The AI assembly line ends with Microsoft, Google and Meta

By Parmy Olson

It’s almost impossible for an artificial-intelligence startup to build anything as good as ChatGPT, but Inflection was getting there.

Last year the Palo Alto, California-based firm raised $1.3 billion in a single fundraising round to turn its chatbot Pi into a personal assistant for everything. It built up a phenomenal cache of computing power, gaining access to thousands of coveted graphics-processing unit chips from Nvidia Corp. and was on track to surpass OpenAI’s free version of ChatGPT with a model it had built, remarkably, from scratch. Compared to most startups, Inflection’s path to success looked smooth. So it came as a shock to the industry on Tuesday when Inflection announced that its co-founders Mustafa Suleyman and Karén Simonyan, along with most of its employees, were joining investor Microsoft Corp. as employees, and that Suleyman would lead the software giant’s consumer AI business.

What happened? Had Inflection run out of all that money in less than a year? If large portions of the funding were in cloud credits, perhaps it had, and those credits can now flow back to Microsoft. Suleyman also told Bloomberg last year that Inflection lacked a business model. But plenty of tech startups have coasted on venture capital dollars for years before being able to open the revenue spigots. That Inflection has been swallowed so quickly by Microsoft underscores a stark new reality: With AI, legacy tech companies are sucking the innovation out of the room like a giant squid and more rapidly than with previous waves of technology. And they’re doing it right under the noses of regulators.

Requirements around computing power and talent have made it too expensive for most companies to build cutting-edge generative AI models without the patronage of a tech giant like Microsoft, Google or Meta Platforms Inc. Case in point: Apple is thinking of outsourcing its generative AI efforts to Google.

Until now, Microsoft’s strategy seemed to be one of hedging its bets. It made a major investment in OpenAI, but it also invested in hot AI rivals including Inflection and Mistral. Now, it’s starting to adopt the Mark Zuckerberg School of Competition playbook, blasting smaller contenders out of existence so they’re no longer a threat, and pulling their talent into its orbit as it’s now doing with Inflection.

That may have been the plan all along for Inflection, whose other co-founder is Reid Hoffman, the billionaire who sold LinkedIn to Microsoft and then joined the software giant’s board. Hoffman went on to broker the meetings that led to Microsoft’s investment in OpenAI, so he may well have been pivotal to the Inflection deal. (The night before Tuesday’s announcement, I happened to spot Hoffman walking out of an AI conference in Paris and into a private meeting with Kevin Scott, Microsoft’s chief technology officer.)

Hiring Inflection’s staff, rather than buying the company outright, is a clever sleight of hand by Microsoft in the face of rising antitrust scrutiny of Big Tech behavior in the AI space. According to Bloomberg News, Inflection’s investors will be made whole, possibly by a licensing deal between Inflection and Microsoft.

That sounds a lot like an acquisition wrapped up in a hiring spree — the kind of shrewd move you’d expect from a company that’s spent years learning how to bat away antitrust regulators, ever since its bouts with the European Union in the early 2000s. That’s likely why Microsoft has managed to purchase large players like Activision Blizzard (for $69 billion in 2022) and Nuance Communications ($19 billion in 2021) and side-step antitrust probes into those deals, while Meta was blocked by British antitrust authorities for trying to buy a gif site called Giphy for just $315 million.

Because big tech buys, rather than innovates, the strategy benefits Microsoft. So long as the company can keep finding novel ways to capture the world’s top AI talent — and on that, Inflection’s Simonyan is a major coup — Microsoft can maintain pole position in the AI arms race.

It’s worth noting that Inflection co-founder Suleyman had noble goals for the firm that weren’t so different from those of OpenAI once upon a time. Having previously worked at Google’s DeepMind, where he tried building an independent ethics council for its AI efforts, he’d made Inflection a public benefit corporation, meaning it had to legally prioritize its social and environmental impact at the same level as its commercial obligations.

AI’s builders often start their journeys with humanitarian objectives, before realizing they’re caught in a system where there’s only one logical outcome: helping to fatten up legacy tech companies and entrench their dominance. Inflection seems to have done that more quickly than anyone expected by joining Microsoft. Antitrust regulators will probably take note — but whether Microsoft will avoid their sanctions yet again is another question.