Could Microsoft Make Half a Trillion Dollars from the OpenAI Deal?

As I understand the terms of the OpenAI & Microsoft deal, Microsoft has the potential for $500B in revenue as they work through the deal ladder to satisfy the terms and return all of the equity to OpenAI.

Here are the terms the deal: 

  • Microsoft must earn back their investment in OpenAI; $1B in 2019, $2B in 2021, and $10B in 2023 for a total of $13B.

The Microsoft profit ladder:

  • Phase 1:  Microsoft gets 75% of the profits until they recover the $13B investment.

  • Phase 2:  Microsoft then gets 49% of the profits until they recover $92B.  Microsoft then reverts their shares to OpenAI and has no position.

So, if we work through this ladder:

  • Phase 1:  To get to their $13B, Microsoft must earn 13 / 75% or $17.3B. Microsoft gross margin ranges from 35% to 69%, so, we’ll go with 50% to keep the calculations simple.  That would mean that Microsoft would need $34.7B in revenue to get through Phase 1.

Revenue from Phase 1 = $34.7B

  • Phase 2:  To get to $92B in revenue at 49%, that is $188B. Again, using a 50% gross marking, then the total revenue would be $376B

Revenue from Phase 2 = $376B

Total Revenue:  $411B

Many details have not been communicated, but if the generous 50% gross margin was actually slightly less desirable, for example, 41%, you are looking at total revenue of $500B or half a trillion $$ to work through the ladder.  Of course the deployment of OpenAI capabilities could also be massively profitable and result could be less, say, $250B in revenue. 

Microsoft’s total annual revenue for FY2022 was $198B.  

Any way you slice it, the potential bottom line impact to Microsoft is significant.  And OpenAI gets an instant sales channel, one of the best in the business, and unlimited compute.  Microsoft will have, at a minimum, maintained parity in AI solutions on their platform if not gained a leadership position.  Likely a new deal would be negotiated as the terms of this deal are worked through, over 5 years or so, unless Microsoft doubles their revenue for next year.

As we have seen with Microsoft’s rapid CoPilot and Bing execution, they seem to be on their way.  Go Satya and thank you Sam. I hope the Microsofty who orchestrated this deal was properly compensated. I do believe that corporations and startups can't prosper together.

Reference:  https://fortune.com/2023/01/24/whos-getting-the-better-deal-in-microsofts-10-billion-tie-up-with-chatgpt-creator-openai/