Microsoft’s association with OpenAI has been a cornerstone of its recent surge in growth. The collaboration has granted Microsoft exclusive access to OpenAI’s powerful models, significantly boosting the performance of its Azure cloud platform and contributing to Microsoft’s market value nearing $4 trillion. For the April-June quarter, Azure’s revenue is projected to rise by 34.8%, aligning with Microsoft’s expectations and slightly outpacing the previous quarter’s growth of 33%.
However, this once-secure partnership now finds itself in the midst of renegotiation. OpenAI is preparing for a public offering, and its transformation into a public-benefit corporation will require Microsoft’s approval. Reports indicate that the two companies are at an impasse regarding the extent of Microsoft’s future access to OpenAI’s technology, as well as its equity stake in the company after the transition.
This restructuring is linked to OpenAI’s $40 billion funding round, led by Japan’s SoftBank, with half of this investment contingent on the successful legal changes before the year ends. Without Microsoft’s approval, the deal cannot proceed.
OpenAI is also diversifying its cloud partnerships. Recently, it has deepened its collaboration with Oracle, securing plans for 4.5 gigawatts of data center capacity, and it has started leveraging Google Cloud for additional computational resources.
While market analysts, including UBS, express mixed opinions about what this shift means for Microsoft, the tech giant is still viewed as having strong bargaining power. “Microsoft’s leadership has earned enough credibility… and the company will negotiate terms beneficial to its shareholders,” analysts have stated. This sentiment is reflected in the stock market, where Microsoft shares have risen over 20% this year.
Beyond AI, Microsoft is expected to report impressive numbers for the quarter. Analysts predict a 14% revenue increase, reaching $73.81 billion – the company’s strongest growth in three quarters. This rise is driven by factors such as a weaker US dollar, increased non-AI demand for Azure, and a surge in Windows orders as PC manufacturers brace for potential tariffs.
Profit is projected to grow by 14.2%, reaching $25.16 billion. This marks a slight slowdown compared to previous quarters, largely due to increased operational expenses.
Investors are also keeping a close eye on Microsoft’s capital spending. While Alphabet has recently boosted its annual spending target by $10 billion, Microsoft has acknowledged facing limitations in AI capacity. The company has indicated it will continue investing in infrastructure, albeit at a slower pace, focusing more on immediate assets such as AI chips. Last fiscal year, Microsoft earmarked more than $80 billion for capital expenditure.
Dan Morgan, senior portfolio manager at Synovus Trust and a Microsoft shareholder, believes the investment is paying off. “Investors may still be underestimating the potential for Microsoft’s AI business to generate sustained growth as the agentic AI era evolves,” he noted.
As negotiations continue to update the deal between Microsoft and OpenAI, sources suggest the companies are working to ensure that Microsoft maintains access to OpenAI’s models, even if OpenAI reaches the milestone of artificial general intelligence (AGI), at which point certain terms of their current agreement would no longer apply.
The two parties have been in discussions for several months, with Microsoft aiming to secure future access to OpenAI’s cutting-edge models. These talks could culminate in a finalized agreement in the coming weeks.
Meanwhile, OpenAI is facing external pressure from various fronts. Notably, co-founder Elon Musk, who left the company years ago, is suing OpenAI for allegedly deviating from its original mission to create AI for the public good rather than private profit.
As Microsoft prepares to report its earnings, all eyes will be on the outcome of these high-stakes negotiations and OpenAI’s growing ties with rival cloud providers.
