Does EU Compliance Require Microsoft to Disclose OpenAI Investment as a Merger?

The European Union is checking whether Microsoft’s investment in generative AI giant OpenAI is reviewable under the bloc’s merger regulations, it said today. “Finally, the European Commission is checking whether Microsoft’s investment in OpenAI might be reviewable under the EU Merger Regulation,” it added. Commenting in a statement, EU competition chief Margrethe Vestager said:Virtual worlds and generative AI are rapidly developing. They also told us there are no “particular concerns” the EU has identified yet vis-a-vis competition and generative AI as yet. Per the spokesperson, a transaction would be notifiable to the Commission under the EU Merger Regulation if it involves ” a change of control on a lasting basis”.

The European Union has announced its investigation into Microsoft’s investment in generative AI giant OpenAI. The union said it is assessing the arrangement under its merger regulations in a statement released today.

“The development comes in the wake of the turmoil at OpenAI in late November when the then board voted to oust founder and CEO Sam Altman — a shock move that triggered an aggressive counter manouever by OpenAI investor Microsoft, which stepped in to say it was hiring Altman.”

This move follows the earlier drama at OpenAI when the board voted to remove founder and CEO Sam Altman, which led to a swift return after a countermove by Microsoft to hire Altman. The tech giant also extended an offer to any other OpenAI staffers who wanted to jump ship during the leadership upheaval.

The episode resulted in Altman’s return as lead of OpenAI and a new board being appointed. This reshuffle saw the departure of several members who had voted to remove Altman. Microsoft also gained representation on the board for the first time, in the form of a non-voting board observer.

The EU’s probe into the arrangement, which also includes Microsoft’s significant stake in OpenAI, aims to assess potential competition concerns.

“Last month the UK’s competition authority launched an inquiry to decide whether the pair of tech giants are in a “relevant merger situation”. Its invitation to comment closed on January 3 — but the scrutiny procedure remains ongoing.”

In December, the UK’s competition authority opened an investigation into whether Microsoft and OpenAI are in a “relevant merger situation”. This inquiry is ongoing.

Germany’s Federal Cartel Office (FCO) has also examined the relationship between Microsoft and OpenAI. In the fall of last year, just before Altman’s shocking ousting and return, the FCO determined that the cooperation between the two companies was not subject to merger control at that time. However, the office did warn that if Microsoft were to increase its influence on OpenAI, it may need to re-examine the arrangement under competition law.

The EU Commission’s announcement today that it is reviewing the Microsoft-OpenAI investment and partnership coincides with two calls for contributions on competition in the fields of generative AI and virtual worlds. The EU is seeking insights from stakeholders on the level of competition in these emerging markets and how competition law can ensure their competitiveness. The deadline for submissions is March 11, and the Commission may hold a workshop in the second quarter of 2024 to further discuss the contributions received.

The Commission also stated that it is investigating agreements between major digital market players and generative AI developers and providers, in order to understand their impact on market dynamics.

“Finally, the European Commission is checking whether Microsoft’s investment in OpenAI might be reviewable under the EU Merger Regulation,” stated the Commission.

Margrethe Vestager, the EU’s competition chief, commented in a statement:

“Virtual worlds and generative AI are rapidly developing. It is fundamental that these new markets stay competitive, and that nothing stands in the way of businesses growing and providing the best and most innovative products to consumers. We are inviting businesses and experts to tell us about any competition issues that they may perceive in these industries, whilst also closely monitoring AI partnerships to ensure they do not unduly distort market dynamics.”

A spokesperson for the Commission noted that they are seeking input from stakeholders in order to gain a better understanding of these markets and any potential issues. They also confirmed that there are no particular concerns identified at this time.

According to the spokesperson, a transaction would fall under the EU Merger Regulation if it results in a “change of control on a lasting basis”. If this were the case, the Commission would have the power to examine the transaction for any negative impacts on competition and potentially impose remedies to address any issues identified, such as ordering the companies to undo the merger as seen in the UK’s CMA and Facebook-Giphy case in 2021. However, the spokesperson declined to speculate on any next steps the EU may take in regards to the Microsoft-OpenAI deal.

The EU has previously determined that national merger rules do not apply in this case, but has noted that any further developments in the relationship between Microsoft and OpenAI will need to be re-examined. Therefore, it remains to be seen whether the EU will deem it has the authority to intervene and thoroughly scrutinize the details of this partnership using merger laws.

While the EU has recently introduced a new approach to digital competition through the Digital Markets Act (DMA), which targets gatekeepers, the regulation may already be outdated before the compliance deadline for the six tech giants it applies to. This is because the rules are based on the EU’s previous experiences with competition cases involving Big Tech, giving the regulations a retrospective and rigid feel. Additionally, while Microsoft has been designated a gatekeeper under the DMA for its Windows OS, its leverage in the rapidly evolving generative AI market comes through its partnership with OpenAI via its cloud infrastructure.

It is uncertain if the DMA, which must be complied with by early March, will be effective in curbing the influence of hyperscalers like Microsoft in using their vast resources in cloud infrastructure to dominate the generative AI era. Traditional merger regulations could potentially be a powerful tool for competition authorities to intervene in these cases, assuming they are able to use them.

The Commission’s spokesperson stated that while the merger has not been formally notified, the Commission is closely monitoring the situation and Microsoft’s role on the OpenAI board and its investment agreements with the company. They declined to comment on any potential next steps.

The Microsoft-OpenAI deal has also recently come under scrutiny from digital rights and pro-competition groups, who are calling on regulators to take action. In a submission to the UK’s competition authority, several organizations, including the Irish Council for Civil Liberties and Article 19, argued that only by aggressively and promptly addressing anti-competitive behavior in AI can regulators prevent further consolidation and control by the tech giants in digital markets.

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Dylan Williams

Dylan Williams is a multimedia storyteller with a background in video production and graphic design. He has a knack for finding and sharing unique and visually striking stories from around the world.

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