FTC opens antitrust probe of Microsoft AI deal

The Federal Trade Commission is investigating whether Microsoft structured one of its latest deals with an artificial-intelligence startup to avoid a government antitrust review of the transaction.

Microsoft in March hired Inflection AI’s co-founder and almost all of its employees and agreed to pay the startup around $650 million as part of a licensing fee to resell its technology. Inflection’s investors were told they would be repaid over time by the sales proceeds.

Companies are required to report acquisitions valued at more than $119 million to federal antitrust-enforcement agencies, which have the option to investigate a deal’s impact on competition. The FTC or the Justice Department, which share antitrust authority, can sue to block mergers or other investments if an investigation finds the deal would substantially reduce competition or lead to a monopoly.

The FTC has already been sifting through AI investments made by leading companies such as Microsoft and Google-owner Alphabet. FTC Chair Lina Khan has expressed concern that tech behemoths could eventually acquire or control the most promising AI applications, giving them a tight grip on systems that have humanlike abilities to converse, create art and write computer code.

The FTC is now drilling down on Microsoft’s deal with Inflection, seeking information about how and why they negotiated their partnership, according to a person familiar with the matter and records viewed by The Wall Street Journal. Civil subpoenas the commission sent recently to Microsoft and Inflection seek documents going back about two years. The agency is trying to determine whether Microsoft crafted a deal that would give it control of Inflection but also dodge FTC review of the transaction, the person said.

If the agency finds that Microsoft should have reported and sought government review of its deal with Inflection, the FTC could bring an enforcement action against Microsoft. Officials could ask a court to fine Microsoft and suspend the transaction while the FTC conducts a full-scale investigation of the deal’s impact on competition.

Tech companies often buy startups to scoop up their talent, a tactic known as an “acquihire.” In Microsoft’s case, the company picked off Inflection’s specialized workforce of AI researchers but didn’t purchase the company outright.

Based in the San Francisco Bay Area, Inflection AI built one of the world’s biggest large language models, and launched an AI chatbot with that technology called Pi. Inflection is one of the tech companies that built and sold access to large language models. The others include OpenAI, the creator of ChatGPT, and Google.

Microsoft was an investor in both OpenAI and Inflection. The FTC in January opened a broad investigation of Microsoft’s investment in OpenAI and Alphabet’s relationship with Anthropic, a rival of OpenAI that was founded by former OpenAI engineers in 2021.

At Microsoft, Inflection co-founder Mustafa Suleyman and his former team established a new division called Microsoft AI that was tasked with developing AI products for consumers. That includes AI assistants for Bing, its search engine, and Windows.

Inflection is continuing operations under a new management team but pivoted away from Pi, a consumer product, and toward services for corporate clients.

Ted Shelton, Inflection’s new chief operating officer, said he wasn’t aware of an FTC investigation. But Inflection wasn’t acquired by Microsoft, he said. “We are a wholly independent company,” Shelton said. “Microsoft has no investment in our company.”

Entrepreneur Reid Hoffman and venture-capital firm Greylock Partners are now the principal investors in Inflection, Shelton added.

The hires resembled how Microsoft earlier moved to hire Sam Altman, the CEO of OpenAI, after his board of directors pushed him out in November. Altman returned as chief executive of OpenAI after a five-day standoff with the board. The directors had alleged Altman wasn’t completely candid in his communications with them.

OpenAI’s nonprofit board oversees a for-profit arm that has outside investors. Microsoft invested around $13 billion in OpenAI, acquiring a claim to 49% of any profit it generates.

Deepa Seetharaman contributed to this article.

Write to Dave Michaels at dave.michaels@wsj.com and Tom Dotan at tom.dotan@wsj.com