Microsoft’s Comments on Private Benefit and Public Good in the OpenAI (c)(3) Joint Venture

We have previously reported that Delaware has made inquiries to OpenAI (c)(3) regarding its reported transition to a public benefit corporation.  Now comes word that OpenAI (c)(3) has initiated talks with California’s AG:

Meanwhile, Microsoft’s most recent 10Q contains a few nuggets relevant to whether profit and tax exempt charity can coexist in a single entity.  First, this statement relevant to Revenue Ruling 98-15’s requirement that OpenAI (c)(3) have ultimate authority over the joint venture:

Investments that are considered variable interest entities (“VIEs”) are evaluated to determine whether we are the primary beneficiary of the VIE, in which case we would be required to consolidate the entity. We evaluate whether we have (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have determined we are not the primary beneficiary of any of our VIE investments. Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting. We have an investment in OpenAI Global, LLC (“OpenAI”) and have made total funding commitments of $13 billion. The investment is accounted for under the equity method of accounting.

I suppose the statement is legally accurate, that Microsoft does not have the “power to direct” OpenAI LLC’s activities. But it is probably inconsistent with the economic reality.  And then Microsoft includes this statement, implicitly justifying OpenAI LLC’s charitable purpose while also suggesting that the charitable and business purposes are co-extensive:  

Issues in the development and use of AI may result in reputational or competitive harm or liability. We are building AI into many of our offerings, including our productivity services, and we are also making AI available for our customers to use in solutions that they build. This AI may be developed by Microsoft or others, including our strategic partner, OpenAI. We expect these elements of our business to grow. We envision a future in which AI operating in devices, applications, and the cloud helps our customers be more productive in their work and personal lives. As with many innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. AI algorithms or training methodologies may be flawed. Datasets may be overbroad, insufficient, or contain biased information. Content generated by AI systems may be offensive, illegal, inaccurate, or otherwise harmful. Ineffective or inadequate AI development or deployment practices by Microsoft or others could result in incidents that impair the acceptance of AI solutions, cause harm to individuals, customers, or society, or result in our products and services not working as intended. Human review of certain inputs and outputs may be required. . . If we enable or offer AI solutions that have unintended consequences, unintended usage or customization by our customers and partners, are contrary to our responsible AI policies and practices, or are otherwise controversial because of their impact on human rights, privacy, employment, or other social, economic, or political issues, our reputation, competitive position, business, financial condition, and results of operations may be adversely affected.

It’s just plain good business to act in accordance with OpenAI (c)(3)’s charitable goals.  For now, anyway.  Microsoft is still in it just for the money, though.  In an earnings conference call, Microsoft’s CEO said this:  

“The partnership for both sides — that’s OpenAI and Microsoft — has been super beneficial,” he said, adding that Microsoft “effectively sponsored” what became one of the “highest-valued private companies today when we invested in them, and really took a bet on them and their innovation, four or five years ago.”

That, in turn, “has led to great success” for both companies, which Microsoft and OpenAI continue to build upon, Nadella said. He cited Microsoft providing OpenAI with the infrastructure needed for their innovations, and Microsoft’s ability to leverage the resulting AI models from OpenAI, in addition to those that it trains and runs itself. “We feel very, very good about our investment stake in OpenAI, and our own our focus,” he said. “We’re always in constant dialogue with them. In a partnership like this, when both sides have achieved mutual success at the pace at which we’ve achieved it, that means we need to push each other to do more to capture the moment, and that’s what we plan to do — and we intend to keep building on it.”

Charity is nice, but this is all about the Benjamins.  

darryll k. jones