Introduction

In a significant development for the tech industry, Microsoft is under regulatory scrutiny in the United Kingdom (UK) following its hiring of the core team from Inflection AI, a U.S.-based rival to OpenAI in which Microsoft had previously invested. The Competition and Markets Authority (CMA), the UK’s competition watchdog, has announced a ‘phase 1’ merger inquiry, initiating a 40-working day investigation to gather evidence and determine whether to proceed with a full probe.

Background

The CMA’s announcement follows the launch of Microsoft’s new consumer AI division by CEO Satya Nadella, led by Inflection AI founders, including Karén Simonyan and Mustafa Suleyman, along with several other Inflection AI members. Notably, Jordan Hoffmann, now heading Microsoft’s U.K. AI hub in London, is among those who joined.

Regulatory Concerns

The probe centers on concerns that big tech companies are using new M&A approaches, dubbed ‘quasi-mergers,’ to avoid regulatory scrutiny in the AI sector. These strategies may include strategic investments or hiring startup founders and technical talent. This development raises important questions about the boundaries between investment and acquisition, and how regulators can effectively police these practices.

The Role of Quasi-Mergers

Quasi-mergers refer to non-traditional business combinations that blur the lines between ownership and partnership. These strategies allow companies to acquire key personnel, technology, or intellectual property without explicitly taking control of a target company. By leveraging quasi-mergers, big tech companies can build competitive advantages while avoiding formal regulatory scrutiny.

Previous Investigations

The CMA has been conducting preliminary inquiries into several AI partnerships, including Microsoft’s investment in Mistral AI, which was found not to qualify for investigation under current regulations. This announcement was anticipated as the CMA had been exploring ways to address concerns around quasi-mergers in the AI sector.

Amazon and Anthropic Investigation

The CMA is also examining Amazon’s $4 billion investment in U.S.-based AI company Anthropic, which has raised similar questions about the nature of this investment. The probe will determine whether the hiring constitutes a ‘merger’ and if it potentially harms competition in the UK. If so, a more detailed ‘phase 2’ probe, lasting around six months, will follow.

Implications for Microsoft

The investigation’s findings have significant implications for Microsoft, which has been investing heavily in AI research and development through partnerships with OpenAI and other companies. The outcome of this inquiry may set a precedent for future regulatory scrutiny of quasi-mergers in the AI sector.

Timeline and Next Steps

The phase 1 inquiry will determine by September 11 whether the hiring constitutes a ‘merger’ and if it potentially harms competition in the UK. If the CMA finds that a merger has occurred, or if there are concerns about the impact on competition, a more detailed ‘phase 2’ probe will follow.

Industry Reactions

The news of Microsoft’s investigation has sparked reactions from industry observers, with some questioning whether the CMA’s approach is sufficient to address emerging concerns around quasi-mergers. Others have highlighted the need for greater regulatory clarity and enforcement in the AI sector.

Conclusion

Microsoft’s hiring of Inflection AI’s core team raises important questions about the boundaries between investment and acquisition in the AI sector. The CMA’s investigation will determine whether this move constitutes a ‘merger’ and if it potentially harms competition in the UK. As the industry continues to evolve, regulatory scrutiny is essential to ensure that big tech companies operate fairly and transparently.

References

• Competition and Markets Authority – The UK’s Competition and Markets Authority website provides information on current investigations, including the phase 1 inquiry into Microsoft’s hiring of Inflection AI’s core team.
• Merger Inquiry Process – This guide explains the CMA’s merger inquiry process and provides information on how investigations are conducted.

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