OpenAI Completes For-Profit Transition --- Conversion makes it easier to raise funds, draw talent, and clear path to eventual IPO

 

Microsoft and OpenAI have a convoluted partnership to hide from the regulators monopoly creating tendencies in their work.

 

Based on recent news reports, the suggestion that Microsoft and OpenAI have a convoluted partnership to hide monopolistic tendencies is supported by the facts that their arrangement has attracted intense regulatory scrutiny and prompted accusations of anticompetitive behavior. The complex structure has raised significant concerns about market dominance and the potential for a powerful tech company to control the emerging AI landscape.

Key elements of the Microsoft-OpenAI partnership

 

    Unique corporate structure. OpenAI was founded as a nonprofit dedicated to developing AI for the benefit of humanity. This was later paired with a for-profit arm. Microsoft initially made a $1 billion investment in 2019 under a unique agreement involving profit-sharing and cloud computing services.

    Exclusive tech rights. For years, Microsoft benefited from exclusive access to OpenAI's powerful AI models through its Azure cloud platform. This gave Microsoft a significant market advantage, which has drawn close examination by antitrust regulators.

    Avoidance of traditional merger. By structuring the deal as an investment and partnership rather than a standard acquisition, Microsoft likely avoided direct review by regulators that a full merger would trigger. This approach has been a central point of regulatory and public scrutiny.

 

Regulatory scrutiny and antitrust concerns

 

    Multiple investigations. The Federal Trade Commission (FTC) in the U.S. has investigated whether the partnership could give Microsoft an unfair competitive advantage and potentially lead to an AI monopoly. The European Commission also looked into the matter but initially found the partnership did not qualify as a merger.

    FTC warning. In early 2025, an FTC report highlighted how partnerships between Big Tech and AI startups could create a "lock-in" effect that hinders competition. This report singled out arrangements like Microsoft's deal with OpenAI.

    Accusations of anticompetitive practices. The partnership has been publicly criticized for allowing a dominant company like Microsoft to influence an emerging technology. Some industry participants have raised questions about whether the deal was intentionally structured to evade regulatory oversight.

 

Recent restructuring and ongoing issues

 

    OpenAI's shift and new deal. In October 2025, OpenAI restructured into a public benefit corporation, and regulators in Delaware and California cleared the new arrangement. Microsoft converted its stake, and the two companies signed a new agreement to redefine their relationship.

    Altered exclusive rights. As part of the recent agreement, Microsoft will hold a 27% stake in the for-profit arm and has extended intellectual property rights to OpenAI's technology through 2032. In exchange, Microsoft lost its exclusive rights to be OpenAI's cloud provider.

    Tensions remain. Despite the new deal, reporting indicates that tensions between the two companies have boiled over in recent years, with OpenAI at one point considering filing an antitrust complaint against Microsoft. This suggests the partnership was not always a smooth operation and faced internal disagreement over Microsoft's degree of control.

 

“OpenAI has successfully converted to a more traditional corporate structure, a move that cleared an obstacle for a potential initial public offering and pushed the valuation of longtime partner Microsoft above $4 trillion.

 

The artificial-intelligence startup has turned its for-profit subsidiary into a public-benefit corporation, of which Microsoft will own 27%. The conversion will grant OpenAI's nonprofit parent a stake in the for-profit worth $130 billion, with the ability to get more ownership as the for-profit becomes more valuable.

 

The deal ends nearly a year of wrangling with the attorneys general of California and Delaware, who have the power to regulate nonprofits, as well as with the broader philanthropic community and key investors over the question of whether the AI juggernaut could remain true to its mission while transforming into a more conventional company.

 

The new structure will also make it easier for OpenAI to raise money and attract talent.

 

OpenAI continues to face litigation from Elon Musk's xAI and other parties over its corporate status, as outside groups had alleged that the company strayed from its nonprofit mission in seeking to convert into a for-profit company.

 

Shares in Microsoft rose about 2% Tuesday and the company's value pushed above $4 trillion. The company reports its first fiscal quarterly earnings Wednesday.

 

"When Microsoft made some of the initial investments, you had no clue just how large and powerful OpenAI was going to be in the software and AI ecosystem," said Jackson E. Ader, an analyst at KeyBanc Capital Markets. "OpenAI wanted to spread its wings eventually. It was natural."

 

Under the agreement, Microsoft will have exclusive intellectual-property rights to OpenAI technology until 2032. OpenAI is purchasing an additional $250 billion worth of Microsoft's Azure cloud-computing services, Microsoft said Tuesday, but Microsoft will no longer have a right of first refusal to be OpenAI's computing supplier.

 

As part of the new structure, the company's nonprofit parent will be renamed the OpenAI Foundation and commit an initial $25 billion to healthcare and AI resilience efforts, on top of the $50 million fund to support nonprofits that it announced earlier this year. The company said it made changes to its planned structure as a result of talks with the offices of the attorneys general of California and Delaware.

 

The conversion was essential for OpenAI's fundraising efforts, as some of its investors had the right to not pay their full commitments to the company if OpenAI didn't convert by the end of this year.

 

During a livestream on the company's website on Tuesday, OpenAI CEO Sam Altman was asked about the company's IPO plans, and said the company doesn't have specific plans about the timing of its IPO. "But I think it's fair to say it is the most likely path for us, given the capital needs that we'll have, and the size of the company," Altman said.

 

OpenAI leadership began mulling a conversion to a more traditional structure in the wake of Altman's firing in late 2023 by the company's nonprofit board, according to people familiar with the matter. He was later reinstated.

 

In its previous structure, investors like Microsoft didn't own equity, but rather the ability to participate in the profits of the for-profit subsidiary, with profits capped at 100 times their investment for initial investors. Any profits over that were to go to the nonprofit.

 

In an interview with business streaming show TBPN, Microsoft Chief Executive Satya Nadella said Microsoft is focused on being a "platform company" with many partners, and that it has its own capabilities of creating world-class AI technology. Numerous companies use Microsoft's Azure cloud computing services to train their AI models and run workloads.

 

"My mindset is all platform," he said. "I'm happy with OpenAI. I would love to have Anthropic, [Microsoft AI], Grok -- anyone. If Google wants to put Gemini on Azure, please do so."

 

Earlier this year, following Musk's lawsuit and an outcry from critics, including nonprofit groups, over the planned conversion, the company announced it was scaling back its ambitions to turn OpenAI into a more conventional company, and would allow the nonprofit to remain in control of the for-profit.

 

The deal caps a multiyear saga over the relationship between Microsoft and OpenAI and comes at the end of a summer of tense negotiations.

 

Microsoft was one of OpenAI's earliest partners and among its largest investors, integrating the company's technology into many of its products and helping fuel the early years of the AI boom. The two companies would later become competitors, sparring over how much control Microsoft had over the startup.

 

The relationship at one point grew so fractious that OpenAI considered going to antitrust regulators to break out of the contract, The Wall Street Journal reported.

 

The Journal said in October 2024 that Microsoft had invested $13.75 billion in OpenAI since 2019, and the value of that investment ultimately increased by nearly a factor of 10.

 

Microsoft has an unusual relationship with OpenAI. The two sides recently reached a tentative agreement to extend their partnership. Microsoft aims to have a level of technological independence from OpenAI as it builds its Copilot assistant, and OpenAI now also depends on other cloud providers for its AI work. Microsoft now uses AI models from OpenAI rival Anthropic in its 365 tools, and it is also developing its own models independent of OpenAI.

 

Microsoft's Nadella recently decided to devote more of his schedule to the company's AI initiatives. He told employees this month that he would hand some executive duties to a deputy to focus on Microsoft's technical work, especially involving AI. Nadella desires to be more deeply involved in the company's efforts to develop its AI capabilities and data centers.

 

Some investors have cautioned that the tech industry's huge spending on AI infrastructure is creating a bubble, with many deals surrounding OpenAI.” [1]

 

1. OpenAI Completes For-Profit Transition --- Conversion makes it easier to raise funds, draw talent, and clear path to eventual IPO. Keach Hagey; Herrera, Sebastian.  Wall Street Journal, Eastern edition; New York, N.Y.. 29 Oct 2025: A1.