OpenAI Gives Microsoft 27% Stake, Completes For-Profit Shift

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2:04Carol Massar:Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank N.A. Member FDIC. Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead. with insight on the people, companies, and trends shaping today's complex economy, plus global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast with Carol Masser and Tim Stenevec on Bloomberg Radio. As we've said, Tim, there's just so much coming at us on this Tuesday, and a lot of it is because of NVIDIA, but there's just so much going on when it comes to AI-related news today.

2:54Yeah, OpenAI continues to forge relationships, as does PayPal. The two announced a tie-up whereby PayPal's digital wallet will be embedded into ChatGPT. It'll send PayPal shares up the most in more than six months, or it did send PayPal shares up the most in more than six months. And then the Microsoft news that we've talked about quite a bit, Carol. Long-time backer Microsoft, a 27 % ownership stake in OpenAI. This part of a restructuring plan that took nearly a year to negotiate. It removes a major uncertainty for both companies and clears the path for ChatGPT and the maker of ChatGPT to become a for-profit business.

3:26Carol Massar:It's a lot. So let's get into it and really just how OpenAI continues to be at the center of so much. But we have so many questions about why Microsoft is doing this at this time. Bloomberg Intelligence Senior Technology Analyst Anurag Rana joining us from the Bloomberg News Bureau in Chicago. Anurag, why is Microsoft doing this? Did the company need to do this, kind of cement that relationship financially and otherwise with OpenAI? Yeah, I mean, they have to do it because OpenAI has been raising capital with the idea that they will go from a not-for-profit to a for-profit company, eventually going public someday.

4:02So, I mean, this had to be done. The big intentions were there are so many things that they were arguing against, you know, revenue share, technology share, all sorts of different things. Microsoft had control over which cloud providers that they can use, et cetera. So this new agreement kind of cements a lot of those things, removes a big overhang that's on, I would say, more on Microsoft than on OpenAI, frankly, because Microsoft is using OpenAI's technology in their products, in the co-pilot products that are out there. You know, that's, I think, for us, that's the most important thing. Frankly, it's not so much the other financial details.

4:37Since Microsoft will have this 27 % ownership stake in OpenAI, can we look at Microsoft's share price on a daily basis as some sort of public proxy for OpenAI and how investors are valuing OpenAI? Or am I trying to do too much math here? No, I think that's a bit too extrapolation over there. The thing that you want to focus on is, for how many years will Microsoft have access to OpenAI's leading models? So when you look at Frontier models, you have OpenAI, perhaps most in the lead, then you have Anthropic and Gemini. Those are the three big ones that everybody talks about. Down the road, Microsoft needs to make sure that the co-pilot products that they are selling out to the public, both on the M365 and then the GitHub co-pilot, which is used for coding, they really have an alternative to OpenAI.

5:29One answer could be they have their own models, but they're not there yet. So this contract, extend that to 2032, which is, you can say that they're giving themselves seven years to figure this thing out.

5:42Carol Massar:Help me out, though. It's just like OpenAI and Microsoft. I'm looking at the Bloomberg, OpenAI and PayPal, OpenAI and SoftBank, OpenAI, you know, pick your company. They are just, I feel like lining up deals or agreements or relationships with everybody and anybody. I mean, Microsoft, I mean, are they going to have to share the wealth, if you will? And does it become a little bit messy? because I'm just assuming that there will be companies that maybe in some ways are also competing with Microsoft that have deals with OpenAI, or is that not right? I don't know. See, it's a very common thing in technology.

6:25Almost everybody who's competing with each other are also working closely with each other. So that's on the side. But when you look at OpenAI, that's an area where you and I use ChatGPT a lot. But imagine that now what you can do is, Let's say they have a partnership with Walmart. With PayPal today, you are looking at a product and you decide that you can just buy the product seamlessly from that. They have a similar agreement with Stripe and Shopify. So what OpenAI is basically saying, let us be the front end for a lot of what you're doing, let's say on the consumer side. So example that I gave you is more for a retail purchase.

7:00But on the other hand, they also have a deal with Salesforce. So, for example, if you are in chat GPT and you want to look at your Salesforce application, you can do that as well. So OpenAI wants to make sure that they are the front end for a lot of discussions that are going to happen. And that's where I think a lot of the fighting is going to be down the road. Anurag, we had this conversation with Jan van Ecke of Van Ecke yesterday, and he talked a lot about AI and the AI trade. But he also mentioned some stats about when when web traffic is going from chat GPT to websites. And it got me thinking about how people are increasingly replacing or supplementing what they do on the Internet using chat GPT.

7:42The news today, too, that that this potential PayPal tie up where you can pay for stuff within chat GPT also got me thinking, does does Galphabet have to be scared about its core business here? But, you know, but that's been the case for so many years. I mean, there have been people have been talking about this the first day ChatGPT was launched that, oh, what's going to kill Google search business? I mean, so far, I haven't seen those numbers that are out there that are just having a very large financial impact. I'm sure there is some share loss in searches, but I haven't seen it. So we'll see, you know, how this shapes up.

8:18Google has or Alphabet has a lot of interesting assets. I mean, they have semiconductors that are very important. They have a cloud platform. They have a large frontier model. So I think they have all the pieces out there. The question is, you know, whether the market is big enough for a lot of them to exist or coexist at the same time.

8:39Carol Massar:Hey, Anurag, you know, over the summer, Bloomberg put out how OpenAI said Elon Musk identified Mark Zuckerberg as one of the people with whom he had communicated about potentially financing a deal to purchase OpenAI. Does this Microsoft deal put an end to any other big player coming in? I mean, this is theirs? I think so. But again, you know, legal ramifications are such that you don't know how some of the judges will move towards. But this is, you know, this is basically opening eyes saying we have figured out a way to how to go, you know, you could say become for profit and eventually someday go public.

9:17Hmm.

9:18Carol Massar:Yeah, that's going to be interesting, right? I mean, listen, what valuation? Right. But for open AI, right, they can kind of stop the money grab for now, right? Because they just got a massive cash infusion. Yeah, but they are also spending at the amount that nobody has seen. I mean, they have a very large contract with Oracle and they, you know, today with this agreement, they've committed another$250 billion of computing capacity with Microsoft. So it's, you know, their expense is far exceeding the revenue right now. They are doing these, you know, you could say investments so that down the road, they can recognize the value of some of these investments.

9:59So that's, I think, where the mismatch is for a lot of people. And so unless there is some equilibrium, I think it's going to be very tough for them to go public.

10:06Carol Massar:Yeah, the money flows around AI in out is like phenomenal. Anurag, you too. Phenomenal. Thank you. Thank you so much. He is Bloomberg Intelligence Senior Technology Analyst out there in our Bloomberg News Chicago Bureau. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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12:40Carol Massar:Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. It's a Fed Tuesday, Carol. It is a Fed Tuesday. Which means it's followed by a Fed Wednesday. That's how it works. Two-day meetings. Let's get into it with Danielle DiMartino. She's CEO and Chief Strategist at the research and analytics firm QI Research. She's also a former advisor at the Dallas Fed. She's here in our Bloomberg Interactive Broker Studio. We've spoken to you a couple times in recent months. I want to go back to our conversation with you back in July.

13:16I remember it because you were kind of the first person to warn me of weakness in the labor market. You talked about the gig workers out there and the people who were driving for Uber, for example, or Lyft or doing other gig work and the way that a lot of them, in your view, were overqualified because they couldn't find work and what they were trained for, what they went to college for. Is the labor market worse now than it was back in July? Judging by my Lyft and Uber drivers, I would have to say yes. The demographics has expanded. and you've especially got a lot of kind of college graduates right now who are looking for gig work because they can't secure work in in the broader economy as as they thought they would be able to you know they walk across the stage proud with their diploma and boom there's no work so i mean right now the the unemployment rate among college graduates is the highest it's been since 1988 1988 it was a supply issue because that was the peak of baby boomers entering the workforce Now it's the flip side of it.

14:14It's a demand issue. And these kids are rightfully, they're very anxious.

14:20Carol Massar:So when you've got Amazon letting go, 14 ,000 jobs, a lot of it corporate, right? We've got UPS and that's part of its cost cutting. Matt Lizetti at Deutsche Bank says, pay no attention to these headline figures because they're small in comparison to the churn that we see each and every month. And that 5 million jobs are still being created. So what is the net net here? You look skeptical. Yeah. Well, I mean, so we collaborate sometimes with Macro Edge and they're an alternative to Challenger Grand Christmas. Yeah. And with the UPS announcement this morning, and of course, that was so much higher than what was expected, right?

14:57It was 30 percent of what they had previously announced. So we learned from so many companies after the fact about attrition or layoffs rather than layoffs being announced. In any event, at 131 ,000 announced layoffs for the month of October thus far, and being in the heat of earnings season when so many companies are like, I'm going to get the stock to pop, I'm going to lay some people off. We're seeing the third highest level of announced layoffs in two years. So that, to me, at least, is alarming when you do what Chair Powell suggests you do. if you add the lack of hiring to the firing. Because a few years ago, there wasn't all of this lack of hiring.

15:38Now it's very much a pervasive phenomenon in addition to the layoffs coming through.

15:44Carol Massar:Yeah. And then there was the hoarding that was still going on after the pandemic. People were freaked out. They couldn't find workers, right? Pandemic, post-pandemic. And so they're like, let me hold on to it. I mean, UPS is up 8%. And UPS is flying. But look at the one year chart. Yeah, that's a good point. Of UPS. And that required 48 ,000 layoffs in addition to the 34 ,000 they announced. There was another 14 ,000 in their corporate office. Amazon today said that's 14, but that's 14 of 30. And we know that - Stocks down 30 % in the past year. UPS. Yeah, UPS. Oh, yes, absolutely. Well, so then - Got quite the yield.

16:23Carol Massar:All right, one word. How do you describe the economy? One word. Weak. So does the Fed obviously needs to cut in your view? I don't think the Fed has any. Yes, the Fed absolutely has to cut. I think that they begin to discuss, given the magnitude of the layoffs that are rolling in and the lack of hiring that that Chair Powell said could in and of itself increase the unemployment rate. I think that right now what they're discussing is 25 or 50 in December. So can I just throw at you? Like Tim and I've had lots of conversations about earnings, right? Earnings growth is there. Revenue growth is there.

17:00Carol Massar:So companies are doing well. That's the analysis that has come our way. And it's not just big tech, although we'll see what big tech has right this week because we get a big read. But it's been broader based. I would say that - Do you not agree with that? No, no, no. I would say that earnings are doing better than revenues. And so in one survey after another, whether it's a CEO survey, a CFO survey, a regional Fed survey. But there is revenue growth. It's, I think, coming in better. That's, again, what people have shared. There is revenue growth. But remember, these are all based on lowered bars that are easier to get over.

17:35I mean, if you want to look at the entire revenue picture, I think it's important to bring in the BCY Go function and look at the bankruptcies that are coming in on top of this. And that is, you know, S &P has been tracking monthly bankruptcies for forever. And last month, September came in at the highest number in the post-pandemic era of bankruptcies. And we're seeing, I mean, BCY goes hopping. Whoever's in charge of that is busy. So is, you know, we talk a lot about the K-shaped economy when it comes to consumers, but is it a K-shaped market where, you know, and we know this about the S &P 500 companies, that there are, you know, the mag seven have just carried this index for years.

18:19But are you seriously concerned about pretty much the other company, all the other companies? Well, I mean, if you're asking me if I'm seriously concerned about the other 90 % of Americans who are outside of the top 10 % who represent 50 % of spending, yes, yes, I am. And I think we're seeing that in freight. But we're seeing it in freight and we're seeing it in some companies, but we're not seeing it. I mean, we're at record, a new record. Oh, no, no, no, we're not seeing it in asset prices. Why are we not seeing it in asset prices? Well, there's something very automated about this market and this market will continue to feed on itself because that that is that is the structure of passive investing.

18:56Passive investing forces stock prices up because you have to buy the biggest market cap. Look at NVIDIA today. But that's that is a function not of necessarily enthusiasm about NVIDIA, the stock on a fundamental level, the way we used to think of portfolio management 101. But it is a function of passive investing flows.

19:16Carol Massar:So what do you tell investors? Do you just tell them, get ready? Well, according to Bloomberg, the cost of hedging against a decline in the markets is very expensive right now. So we know that we know that portfolio managers are very nervous about what's happening. But no, I actually watch the Fed the most closely because you've got all of this money, trillions and trillions, I think, 12, 13 trillion dollars in cash, cash equivalents, money, market funds, etc. That's, you know, that's predominantly owned by people who are 70 and older. So as long as the Fed does not cut too much, I think we're OK.

19:51But if the Fed starts to cut into what retirees consider to be the corpus of their monthly income, because they have really enjoyed the Fed being higher for longer. They've collected every single 50 basis point cut by the Fed. You take$71 billion of cash out of the hands of retirees. We don't want for people who own 40 % of the stock market, i.e. the 70 year olds, to even think about selling because that unleashes passive.

20:16Carol Massar:OK, got to leave it there. Hey, thanks. Good to see you, Danielle DiMartino Booth, CEO, chief strategist at the research and analytics firm QI Research. Stay with us. More from Bloomberg Business Week Daily coming up after this.

20:32Carol Massar:Let's not forget, we have a big storm. We know Hurricane Melissa has made landfall in Jamaica. Strong, strong winds. And so it's something. We're talking about a Category 5 storm. This is a very serious storm. Yeah. Melissa crossed into Jamaica with sustained winds of 185 miles per hour, making it a rare Category 5 hurricane at landfall. It struck near New Hope on Jamaica's southern coast. It's about 25 miles south of Montego Bay. The U.S. National Hurricane Center said in a statement at 1 p.m. in New York time. Since then, its strongest winds have weakened to 160 miles per hour, still at the top of the five step scale.