Do Big Cloud companies control AI startups?

Welcome to Runtime! Today: The federal government wants to know how much influence the Big Three cloud providers have over their AI investments, Intel's data-center revenue continues to decline, and this week in enterprise moves.

(Was this email forwarded to you? Sign up here to get Runtime each week.)

Fortuitous timing, clouds

Over the last year, cloud providers have invested billions of dollars in startups working on generative AI large-language models, led by the $13 billion Microsoft has poured into OpenAI. They hoped investing in those companies — rather than buying them — would help them avoid regulatory scrutiny, but those hopes ended Thursday.

The Federal Trade Commission announced an inquiry into Amazon, Google, and Microsoft's investments in OpenAI and Anthropic. "Our study will shed light on whether investments and partnerships pursued by dominant companies risk distorting innovation and undermining fair competition," said Lina Khan, chair of the FTC, in a press release.

• The FTC is looking for more details around "the practical implications of a specific partnership or investment, including decisions around new product releases, governance or oversight rights, and the topic of regular meetings," it said in the release.
• It also wants to know more about "competition for AI inputs and resources, including the competitive dynamics regarding key products and services needed for generative AI," which seems almost certain to ensnare Nvidia at some point. 
• This is a fact-finding mission for now, but "findings stemming from such orders can help inform future Commission actions."

Even if OpenAI's board hadn't shocked the world by firing Sam Altman last November, we might have wound up here. But it seems pretty clear that Microsoft's maneuvering over the following week to get Altman reinstated raised more than a few eyebrows in D.C.

• In early December Bloomberg reported that the FTC was considering whether or not to launch the inquiry it just launched, given that Microsoft hasn't disclosed any details about its investment in OpenAI to the U.S. government but seems to quite clearly play an outsized role in its affairs.
• Amazon and Google's involvement with Anthropic has been far less dramatic, but the startup has raised more than $6 billion from the two cloud giants without providing a lot of details on how much control they have over its direction.
• Ten years ago in response to an existential threat from a smaller company, big tech companies like Microsoft, Amazon, and Google might have simply acquired those companies for their intellectual property and talent.
• But the regulatory path to getting deals approved has become much harder now that these three companies are worth a combined $6.5 trillion, giving them basically unlimited capital to shape the tech industry in their vision.

As the FTC scrutinizes Big Cloud's investment in the generative AI boom, the information generated by the inquiry could also be an opportunity for the federal government to take a closer look at whether or not these investments fall into a category known as "round tripping."

• In short, round-tripping is an accounting concept in which one company gives money to another company that it knows it will get back in the long run, such as when cloud companies invest in generative AI companies on the condition they spend that investment on their respective cloud services.
• This isn't illegal, but it's a disingenuous way of turning capital into revenue, and investors have been complaining about the practice with respect to the generative AI boom for a while.
• "This is what happens when you 'invest' with 'credits' that allow you to goose your own revenues," said prominent investor Bill Gurley last week, in response to a report that showed how Big Tech companies have dominated tech investment during the AI boom.
• "As long as that is allowed, expect it to continue and expect way more. And expect a massive mess in the end," Gurley said.

One step up, two steps back

Intel beat Wall Street estimates for revenue and profit during the fourth quarter, but data-center revenue continued to decline and a weak forecast for the upcoming year sent its shares down almost eight percent in after-hours trading Thursday afternoon. CEO Pat Gelsinger's turnaround plan remains a work in progress.

On the plus side, Intel's 10% increase in overall revenue ended a seven-quarter streak of declining revenue, according to CNBC. On the negative side, sales of data center chips declined by 10%, which means Intel continues to cede share to AMD and Arm-based rivals in a market it once single-handedly controlled.

And looking into the first quarter of 2024, Intel projected revenue would fall more than $1 billion short of Wall Street estimates. Companies of Intel's size can't pivot very quickly, but it is missing out on a once-in-a-generation explosion in chip sales thanks to the generative AI boom, and its plan to turn into a manufacturing hub for chip designers isn't accelerating fast enough to make up the gap.

Enterprise moves

Claire Vo is the new chief product officer at LaunchDarkly, joining the company after holding similar roles at Color and Optimizely.

Kristin Major is the new chief people officer at HPE, following 12 years with the company in several HR roles.

Neil McDonald is the new head of high-performance compute and AI at HPE, replacing Justin Hotard, who left to take a similar role at Intel earlier this month.

Amy Farrow is the new senior vice president and chief information officer at InfoBlox, joining the company after serving as Lyft's first CIO.

Astasia Myers is the newest general partner at Felicis, with plans to focus on enterprise infrastructure investing.

Brad Burns is the new chief communications officer at Snowflake, joining the company after more than five years at Salesforce.

The Runtime roundup

HPE's Microsoft 365 accounts were hacked by the same group that infiltrated Microsoft's corporate accounts late last year, and its cybersecurity team was also the target of that attack.

IBM beat Wall Street estimates for revenue and profit on Wednesday and enjoyed a nearly 10% bump in its stock price Thursday.

ServiceNow also beat analyst estimates and raised its own forecast for subscription revenue heading into the first quarter.

Dell helped fund a think tank stoking fears of China's influence over Lenovo, a major Dell competitor in the server market, during last year's weather balloon scare according to Bloomberg.

AWS will invest $10 billion in Mississippi to build two new data-center sites, which would be its first region in the Deep South.

OpenAI lowered API pricing on GPT-3.5 Turbo and said it had improved the "laziness" problem some users have encountered with GPT-4.

Thanks for reading — see you Saturday!