAI surreptitiously created an AI voice modeled on her reflected poorly on their efforts to make AI a more trusted technology.

Altman's status as the most important figure determining Microsoft's AI strategy is becoming less certain, thanks to the arrival of Suleyman and his team. Suleyman was a co-founder of DeepMind, the trailblazing AI company that was bought by Google and became the engine of its artificial intelligence efforts. Altman, along with Elon Musk, launched OpenAI as a nonprofit in 2015 partly to ensure that the future of AI was not explored in secret and controlled by Google.

Suleyman left DeepMind to help start Inflection in 2022, joining forces with LinkedIn co-founder Hoffman, one of OpenAI's earliest investors and a board member. Hoffman resigned from OpenAI's board not long after he started Inflection.

Microsoft was already a fan of Inflection -- it had invested hundreds of millions -- when Nadella decided to recruit Suleyman. Nadella spent more than a month discussing a potential move with Suleyman, who was given the title of CEO of AI.

Microsoft insiders say the internal politics and the balance of power between the longtime rivals Suleyman and Altman have been confusing. The Inflection co-founder is set to be one of the main points of contact between Microsoft and OpenAI, said a person familiar with the matter.

Nadella has given Suleyman's team a large budget and wide latitude to operate. His group has absorbed other AI teams. Some Microsoft employees view the Inflection imports as a foreign body; these new employees communicate through Slack rather than the Microsoft-owned Teams tool.

Microsoft said that new and existing teams work together. The company has worked to quell speculation there is any friction with OpenAI. At Microsoft's annual developer conference in May, Altman was a special surprise guest.

Still, Nadella isn't slowing down. Microsoft's shares have surged more than 10-fold under his watch, lifting it above Apple for much of this year to make it the largest company in the world by market value. One of his top priorities today is rebranding the Azure cloud as the go-to place for startups.

In November, Nadella approved a program giving early-stage startups free access to some of Microsoft's computing clusters, a strategy meant to win their allegiance in the event they become the next breakout success.

The company has signed deals to bring startups such as Cohere and French startup Mistral AI onto Azure. Both companies are developing large language models that compete with OpenAI. In April, Microsoft invested $1.5 billion in Abu Dhabi-based AI company G42, which will have the company run its software and services on Azure.

Arvind Jain, CEO of Glean, an enterprise AI company, has repeatedly met with Nadella during the Microsoft chief's recent startup charm offensive. Jain, like many other founders, didn't initially consider Microsoft a player in the startup game but today runs his AI assistant off Microsoft's cloud.

"Microsoft makes the effort to connect and reach out," Jain said. "When we started our team didn't consider Azure as an option. AI changed that."" [1]

1. Microsoft's Nadella Is Building An AI Empire --- After OpenAI deal, the CEO spreads his bets in an attempt to dominate. Dotan, Tom; Berber, Jin.  Wall Street Journal, Eastern edition; New York, N.Y.. 14 June 2024: A.1.