UK Regulator Deems Microsoft and Inflection AI’s Partnership a Merger, But Clears It Of Competition Concerns

The UK’s Competition and Markets Authority has ended its investigation into the partnership between Microsoft and Inflection AI and cleared it of any competition concerns.

It did, however, deem it a “relevant merger situation” that falls within its jurisdiction, so similar deals that do not strictly meet the criteria of an acquisition could be investigated in the future.

Inflection AI co-founders Mustafa Suleyman and Karén Simonyan joined Microsoft in March and took “several” coworkers with them. This included Jordan Hoffman, who now fronts Microsoft’s AI Hub in London.

The CMA opened an inquiry into whether this and Microsoft’s other deals with Inflection should be considered anti-competitive on July 16.

The CMA has released a summary of its investigation, explaining the decision. Ultimately, the merger “does not give rise to a realistic prospect of a substantial lessening of competition as a result of horizontal unilateral effects” in the realms of consumer chatbots and foundational AI models.

Why Microsoft hiring from Inflection drew the CMA’s attention

The inquiry studied “whether it is or may be the case that Microsoft Corporation’s hiring of certain former employees of Inflection and its entry into associated arrangements with Inflection has resulted in the creation of a relevant merger situation,” the CMA wrote.

In the summary published this week, it added that the staff responsible for AI development is “at the core of any business seeking to develop FMs or chatbots,” because “any technology in this space can quickly become obsolete without ongoing development.”

“In this context, the CMA considers that acquiring a team with relevant know-how — even without further assets — may fall within the CMA’s merger control jurisdiction,” the CMA wrote.

The “associated arrangements” it refers to include a nonexclusive licensing deal to utilize Inflection intellectual property for Microsoft’s Azure cloud. Microsoft paid $650 million for this privilege and the Inflection team, according to Reuters.

If deemed a merger, Microsoft-Inflection could create a “substantial lessening of competition within any market or markets in the United Kingdom for goods or services,” the CMA wrote, which would fall under the authority’s jurisdiction.

In a statement to the BBC in July, a Microsoft spokesperson said, “We are confident that the hiring of talent promotes competition and should not be treated as a merger.”

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Why the CMA cleared the partnership

Inflection has developed its own generative AI chatbot, Pi, and also plans to develop a foundational AI model for enterprise customers. This means that its partnership with Microsoft could pose a disproportionate threat to competition in the consumer chatbot and foundational AI model spaces.

However, despite hiring the “vast majority of [Inflection’s] team” and arrangements representing a merger in the eyes of the CMA, it cleared the partnership of competition concerns in both these markets.

The CMA greenlit the merger with regards to the chatbot market for the following reasons:

1. Prior to its partnership with Microsoft, Inflection held a very small share of U.K. domain visits for chatbots and had not been able to materially increase or sustain user numbers like its competitors.
2. Pi is not a material competitive constraint on Microsoft’s or its competitors’ chatbots.
3. Inflection is not an important source of product innovation, which could unfairly restrict competition now or in the future. Many of its most valuable features could be replicated by competitors.
4. Inflection would have faced significant challenges in winning customers from its competitors and realizing its development ambitions.

It OK’d the merger in the U.K.’s foundational AI market for the following reasons:

1. None of the potential customers of Inflection’s enterprise AI model could identify features that would make it more attractive than competitors’.
2. Competitors without enterprise AI models are already actively or capable of developing their existing consumer models into enterprise versions.

Why is the CMA investigating Big Tech firms?

Big Tech firms are rapidly investing in young AI startups to gain early control and capitalize on the AI boom. Notably, this can be seen through partnerships such as Microsoft and OpenAI, NVIDIA and Inflection AI, and Google and Anthropic.

However, such collaborations can lead to market dominance, making it more difficult for other independent companies to get funding, attract talent, or compete with the advanced technology and reach of the big players.

Complete mergers and acquisitions often trigger extensive regulatory scrutiny and potential antitrust actions for this reason, which can delay or block proceedings. To avoid this situation, Big Tech instead makes strategic investments in the most promising startups and/or hires their top talent, allowing them to gain influence and access to innovative technologies unchecked.

The CMA continues its investigation into “interconnected web” of AI companies

The investigation into Microsoft and Inflection highlights the complicated web of relationships between AI players. Suleyman previously worked at Google DeepMind, then co-founded Inflection alongside Karén Simonyan. (Simoyan moved to Microsoft AI as chief scientist under Suleyman.)

Inflection AI makes a generative AI chatbot called Pi, which is intended to be a “kind and supportive companion.” It hosts Inflection 2.5, the large language model behind Pi, on Microsoft Azure.

The CMA turned its eye to Inflection AI in April, when Inflection AI was mentioned as a part of a request to comment on “AI partnerships and other arrangements.” Specifically, the CMA highlighted several relationships between giant tech companies and AI startups:

• Microsoft and Mistral AI, although the size of Mistral’s investment meant the partnership didn’t qualify for investigation.
• Amazon and Anthropic, which has now been escalated into a full investigation as of August 8.
• Microsoft and Inflection AI.

The CMA has been looking into OpenAI and Google’s ties with Anthropic as well. Close relationships between players in the AI industry “could be exacerbating existing positions of market power through the FMs [foundation models] value chain,” the CMA wrote in April.

According to the authority, the AI industry contains “an interconnected web of over 90 partnerships and strategic investments involving the same firms.”