Microsoft’s Out-of-Box Thinking on AI Demands Full FTC Scrutiny

When Federal Trade Commission Chair Lina Khan recently said on “The Daily Show” that “there’s no AI exemption from the laws” on monopolies, the FTC must make that true by using all its enforcement and research power to prevent anticompetitive activity in artificial intelligence.

Fortunately, the FTC has launched an inquiry into the relationships between the leading AI and cloud service companies to better understand how their web of partnerships and investments will impact competition and innovation. It’s a welcome first step to protecting the competitive landscape in two of the fastest-developing technological markets in the world.

But studying alone will be inadequate, especially when AI poses the risk of radically changing markets. The FTC must look at all its tools in scrutinizing Microsoft’s recent actions, which risk letting the world’s most valuable company create an AI “walled garden.”

Microsoft stands alone in the creative ways it employs to snap up AI talent and intellectual property for its vertically integrated AI stack while avoiding antitrust scrutiny. The company’s $13 billion investment in OpenAI locked the AI darling into Azure, creating exclusive access to OpenAI’s intellectual property to use and license.

While not an acquisition, the investment, in the words of CEO Satya Nadella, placed Microsoft “below, above, and around” OpenAI, and enabled Microsoft to be self-sufficient in AI. The European Commission’s determination that Microsoft “doesn’t control the direction of OpenAI” contradicts Nadella’s position, and makes the FTC’s efforts all the more important.

With Inflection AI, Microsoft took a blunter approach. Under Nadella’s leadership, Microsoft hired two of Inflection’s three executives and a broad swath of the company’s AI researchers and developers. Inflection has since pivoted to a new line of business.

In both cases, Microsoft’s end game seems to be to absorb entire companies’ worth of talent and IP and then neutralize, or at least co-opt, competitors to its CoPilot AI tool. The OpenAI-Microsoft tie-up sparked an antitrust probe in the UK late last year.

Microsoft appears to have a playbook of using strength in one market to capture market share in another. It has used restrictive licensing practices and leveraged its dominance in on-premise cloud infrastructure.

Now it seems to be bringing these same tactics to AI, deploying its massive Office 365 and Azure customer base to drive adoption of Copilot, which it then can tie to license agreements. No doubt every company in tech is watching to see if and how the FTC responds.

The FTC can take several actions. The commission is perhaps best known for its trust-busting lawsuits, but antitrust investigations require significant time and resources—and can take years to adjudicate and resolve. Official investigations into Microsoft’s AI non-acquisition acquisitions may be necessary, but the FTC can do more than sit back and watch.

The commission was established to oversee not only antitrust regulation but also non-enforcement actions like studies and policy statements that would encourage competition and protect consumers. It has de-emphasized these aspects of its mandate since the 1980s. But Khan has been a bit of a throwback by vigorously using non-enforcement actions available to the FTC such as policy statements.

This approach is clearly in Khan’s playbook. She forcefully and publicly made the case about the steps the FTC was taking to bring down drug costs and promote competition to government and industry leaders in March. We need this same three-pronged approach in the AI and cloud markets.

As the FTC continues its inquiry into AI investments and partnerships, it must adopt the active and vocal use of its non-enforcement powers to drive public awareness, legislative attention, and industry actions to bring greater competition and fairness to the cloud and AI markets. Innovation, access, and lower costs for consumers and industry will follow.

The policies and precedents we set today will set the competitive balance of these markets for generations to come.

(Article has been updated with author disclosure)

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Balto is the former policy director of the FTC and has practiced antitrust law for over 30 years. He has advised Google on a consulting basis in his capacity as legal counsel.

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