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FTC Probes Microsoft’s $650 Million AI Deal with Inflection

Following its recent $650 million investment in Inflection AI, Microsoft is facing a probe into the fairness of the deal.

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The Federal Trade Commission (FTC) is examining Microsoft's recent collaboration with Inflection AI, focusing on whether the transaction was structured to evade mandatory antitrust reviews. According to the Wall Street Journal, this inquiry brings attention to the heightened regulatory scrutiny in the growing artificial intelligence field.

In March, engaged in a major deal with Inflection AI, including the hiring of its co-founder and the majority of its workforce. As part of the agreement, Microsoft committed approximately $650 million to Inflection, categorized as a licensing fee for the startup's technology. Investors were assured of repayment through future sales.

Regulatory Requirements and Concerns

Current regulations mandate that acquisitions over $119 million be reported to federal antitrust authorities, who then evaluate the deal's impact on market competition. The FTC or the Justice Department can intervene if a merger is deemed to significantly reduce competition or create a monopoly.

The FTC's investigation is part of its wider scrutiny of AI investments by major tech companies, including Microsoft and parent company, Alphabet. FTC Chair Lina Khan has expressed concerns that leading tech firms could dominate the most promising AI technologies, potentially hindering competition and innovation in the sector.

Specifics of the FTC Inquiry

The FTC is assessing the specifics of Microsoft's deal with , focusing on the motivations and terms of the partnership. Civil subpoenas have been issued to both companies, requesting documents from the past two years to determine if Microsoft's arrangement was meant to bypass FTC oversight while still securing control over Inflection's assets.

If the FTC finds that Microsoft should have reported the deal, enforcement actions could follow. These may include fines and halting the transaction while a thorough investigation is conducted to understand its competitive impacts.

Microsoft's Acquihire Strategy

Microsoft's strategy to integrate Inflection's talent without purchasing the company outright reflects a common industry practice known as an “acquihire.” This technique allows companies to bring in specialized workforces without the complexities of a full acquisition.

Inflection AI, based in the San Francisco Bay Area, is recognized for developing one of the largest models and launching an AI chatbot named Pi. Despite the deal with Microsoft, Inflection continues to operate independently under new management, shifting its focus from consumer products to corporate services.

Ted Shelton, Inflection's new chief operating officer, said he was unaware of the FTC investigation. He highlighted that Inflection remains a wholly independent entity with no direct investment from Microsoft. The primary backers are entrepreneur Reid Hoffman and venture-capital firm Greylock Partners.

Comparison with OpenAI

This hiring strategy is similar to Microsoft's earlier move to bring in Sam Altman, CEO of OpenAI, after his temporary ousting by the board. Microsoft has a substantial investment in , totaling around $13 billion, which gives it a claim to 49% of any profits generated by the AI company.

The FTC's probe into Microsoft's arrangement with Inflection AI highlights growing regulatory vigilance in the AI industry. As AI technologies advance and become more integrated into various sectors, regulators are focusing on ensuring fair competition and preventing monopolistic practices.

Luke Jones
Luke Jones
Luke has been writing about all things tech for more than five years. He is following Microsoft closely to bring you the latest news about Windows, Office, Azure, Skype, HoloLens and all the rest of their products.

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