What OpenAI’s Stargate Deal Means for Microsoft

Summary

WSJ Tech News Briefing: What OpenAI’s Stargate Deal Means for Microsoft Release Date: January 24, 2025

Hosted by Julie Chang for The Wall Street Journal

---

1. US Drone Manufacturers Shift Away from Chinese Suppliers

Overview: In this segment, the podcast delves into the challenges faced by American drone companies that have historically depended on Chinese suppliers for essential components. With escalating tensions and Beijing’s willingness to restrict access to these critical parts, companies are seeking alternative sources, notably turning to Taiwan.

Key Developments:

• Sanctions Impact: China has sanctioned over a dozen US drone tech firms, disrupting the supply of vital components such as batteries. This has forced companies like Skydio to seek new suppliers to maintain their drone performance.

• Taiwan’s Role: Taiwan is positioning itself as a reliable alternative by investing heavily in a "democratic supply chain" free from Chinese influence. The government is committing at least $1.35 billion over four years and allocating $10 million towards the research and development of drone chips.

Notable Quotes:

• Heather Somerville (WSJ Reporter) [01:21]:

  "Skydio now doesn't have a battery supplier and has to reduce the number of batteries on its drones from three to one. This means the drones don't work as well. They don't fly as long; their performance is compromised."

• Heather Somerville [02:18]:

  "Taiwan is investing heavily in what it calls a democratic supply chain. So supply chain that doesn't include China."

Challenges Ahead:

• Cost and Volume: While Taiwan offers more affordable parts compared to other allies like Japan and South Korea, it cannot yet match China’s ability to produce components at scale and low cost. This presents a significant hurdle for US companies that require high-volume production to keep costs down.

• Geopolitical Risks: Engaging with Taiwanese suppliers comes with its own set of risks. US companies fear that partnering with Taiwan might provoke Beijing to retaliate, further jeopardizing their business operations. Additionally, uncertainties about Taiwan’s long-term stability and potential conflicts with China add to the complexity.

Heather Somerville [03:17]:

"If China catches wind of a US Company doing business with Taiwan, that is seen as an aggression that China is not going to stand for and China will potentially come after them."

Taiwan’s Strategic Investments: Taiwan's commitment to building a robust, independent supply chain is aimed at making itself an attractive partner for US firms. This includes not only financial investments but also efforts to enhance cybersecurity and technological capabilities to ensure reliability and security for international partners.

---

2. OpenAI’s Stargate Deal and Its Implications for Microsoft

Overview: The podcast transitions to a significant development in the artificial intelligence sector: OpenAI’s formation of a new joint venture named Stargate. This venture aims to expand OpenAI’s infrastructure by constructing additional data centers, signaling potential shifts in its longstanding partnership with Microsoft.

Key Developments:

• Stargate Joint Venture: Announced at a White House press conference, Stargate is a collaboration between OpenAI, Oracle, and SoftBank, with plans to invest up to $500 billion in building AI infrastructure in the United States. This includes the establishment of new data centers to support OpenAI’s AI advancements.

• Impact on Microsoft: Microsoft has been OpenAI’s primary investor and the sole cloud computing provider supporting OpenAI’s models like ChatGPT and GPT-4. The introduction of Stargate suggests that OpenAI may be diversifying its infrastructure partnerships, potentially reducing its reliance on Microsoft.

Notable Quotes:

• Deloitte Representative [06:22]:

  "OpenAI is always wanting more, more, more. They're this fast-growing, highly funded AI startup that is trying to create artificial general intelligence, which requires huge computing clusters. And Microsoft is a publicly traded company that has to justify billions of dollars that they pour into something."

• Sam Altman, OpenAI CEO [10:30]:

  "We still have a great relationship with [Microsoft]. We just need more capacity."

• Satya Nadella, Microsoft CEO [11:04]:

  "We still have a great relationship with them. They still host OpenAI's software APIs exclusively on Azure on Microsoft's cloud computing platform."

Background of Tensions: The partnership between OpenAI and Microsoft has experienced strains due to differing growth ambitions and operational speeds. OpenAI’s rapid expansion and quest for advanced AI capabilities have sometimes outpaced Microsoft's ability to scale and adapt, leading to negotiations over cloud computing resources and exclusivity agreements.

Deloitte Representative [07:37]:

"Microsoft and OpenAI were in fairly intense negotiations to extend or renew the contract that these guys have had. The negotiations were about cloud computing and exclusivity and the fact that Microsoft has been not only the biggest investor in OpenAI but also its sole cloud computing provider."

Stargate’s Role: Stargate represents OpenAI’s strategic move to secure additional infrastructure support outside of Microsoft. While the initial project under Stargate involves a data center in Texas developed by Oracle, it lays the groundwork for potential future collaborations that may not exclusively involve Microsoft.

Future Implications: Despite the formation of Stargate, the core relationship between OpenAI and Microsoft remains intact. OpenAI’s API services will continue to be hosted on Microsoft’s Azure platform, ensuring that Microsoft still plays a pivotal role in OpenAI’s operations. However, the Stargate venture introduces an element of flexibility for OpenAI to expand its infrastructure without being entirely dependent on a single partner.

Deloitte Representative [10:23]:

"OpenAI’s API...will continue to be exclusively hosted on Azure on Microsoft's cloud computing platform, and Microsoft is still contracted to build out quite a lot of new capacity for OpenAI."

CEO Statements: Both Sam Altman and Satya Nadella have publicly reaffirmed the strength of their companies' relationship. However, they acknowledge a slight divergence in their objectives—OpenAI is focused on pioneering general artificial intelligence, while Microsoft aims to integrate and commercialize these advancements within its product offerings.

Satya Nadella [11:04]:

"There's starting to be a little bit of divergence in terms of the goals of these companies because OpenAI is really interested in building AGI... and Microsoft is really interested in productizing this and trying to take OpenAI's technology and rolling it into software that they can sell to their customers."

Conclusion: The creation of Stargate marks a significant, albeit nuanced, evolution in the OpenAI-Microsoft partnership. While it introduces new dynamics and potential collaborations, the foundational elements of their relationship—particularly around cloud services and API hosting—remain steadfast. This strategic diversification may enhance OpenAI’s capabilities and resilience, while Microsoft continues to benefit from being the exclusive host for its AI innovations.

---

Looking Ahead: Upcoming Series

The podcast also previews an upcoming series that will explore the potential impact of President Trump’s new administration on the tech industry. This series will cover various aspects, including regulation, policy changes, AI investment, and development strategies, offering listeners insights into what the next four years might hold for technology sectors.

---

Produced by: Julie Chang
Additional Support: Bell Lynn
Theme Music: Jessica Fenton and Michael Lavalle
Supervising Producer: Kathryn Millsop
Development Producer: Aisha Al Muslim
Deputy Editors: Scott Salloway and Chris Sinsley
Head of News Audio: Falana Patterson

---

This detailed summary encapsulates the key discussions and insights from the January 24, 2025, episode of WSJ Tech News Briefing, providing listeners with a comprehensive overview of the topics covered without the need to access the original podcast.

Transcript

[Deloitte Representative]

In today's Enterprise? How are CIOs creating more impact in the C suite and with the board? What does it mean to be a blended executive? Learn more on the fourth episode of Techfluential, a podcast from Deloitte, and custom content from WSJ.

[Julie Chang]

Welcome to Tech News Briefing. It's Friday, January 24th. I'm Julie Chang for the Wall Street Journal. US drone makers that rely on China for parts need to look elsewhere. Now some are looking to Taiwan. How's Beijing responding? Plus, OpenAI wants more data centers and it's looking beyond Microsoft to provide them. We'll tell you what this means for the two companies and the partnership that helped launch the Generative artificial intelligence boom. Up first, American drone companies rely on China for parts. But recently that reliance has become untenable as Beijing has shown it's willing to cut off access to these components. China has sanctioned more than a dozen US Drone tech companies already cutting off supplies to things like batteries. Now Taiwan is stepping in to fill that gap. WSJ reporter Heather Somerville has been following the story. Heather, can you give us an example of a US Company that had to look to Taiwan for drone parts?

[Heather Somerville]

Take Silicon Valley drone company skydio, one of the better known US Drone companies. They make small drones that are used by police and otherwise. China sanctioned skydio last October, which cut off its primary battery supply. This is bad news for skydio. Skydio now doesn't have a battery supplier and has to reduce the number of batteries on its drones from three to one. This means the drones don't work as well. They don't fly as long they don't, their performance is compromised. Skydio went to Taiwan and approached Taipei for help with this. Taipei introduced skydio to some of the vendors that are supplying batteries in the country. Skydio is in talks with those companies as well as others. It's also having conversations around the world to find a new battery maker.

[Julie Chang]

How well is Taiwan primed for the drone supply chain?

[Heather Somerville]

So Taiwan is investing heavily in what it calls a democratic supply chain. So supply chain that doesn't include China. And these plans include investing at least 1.35 billion over four years. And also it is putting at least 10 million doll into research and development for drone chips. There's other areas where it's investing heavily, such as cybersecurity, trying to make itself a very appealing partner to US Companies.

[Julie Chang]

China's advantage is that it can produce parts cheaply. Can Taiwan match that?

[Heather Somerville]

Not yet. Taiwan parts are cheaper than you'd get from other allies like Japan and South Korea much cheaper than you'd get in Europe. So they are cheaper than other alternatives. But what China can do that no one else can do is volume. So if you're going to buy in volume, you buy from China and that brings the cost way down.

[Julie Chang]

Beijing can't be happy about this. How is China responding?

[Heather Somerville]

This is the biggest complication. So you have a lot of American companies that are looking to Taiwan for parts because China has already come after them, that China has already cut off access to parts. But you also have other complexities where there are a lot of US Companies that are fearful of doing business with Taiwan or at least having that be public for fear of Beijing doing more injury to their business. Maybe they still get non critical components from China. So if China catches wind of a US Company doing business with Taiwan, that is seen as an aggression that China is not going to stand for and China will potentially come after them. There's also this other concern where Taiwanese companies, despite the conflict with China, still have a lot of ties to China. They might have suppliers, investors. Otherwise in China that becomes very, very tricky. And then you could think about a situation where China does invade the island and takes ownership of the commercial industries. And then these US Companies would be right back where they started sourcing from China.

[Julie Chang]

That was our reporter Heather Somerville. Coming up, OpenAI is leading a new joint venture called Stargate, which will provide the startup with more data centers. Where does this leave its longtime partner, Microsoft? That's after the break.

[Tom Dotan]

This episode is brought to you by Shopify. Forget the frustration of picking commerce platforms when you switch your business to Shopify, the global commerce platform that supercharges your selling wherever you sell. With Shopify, you'll harness the same intuitive features, trusted apps and powerful analytics used by the world's leading brands. Sign up today for your $1 per month trial [e-mail] tech. All lowercase, that's shopify.com tech.

[Julie Chang]

Earlier this week at a White House press conference, OpenAI announced a new joint venture with Oracle and SoftBank that would spend up to $500 billion constructing artificial intelligence infrastructure in the country. The venture is called Stargate, and its plans include building new data centers for the ChatGPT maker to help power its development. Notably missing from the announcement was Microsoft, OpenAI's biggest investor and main data center builder, WSJ. Reporter Tom Dotan has been following the two companies and says Stargate's announcement comes after months of tension between the longtime partners. He's with me now and we should note before we get into it, News Corp, owner of the Wall Street Journal, has a content licensing partnership with OpenAI. Tom, according to your reporting, what was going on between OpenAI and Microsoft leading up to the Stargate announcement?

[Deloitte Representative]

There had been a lot of tension between these companies over the matter of capacity and exclusivity over the years. OpenAI is always wanting more, more, more. They're this fast growing, highly funded AI startup that is trying to create artificial general intelligence, which requires huge computing clusters. And Microsoft is a publicly traded company that has to justify billions of dollars that they pour into something. And so you kind of saw a mismatch between these two of OpenAI wanting to move at light speed to build all new data centers, and Microsoft saying like, all right, we need to approve this, we need to make sure it makes sense. And there got to be quite a bit of tensions over these issues. And so the fact is, OpenAI first joined with Microsoft in 2019. This was pre ChatGPT, pre any of the stuff that we're all talking about these days. And then post ChatGPT, there was kind of this explosion in AI and OpenAI's ambitions as a company just took off. And so you start seeing this company wanting to move as fast as it possibly can, and Microsoft maybe moving faster than it normally does, but it's still a multi trillion dollar company that moves slowly.

[Julie Chang]

Okay, and what did these tensions mean for their agreement?

[Deloitte Representative]

Microsoft and OpenAI were in fairly intense negotiations to extend or renew the contract that these guys have had. You know, off and on, it's dated back to the initial investment Microsoft made in them in 2019. But basically what the negotiations were about is cloud computing and exclusivity and the fact that Microsoft has been not only the biggest investor in OpenAI but also its sole cloud computing provider. So all of the models that OpenAI has built, products like ChatGPT or GPT4 and Sora, that's all almost entirely built on Microsoft's cloud computing. And as OpenAI has grown, Microsoft has had to build more and more data centers for them. And that's actually caused a lot of tension. And so these guys were trying to hammer out a new agreement where they figured out what the relationship going forward would be when it comes to basically cloud computing.

[Julie Chang]

Now OpenAI has announced a joint venture called Stargate. What does Stargate mean for the ChatGPT maker and what would it mean for Microsoft?

[Deloitte Representative]

I hate to be this kind of reporter, but like, too soon to tell. You know, this thing was just announced and as it happens, there's really only one project that exists under Stargate, which is this data center that was already under construction in Texas that Oracle was building for OpenAI. And, and so we already know that OpenAI is going to be using at least one data center that is now being part of the Stargate project for probably training a new future model for them. But going forward, because of this new announcement that Microsoft put out about the agreement, OpenAI now has the ability, if Microsoft decides to pass on building new data centers for them, to bring this contract elsewhere, essentially. And one of the options you would assume is is going to be a Stargate data center.

[Julie Chang]

Is this going to change the working relationship between the two companies?

[Deloitte Representative]

What's interesting about this announcement that Microsoft put out is as much as they described it as an evolution of their relationship, a lot of it really is staying the same. So OpenAI's API. So the way people access OpenAI's software that is still going to be exclusively hosted on Azure on Microsoft's cloud computing platform, and Microsoft is still contracted to build out quite a lot of new capacity for OpenAI. And in this agreement, Microsoft has right of first refusal if OpenAI comes to them asking for new, more capacity beyond the stuff they're already contracted to build. And so theoretically, you could see a world where OpenAI, as is required by the deal, comes to Microsoft asking for more capacity, and Microsoft continues to take those contracts and they remain exclusive to them. So even though there's this option for bringing it elsewhere, you could see significantly, a lot of stuff remain the same.

[Julie Chang]

What has OpenAI CEO Sam Altman said about how Stargate will affect the relationship between the startup and Microsoft?

[Deloitte Representative]

Sam has been out there since the Stargate venture was announced, trying to make sure that everyone knows publicly at least, that the relationship between Microsoft and OpenAI is still really good. After the Stargate announcement, Sam posted on X a response to some person on the platform who was basically insinuating that the relationship between OpenAI and Microsoft was dead. And Sam's response to that was not at all. We still have a great relationship with them. We just need more capacity.

[Julie Chang]

What about Microsoft CEO Satya Nadella? What has he or Microsoft said about how Stargate will affect their relationship with OpenAI?

[Deloitte Representative]

Kind of a mirror of what Sam said. He was asked about this in Davos at the World Economic Forum there, and Nadella was essentially saying, we still have a great relationship with them. They still host OpenAI's software APIs exclusively on Azure. They'll continue to build more capacity for them. The only thing that's different that Satya hinted at is that there's starting to be a little bit of divergence in terms of the goals of these companies because OpenAI is really interested in building AGI, this software that could mimic human level intelligence. And Microsoft is really interested in productizing this and trying to take OpenAI's technology and rolling it into software that they can sell to their customers.

[Julie Chang]

That was our reporter, Tom Doton. Before we go, we want to let you know about a new series coming up on Monday. All next week, Tech News Briefing is exploring how President Trump's new administration could impact the tech industry for the next four years and beyond, from regulation and policy to AI investment and development. So be sure to check it out. And that's it for Tech News Briefing. Today's show was produced by me, Julie Chang. Additional support this week from Bell Lynn. Jessica Fenton and Michael Lavalle wrote our theme music. Our supervising producer is Kathryn Millsop. Our development producer is Aisha Al Muslim. Scott Salloway and Chris Sinsley are the deputy editors. And Falana Patterson is the Wall Street Journal's head of news audio. We'll be back this afternoon with TNB Tech Minute. Thanks for listening.