What OpenAI’s Stargate Deal Means for Microsoft
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Okay, business leaders, are you here to play or are you playing to win? If you're in it to win, meet your next MVP, NetSuite by Oracle. Right now, get the CFO's guide to AI and machine learning at netsuite.com slash wallstreet, netsuite.com slash wallstreet. Welcome to Tech News Briefing. It's Friday, January 24th. I'm Julie Chang for The Wall Street Journal.

U.S. 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 U.S. 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 U.S. company that had to look to Taiwan for drone parts? Take Silicon Valley drone company Skydio, one of the better known U.S. 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. They

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. 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.

How well is Taiwan primed for the drone supply chain? So Taiwan is investing heavily in what it calls a democratic supply chain, so a 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 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 U.S. companies. China's advantage is that it can produce parts cheaply. Can Taiwan match that? 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. Beijing can't be happy about this. How is China responding? 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 U.S. 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 U.S. 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

And then these US companies would be right back where they started sourcing from China. 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.

Okay, business leaders, are you here to play or are you playing to win? If you're in it to win, meet your next MVP. NetSuite by Oracle. NetSuite is your full business management system in one convenient suite. With NetSuite, you're running your accounting, your finance, your HR, your e-commerce, and more all from your online dashboard.

Upgrade your playbook and make the switch to NetSuite, the number one cloud ERP. Get the CFO's guide to AI and machine learning at netsuite.com slash wallstreet. netsuite.com slash wallstreet. 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 chat GPT 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 Dautan 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 know 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?

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-JAT GPT, 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 may be moving faster than it normally does, but it's still a multi-trillion dollar company that moves slowly.

Okay, what did these tensions mean for their agreement? 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 GPT-4 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.

Now, OpenAI has announced a joint venture called Stargate. What does Stargate mean for the ChatGP team maker, and what would it mean for Microsoft? 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 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 going to be a Stargate data center.

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

What has OpenAI CEO Sam Altman said about how Stargate will affect the relationship between the startup and Microsoft? 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. What about Microsoft CEO Satya Nadella? What has he or Microsoft said about how Stargate will affect their relationship with OpenAI? 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, the software that could mimic human-level intelligence, and

And Microsoft is really interested in productizing this and trying to take open AI's technology and rolling it into software that they can sell to their customers. That was our reporter, Tom Dautan.

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 Belle Lin, Jessica Fenton, and Michael LaValle wrote our theme music. Our supervising producer is Catherine Milsop. Our development producer is Aisha Al-Muslim. Scott Salloway and Chris Zinsley 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.

Okay, business leaders, are you here to play or are you playing to win? If you're in it to win, meet your next MVP. NetSuite by Oracle. NetSuite is your full business management system in one convenient suite. With NetSuite, you're running your accounting, your finance, your HR, your e-commerce, and more all from your online dashboard.

Upgrade your playbook and make the switch to NetSuite, the number one cloud ERP. Get the CFO's guide to AI and machine learning at netsuite.com slash wallstreet. netsuite.com slash wallstreet.