UK antitrust watchdog launches investigation into Microsoft’s partnership with Inflection AI

The U.K. competition watchdog began a review of the partnership Microsoft Corp. struck with Inflection AI Inc., a heavily funded rival to OpenAI, earlier this year.

The Competition and Markets Authority, also known as the CMA, announced movement today. The development comes about three months after CMA officials began investigating Microsoft’s deal with Inflection AI. On April 24, the regulator invited members of the public to comment on the potential impact of the partnership on the market.

Inflection AI, founded in 2022, closed a $1.3 billion funding round the following year that included contributions from Microsoft. It has developed a large language model, Inflection-2.5, that can generate text, create code and perform related tasks. The startup said at the time of the algorithm’s debut that it could nearly match the capabilities of GPT-4, the predecessor to OpenAI’s latest GPT-4o LLM.

In March, Microsoft appointed Inflection AI co-founder and CEO Mustafa Suleyman to lead Microsoft AI machine learning group. It also hired most of the remaining LLM staff and entered into a non-exclusive licensing agreement for Inflection-2.5. Inflection AI, for its part, announced plans to refocus on developing custom LLMs for enterprises.

The CMA said today that its investigation into the deal is focused on two main areas. Officials plan to assess how Microsoft hired most of Inflection AI’s staff, as well as examining “related arrangements” it made with the LLM creator as part of the partnership. The CMA did not specify which arrangements it would investigate.

In March, sources reported that information that the partnership cost Microsoft $650 million. The company reportedly paid the bulk of that amount, $620 million, for a non-exclusive license to Inflection AI’s technology. The remaining $30 million was provided as part of an agreement in which Inflection AI agreed not to sue Microsoft for hiring its former employees.

The CMA’s initial priority is to determine whether the partnership constitutes a so-called material merger situation. This term includes not only acquisitions but also other transactions, such as partnerships, in which the companies involved “cease to be distinct”. If the CMA finds that Microsoft’s Inflection AI deal meets the relevant criteria, it will seek to determine whether the deal is likely to significantly lessen market competition in the UK

Depending on the findings of the review, the case may be referred for a more detailed Phase 2 investigation. Such investigations could result in the CMA issuing fines or ordering the firms inspected to change certain business practices.

Microsoft said in a statement that “we believe that hiring talent promotes competition and should not be treated as a merger. We will provide the UK CMA with the information it needs to conclude its investigations expeditiously.”

Microsoft’s partnership with OpenAI is also facing regulatory scrutiny. In late June, the European Union’s top antitrust official revealed that the bloc could begin reviewing the deal. The CMA, for its part, required Last December, the company received feedback from third parties about the impact of the Microsoft-OpenAI partnership on the market, but has not yet opened an investigation into the matter.

Photo: Microsoft