As AI booms, Microsoft’s deal with a startup comes under federal investigation

Jun 6, 2024, 9:39 AM

The Microsoft logo can be seen at the headquarters of the software company. The Federal Trade Commi...

The Microsoft logo can be seen at the headquarters of the software company. The Federal Trade Commission is investigating a recent Microsoft deal with artificial intelligence startup Inflection. Mandatory Credit: Andrej Sokolow/dpa/AP via CNN Newsource

Washington (CNN) — The Federal Trade Commission is investigating a recent Microsoft deal with artificial intelligence startup Inflection, according to a person familiar with the matter, as US antitrust regulators ramp up scrutiny of the red-hot AI industry.

Microsoft announced in March that it had hired Inflection’s co-founders and a number of its staff to lead its Copilot program, and Inflection said its AI model would be hosted on Microsoft’s cloud platform. As part of that deal, Microsoft was said to have paid Inflection $650 million. In its announcement at the time, Microsoft described the move as merely a hiring decision, not as an acquisition.

The FTC probe into Microsoft concerns whether the company’s investment in Inflection constituted an acquisition that Microsoft failed to disclose to the government, one of the people said.

The investigation comes as antitrust officials at the FTC and the Justice Department are nearing a final agreement this week on how to jointly oversee AI giants such as Microsoft, Google, Nvidia, OpenAI and others, two people familiar with the matter told CNN.

That agreement, which could be finalized within days, would appoint DOJ as the lead investigator of Nvidia, while the FTC would take responsibility for investigating Microsoft and OpenAI, the people said. DOJ will likely continue its role in overseeing Google, one of the people indicated. Any investigations would focus on whether the companies have used their dominant positions in the AI industry to harm competition through abusive and illegal behavior.

Microsoft declined to comment on the DOJ-FTC agreement but, in a statement, defended its partnership with Inflection.

“Our agreements with Inflection gave us the opportunity to recruit individuals at Inflection AI and build a team capable of accelerating Microsoft Copilot, while enabling Inflection to continue pursuing its independent business and ambition as an AI studio,” a Microsoft spokesperson said, adding that the company is “confident” it has complied with its reporting obligations.

Inflection and Google didn’t immediately respond to a request for comment; Nvidia and OpenAI declined to comment. The DOJ and FTC declined to comment. The FTC-DOJ agreement was earlier reported by The New York Times; the FTC’s Microsoft probe was earlier reported by The Wall Street Journal.

FTC Chair Lina Khan has warned in op-eds and congressional testimony that, left unchecked, artificial intelligence could “turbocharge” fraud and scams. The agency has published numerous reminders and warnings that businesses can be held liable for making misleading claims about their AI tools or for covertly using consumer data to train AI models. The FTC is currently investigating Reddit’s AI content licensing practices, and is separately investigating OpenAI for possible violations of consumer protection law.

The US agencies’ division-of-labor agreement opens the door to more intensive probes of a sector that has energized investors, enthralled consumers and raised alarm bells among critics who say AI urgently needs regulation to forestall widespread job displacement, discrimination and fraud. Specifically, it carves out roles for the FTC and DOJ to review whether tech giants and AI companies are behaving in anticompetitive ways.

And it highlights how enforcers are increasingly trying to bring existing laws to bear on the industry as prospects for new US laws governing AI have dimmed. The United States is widely viewed as a laggard on AI regulation as others such as the European Union have leapfrogged it with tough rules about how the technology can be used in high-risk contexts. The EU AI Act, for example, outlaws social scoring systems powered by AI and any biometric-based tools used to guess a person’s race, political leanings or sexual orientation. It also bans the use of AI to interpret the emotions of people in schools and workplaces, as well as some types of automated profiling intended to predict a person’s likelihood of committing future crimes.

For years, technology critics and regulators have worried that major tech companies may be monopolizing entire sectors of the economy. That has led to high-profile US government antitrust suits targeting AmazonAppleGoogleMeta and Microsoft.

Some fear that tech companies could abuse their powerful roles in business and society to extend their dominance into the fast-growing field of generative AI, which exploded onto the scene in 2022 when OpenAI released ChatGPT.

Nvidia’s soaring stock prices have served as a barometer of the AI frenzy, underscoring the company’s position as a leading supplier of computing chips necessary for training advanced AI models. On Wednesday, Nvidia became the second-largest publicly traded company in the United States, ending the day with a market capitalization of more than $3 trillion and edging out Apple.

“AI relies on massive amounts of data and computing power, which can give already-dominant firms a substantial advantage,” DOJ antitrust chief Jonathan Kanter said last week in a speech at Stanford University, adding that Americans’ reliance on just a handful of technology giants could allow them to “control these new markets.”

One way for tech giants to wield anticompetitive influence in the AI sector, critics say, is through exclusive partnerships with AI startups. The agreements can potentially “lock in” AI developers as customers of large cloud computing services and give the tech giants significant stakes or influence over the development of AI. Those types of deals, including Microsoft’s relationship with OpenAI, are the subject of an ongoing study by the FTC announced in January.

The DOJ has also become increasingly vocal on AI issues. In 2022, the agency’s antitrust division hired Susan Athey, a Stanford University professor and AI expert, to be its chief economist.

In looking at competition in the AI industry, antitrust enforcers should take lessons on how technology giants have behaved anticompetitively in the past, Athey told CNN at a recent event in Washington hosted by Bloomberg News.

That could include gatekeeping or bottlenecking tactics, making it harder for consumers or customers to switch providers, or becoming the biggest buyer of key supplies — such as AI chips, for example — and denying those necessary supplies to competing rivals.

“We should look back to historical analogues and see where sources of market power have been and how people have preserved them, and those are the kinds of tactics we might worry about going forward,” Athey said.

This story has been updated with additional context and developments.

The-CNN-Wire™ & © 2024 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.

KSL 5 TV Live

National News

First responders arrive at Oaks Park for a ride that is stuck with multiple riders in Portland, Ore...

Associated Press

Crews rescue 28 people trapped upside down high on Oregon amusement park ride

Emergency crews have rescued 28 people after they were stuck for about half an hour dangling upside down high on a ride at a century-old amusement park in Oregon.

4 hours ago

The OnlyFans logo is seen on a computer monitor in this posed photo, Thursday, Dec. 7, 2023, in St....

Associated Press

Former Nashville officer arrested after allegedly participating in an adult video while on duty

A former Nashville police officer has been arrested for two counts of felony official misconduct after law enforcement officials say he allegedly participated in an adult video while on duty.

10 hours ago

The bright purple color depicts auroras on Mars’ nightside that were detected by the ultraviolet ...

Ashley Strickland, CNN

A massive solar storm hits Mars, revealing a risk for future astronauts on the red planet

When the sun unleashed an extreme solar storm and hit Mars in May, it engulfed the red planet with auroras and an influx of charged particles and radiation, according to NASA.

13 hours ago

Catherine, Princess of Wales, pictured here in 2023, has said she is making “good progress” in ...

 Rob Picheta and Max Foster, CNN

Catherine, Princess of Wales, making ‘good progress’ against cancer and is set for first public appearance in months

Catherine, Princess of Wales, has said she is making “good progress” in her recovery from cancer, and will make her first public appearance in months at the King’s official birthday celebration on Saturday.

13 hours ago

FILE - A bump stock is displayed in Harrisonburg, Va., on March 15, 2019. The Supreme Court will he...

Lindsay Whitehurst

Supreme Court strikes down Trump-era ban on bump stocks, gun accessories used in 2017 massacre

Supreme Court strikes down Trump-era ban on bump stocks, rapid fire gun accessories used in 2017 Las Vegas massacre.

16 hours ago

A local organization is keeping kids away from crime and drugs one bike at a time. (KDRV via CNN Ne...

Rocky Walker, CNN

Familia Unida: Keeping kids away from drugs and crime by teaching them to work with their hands

A local organization is keeping kids away from crime and drugs one bike at a time. Familia Unida is a nonprofit that teaches children to channel aggression and negative experiences into healthy and constructive life skills through activities such as bike and car building.

1 day ago

Sponsored Articles

Photo courtesy of Artists of Ballet West...

Ballet West

The rising demand for ballet tickets: why they’re harder to get

Ballet West’s box office is experiencing demand they’ve never seen before, leaving many interested patrons unable to secure tickets they want.

Electrician repairing ceiling fan with lamps indoors...

Lighting Design

Stay cool this summer with ceiling fans

When used correctly, ceiling fans help circulate cool and warm air. They can also help you save on utilities.

Side view at diverse group of children sitting in row at school classroom and using laptops...

PC Laptops

5 internet safety tips for kids

Read these tips about internet safety for kids so that your children can use this tool for learning and discovery in positive ways.

Women hold card for scanning key card to access Photocopier Security system concept...

Les Olson

Why printer security should be top of mind for your business

Connected printers have vulnerable endpoints that are an easy target for cyber thieves. Protect your business with these tips.

Modern chandelier hanging from a white slanted ceiling with windows in the backgruond...

Lighting Design

Light up your home with these top lighting trends for 2024

Check out the latest lighting design trends for 2024 and tips on how you can incorporate them into your home.

Technician woman fixing hardware of desktop computer. Close up....

PC Laptops

Tips for hassle-free computer repairs

Experiencing a glitch in your computer can be frustrating, but with these tips you can have your computer repaired without the stress.

As AI booms, Microsoft’s deal with a startup comes under federal investigation