OpenAI diversifies beyond Microsoft with Google cloud partnership

OpenAI has struck an unprecedented cloud computing deal with Google, despite the companies’ fierce rivalry in artificial intelligence. The partnership, finalized in May after months of negotiations, allows OpenAI to tap Google’s cloud infrastructure to meet surging demand for computing power needed to train and run its AI models, marking a significant shift in AI industry dynamics.

The big picture: This collaboration between two AI heavyweights illustrates how massive computing demands are reshaping competitive relationships in the sector, with OpenAI diversifying beyond its primary supporter Microsoft.

What you should know: The deal represents OpenAI’s latest move to reduce dependency on Microsoft’s Azure cloud service, which had been its exclusive infrastructure provider until January.

• OpenAI’s annualized revenue run rate surged to $10 billion as of June, positioning the company to hit its full-year target amid booming AI adoption.
• The partnership comes as OpenAI’s ChatGPT poses the biggest threat to Google’s dominant search business in years.
• Google and OpenAI had discussed arrangements for months but were previously blocked due to OpenAI’s lock-in with Microsoft.

Strategic context: OpenAI has been aggressively diversifying its computing sources through multiple high-profile partnerships.

• Earlier this year, the company partnered with SoftBank and Oracle on the $500 billion Stargate infrastructure program.
• OpenAI signed deals worth billions with CoreWeave for additional compute capacity.
• The company is on track to finalize the design of its first in-house chip this year, which could reduce dependency on external hardware providers.

Google’s opportunity: The deal helps Google Cloud expand its customer base while capitalizing on its in-house tensor processing units (TPUs), specialized chips that were historically reserved for internal use.

• Google Cloud’s $43 billion in sales comprised 12% of Alphabet’s 2024 revenue.
• The cloud unit has positioned itself as a neutral arbiter of computing resources to outflank Amazon and Microsoft.
• Google has won customers including Apple, Anthropic, and Safe Superintelligence through its expanded TPU offerings.

The complexity: Google faces a delicate balancing act between supporting competitors and protecting its own AI interests.

• Google’s DeepMind AI unit competes directly with OpenAI in developing advanced AI models.
• Selling computing power reduces Google’s own chip supply while bolstering capacity-constrained rivals.
• Google already lacked sufficient capacity to meet cloud customers’ demands as of the last quarter, according to CFO Anat Ashkenazi.

Market pressure: Alphabet, Google’s parent company, faces scrutiny over its massive AI investments while defending against competitive threats.

• The company’s AI-related capital expenditures are expected to hit $75 billion this year.
• Despite ChatGPT’s large lead in monthly users, CEO Sundar Pichai has dismissed concerns about OpenAI usurping Google’s business dominance.
• Google executives recently suggested the AI race may not be winner-take-all.