Prof G Markets: Microsoft and OpenAI, Wash Trading, and European Tech Regulations

Strategic Move

Microsoft's $10 billion investment in OpenAI is a strategic move to integrate AI capabilities into its products, such as Bing and the Microsoft Office suite. Scott Galloway believes this deal is beneficial for Microsoft, as it positions the company at the forefront of AI technology, potentially revitalizing Bing and differentiating it from competitors 1. He notes that the investment is relatively small for a company with a $2 trillion market cap, making it a low-risk, high-reward venture 2.

This feels to me like ride is rain and they deserve it because my understanding is they made a substantial investment a while ago before anyone really was talking about OpenAI.

--- Scott Galloway

The deal structure is unique, with Microsoft receiving 75% of OpenAI's profits until the investment is recouped, after which it will receive 49% of the profits, capped at $92 billion 3.

   

AI Infrastructure

The infrastructure required to support AI applications is substantial, and Microsoft's investment in OpenAI highlights this need. Scott Galloway explains that the processing power required for AI is immense, with ChatGPT's average cost per query being seven times that of Google's 4. This makes the partnership with Microsoft, which has the necessary cloud infrastructure, crucial for OpenAI's success.

This company immediately has recognized that they're nothing without a monopoly on the front end and the back end.

--- Scott Galloway

Galloway also points out that OpenAI's strategy to integrate vertically by securing both the front-end and back-end infrastructure is a smart move, ensuring they have the necessary resources to scale their AI applications 4 5.