Could Microsoft Lose Out as the U.S. Tussles With Brussels?
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Welcome to Tech News Briefing. It's Thursday, May 1st. I'm Victoria Craig for The Wall Street Journal. Microsoft pledges to put down deeper roots in the EU, but could that decision backfire if trade tensions with the U.S. grow? And speaking of strain at Microsoft, the so-called best partnership in tech has turned sour. We'll get the inside scoop about what went wrong and what's ahead for the leaders of Microsoft and OpenAI.

But first, Microsoft's president Brad Smith was in Brussels yesterday to take the Rapsoft plans to expand the company's data centers in the European Union and build out its cloud and AI operations there. But there was an elephant in the room that Smith addressed right off the bat, a rift between the U.S. and the EU on trade, one that's raising questions about whether that could harm American companies' ability to do business on the continent. I think we are at a moment in time where

when business needs to be a bridge across the Atlantic, to be a voice to help enable our governments to find a common path together. In a blog post announcing the EU expansion, Microsoft said it recognizes its business is, quote, "...critically dependent on sustaining the trust of customers, countries, and governments across Europe." And it pledged that, "...in a time of geopolitical volatility, it's committed to providing digital stability."

WSJ European competition and enforcement reporter Edith Hancock is based in Brussels. Edith, walk us through how Brad Smith tried to toe the line of unveiling these new data center plans while also trying to offer reassurance that doing business with Microsoft is a good idea in this tense environment. Sure. So Brad Smith came to Brussels Wednesday morning to announce this pledge to

to put some weight behind EU investment that involves expanding data centre capacity. One of the pledges is that over the course of two years, that capacity they want to expand by about 40%. They also started to figure between 2023 and 2027, that would mean doubling their data centre capacity in Europe.

So yes, he acknowledged that there's a lot of concern in the Brussels community in particular as well, that if the trade war does escalate, then the Trump administration could require certain tech companies in the US to suspend their operations in Europe.

What he did say is that he didn't think that that was a conversation that was happening in Washington. That sounds largely like a concern that is just being felt over here, but that they were listening to that concern. This is a widespread concern, though, for those based in the EU. And we don't have to look too far to see that. This has been brewing for quite a while.

I'm just wondering how big of a problem this could cause for Microsoft and other

other US-based tech companies over the next few years, particularly as President Trump remains in the White House? It's an interesting one because clearly the fact that Brad Smith came to Brussels at all shows that there's a little bit of concern there. The European Union is still a massive market for a lot of these companies. Also at the policy level as well, there is this talk about increased tech sovereignty. You have tech commissioner Hena Vakunin going to different gigafactories and different facilities across Europe to show their kind of interest in that.

But that being said, it would be a task, shall we say, for the bloc to fully wean itself off of U.S. tech giants. And the EU, as we've been talking, has been working for years to rein in the power of big tech to increase competition, they say, in the EU. And it's issued fines for violations on companies like Apple and Google. The Trump administration has really lashed out at a lot of these things and said that they're considering retaliation or would consider retaliation.

Could this ongoing tussle between Brussels and the U.S. and Europe maybe force some of these companies to look outside the EU? Is there any indication that's happening or have we seen other U.S. tech companies

bosses come circling through trying to reassure European business that it's okay to continue doing business. Yeah, the story of the European Union versus big tech is a massive one. Part of the reason that Microsoft feels comfortable coming over to the EU and doing this sort of conversation is because they were one of the first tech companies that ended up getting into all sorts of legal spats with the Commission over massive fines for anti-competitive behavior and

In terms of reinsurances, what you see from a lot of the language that tech companies use, you are getting this kind of sense that they want to keep doing business in the EU. They just want to keep doing it on their terms. The Digital Markets Act, or DMA, was an EU law passed in 2022 that aimed to level the playing field in tech and make it easier for smaller companies to compete with the industry's behemoths. Edith, is that the bluntest tool at Europe's disposal to fight Trump's tariff pressures?

For the commission's part, they've been really, really keen to separate competition enforcement from trade enforcement. That's not to say that there isn't a perception that things get a bit caught up in the mix, but for their part, they do not want to see these things as conflatable. There's an understanding that the US might see the DMA as a non-tariff barrier. That's not a sentiment that's felt over here.

In terms of other tools that they could use to tackle big tech if they wanted to, there is something called an anti-coercion instrument in EU trade law that would allow the EU to tax digital services, for example. So that's one strategy they could use. I would also add that the DMA, it's not designed to go after US American tech companies. It's meant to go after the largest tech companies that also just happen to mostly be US companies.

So in terms of curbing big tech's market power, the GMA is definitely a powerful tool. That was WSJ reporter Edith Hancock. Coming up, two tech execs who together ignited the AI boom are drifting apart. We'll find out what's turning the power players against each other after the break.

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Texting each other less often, scheduling meetings, slowly fostering connections with others. Yep, sounds like the signs of a relationship on the rocks. And that's what's happening between two of the tech world's titans, Microsoft and OpenAI CEOs Satya Nadella and Sam Altman. WSJ reporter Keech Hagee has more details about the growing rift between the two partners who have been leading the AI race.

Keech, you've spoken with people who know the relationship between these CEOs. What happened? Well, you know, they started out as the best partnership in tech, famously. But as the AI boom has exploded, their interests have really diverged. So

So we've seen that OpenAI has become kind of a consumer products company on its own and has had explosive growth of ChatGPT. And Microsoft has struggled to get Copilot to have broad usage. At the same time, they're a ton of tussling over the chips themselves.

and the compute power that Microsoft has promised OpenAI, and OpenAI needs more, and Microsoft just doesn't have enough to really give them. And they're struggling over OpenAI's desire to transform itself into a more traditional for-profit company. Microsoft is a major stakeholder there and has power to throw a wrench into those negotiations if it wants to. And at the same time, they're

They're really struggling with what the future of this AI world is going to look like. They need to build a lot more data centers. And so OpenAI has gone off on its own and made deals with the likes of folks like Oracle. Finally, Microsoft wants faster access to OpenAI's technology. Their deal was they got to have the intellectual property of OpenAI in exchange for the powering the compute, and they're not getting it fast enough for their liking. And there's

some tussle back and forth about whether open AI can actually achieve this, what sounds like a fairly lofty goal of making its artificial intelligence human-like.

So the entire purpose of OpenAI was to achieve what they call AGI, artificial general intelligence, this human-like intelligence. That's the mission of the company. And in our reporting, we found that, you know, when they got together a few years ago, Microsoft and OpenAI seemed aligned on this concept of, okay, AGI is the goal. They had a very sort of delicate negotiation that Microsoft wasn't allowed to pursue AGI. That was something like for OpenAI to do. Once OpenAI reached AGI, Microsoft wouldn't have access to it.

technology beyond that point. So it was always something that OpenAI could use if it wanted to, to say, okay, now it's AGI. And Microsoft suddenly had a much worse deal on its hands. So it's a bit of a leverage that OpenAI has always had over Microsoft. But in recent months, as they've been fighting more and more, Satya Nadella, the CEO of Microsoft, actually went on a podcast last fall and said,

AGI, this benchmark is meaningless. That's just meaningless benchmark hacking. So that definitely had people inside the company at OpenAI really taken aback. Like, whoa, if this is not our goal, then what are we even doing here? And both companies, as you're alluding to, have their own future plans for themselves, but they can also both threaten those independent futures. Exactly. They both have leverage over each other. So OpenAI,

OpenAI, ever since its CEO, Sam Altman, got abruptly fired a couple of years ago, known as the blip, has been trying to become more normal, basically. Not a nonprofit, just a more normal company. They're trying to transition into a public benefit corporation or something that is a little more regular. And Microsoft has...

a deal with OpenAI to get a large percentage of the profit from this IP. And that makes them having a large seat at the table. So as they're negotiating what this future closer to a for-profit thing is going to look like, Microsoft has a lot of power over saying, well, how much should our stake be valued, for example? They might not have the ability to completely block a for-profit transition, but they can certainly make it really difficult by demanding a certain value for it.

So that's one side. And then the other side is this AGI clause. So each has like a major weapon aimed at the other. I guess the turning point really came, as you just mentioned, when OpenAI's board briefly ousted Sam Altman from the company. Just walk us through how that was really a turning point for the relationship between these two men.

So that moment was so interesting because very publicly we saw that Microsoft had Sam Altman's back. When Sam Altman got fired, Satya Nadella offered Sam a job at Microsoft and to bring all his team over and you come build AI over here. They really were instrumental in keeping Sam at the top of that company. But behind the scenes, of course, when the CEO of your major partner gets deposed overnight, that was concerning to Microsoft and they realized they needed an insurance plan.

So they made one in the form of hiring a rival of Sam's named Mustafa Suleiman a few months later to basically try to build something similar in-house that could over time replace OpenAI's technology.

What is the future between these two companies and these two men? What does it look like from here? Because it started out as a real partnership, something that both were really invested in. And now they seem to be looking at futures differently.

outside of each other. We're already seeing that future a little bit in this Stargate project that Sam Altman stood up on the first full day of the Trump presidency and announced a deal with Oracle and SoftBank to create this like huge AI infrastructure project. And that was something that they had originally started talking to Microsoft about. Microsoft said, no, they're really skittish about these huge upfront investments in AI infrastructure. So you can already see some cracks, you know, in the exclusivity that they had going

Going forward, you'll see OpenAI try to diversify where it's getting its compute more and more over time. They will be tied together for many years to come because of this deep relationship where already Microsoft has these like profit participation points with OpenAI, but they're drifting apart.

That was WSJ reporter Keech Heakey. And that's it for Tech News Briefing. Today's show was produced by Julie Chang with Deputy Editor Chris Sinsley. I'm Victoria Craig for The Wall Street Journal. We'll be back this afternoon with TNB Tech Minute. Thanks for listening.