The Federal Trade Commission (FTC) is investigating if Microsoft intentionally designed its recent deal with Inflection AI to avoid antitrust examination. The probe is part of a larger initiative to scrutinise the tech giant’s AI investments and their effects on market competition.
In March, Microsoft secured the services of Inflection AI’s co-founder and nearly all its employees, agreeing to pay around $650 million as a licensing fee to resell Inflection’s technology. This arrangement was communicated to Inflection’s investors, who were assured repayment through future sales proceeds.
Inflection AI, based in the San Francisco Bay Area, is known for developing a significant large language model and launching the AI chatbot Pi. Other major players in this space include OpenAI, creator of ChatGPT and Google, developer of Gemini.
Acquisitions exceeding $119 million typically require reporting to federal antitrust agencies, which can review and potentially challenge deals that may significantly reduce competition or create monopolies. The FTC and the Justice Department share this antitrust oversight responsibility.
FTC Chair Lina Khan has voiced concerns about major tech companies like Microsoft and Google gaining dominance over AI applications that could control vital aspects of technology, including conversational agents, art creation tools, and code-writing software, reports WSJ.
As part of its ongoing investigation, the FTC recently issued civil subpoenas to both Microsoft and Inflection, demanding documents spanning the past two years to scrutinise the specifics of their deal.
The FTC will explore the core question of whether Microsoft designed the deal to acquire effective control over Inflection without triggering mandatory FTC review. Should the FTC determine that Microsoft sidestepped regulatory requirements, it could pursue enforcement actions, including fines and potentially halting the transaction for a comprehensive review of its competitive implications.
Tech giants frequently acquire startups to access specialised talent in a practice known as ‘acquihire.’ Microsoft’s agreement with Inflection involved hiring its AI researchers without outright purchasing the company.
In January 2024, the FTC opened an investigation into Microsoft’s investment in OpenAI and Alphabet’s ties with Anthropic, a competitor founded by former OpenAI engineers.
At Microsoft, Inflection AI co-founder Mustafa Suleyman and his team have launched a new division called Microsoft AI, which is dedicated to developing AI products for consumers, such as improvements to the Bing search engine and the Windows operating system.
Meanwhile, Inflection AI remains an independent company under new management, pivoting from consumer-oriented products like Pi to offering services for corporate clients.
Ted Shelton, Infllection’s new chief operating officer, asserted that the company remains independent and unaware of any FTC investigation. He emphasised that Microsoft holds no investment in Inflection. Principal investors now include entrepreneur Reid Hofman and venture capital firm Greylock Partners.
This situation mirrors Microsoft’s previous attempt to hire Sam Altman, CEO of OpenAI, following his brief ousting by the OpenAI board, which accused him of inadequate transparency. Altman was reinstated after a five-day standoff.
As FTC delves deeper into Microsoft AI-related acquisitions, the outcomes could significantly influence how major tech firms structure future deals and navigate regulatory landscapes.
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