 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Conventional Wisdom says Microsoft is a big winner in the recent open AI saga. We don't quite see it that way. Both Microsoft and open AI are in a worse position today than they were last Thursday. Prior to the firing of open AI CEO Sam Altman and subsequent ongoing public drama that ensued. Microsoft and open AI had a huge lead in market momentum, AI adoption, feature acceleration, and they were setting the narrative in AI. Our discussions with customers and industry insiders leads us to conclude that the duo has put its substantial lead at risk. Now while Satya Nadella is making lemonade from lemons, the window just cracked open for the competition and it's more clear than ever that one large language model will not rule them all. Hello and welcome to this special episode of theCUBE Research Insights powered by ETR. In this Breaking Analysis we weigh in on the impacts of the open AI debacle with a deeper look at customer perspectives and how it alters the competitive landscape in the battle for AI's supremacy. As well, the amazing data team at ETR has run a quick survey of open AI and Microsoft customers to gauge reactions and we'll share that fresh data in addition to some other tidbits. Now before we get into that, so much has been reported on this rapidly evolving story, it changes by the hour it seems, but it's worth reviewing the strange and curious structure that open AI has in place, which has led to a breakdown in communications, a governance failure, and absolute PR disaster. Open AI was formed as a nonprofit in late 2015 with the commendable objective of building safe and artificial intelligence for the benefit of humanity. You know, often governments would be funding this type of initiative, but seeing no obvious public path, a number of private industry players decided that a 501C3 would best serve the mission, but it became clear that despite the initial billion dollar funding from its founders and some other insiders, that the company wouldn't be able to adequately fund its lofty goals. So in 2019, open AI created a structure that allowed it to accelerate its outside investments, including from longtime partner Microsoft, which began partnering with open AI back in 2016. As shown in this graphic, the structure expanded to include a limited liability corporation that appears to have some type of operational role today, it's owned by the nonprofit, which also owns a separate holding company that enabled open AI to take outside investments. The big investor names you might be familiar with are Kuslaw Ventures, Tiger Global, Thrive Capital, Sequoia Capital, and A16Z. Open AI took around a billion dollars from Microsoft around this time, but it's unclear if that investment, which is in the middle box as shown here, the holding company on this graphic, or the one at the bottom, that the cap profit company in which Microsoft has a 49% stake. So it's unclear where the billion is, it doesn't really matter. It's they've got a 49% stake in that bottom structure. So unpacking the structure a little bit more, it's likely that the holding company creates a fence and fences off certain assets, like for example, the artificial general intelligence, the AGI intellectual property and capital, which as you probably know, Microsoft does not have access to. That was carved out of their deal. So Microsoft's 49% ownership of the capped profit company is in exchange for up to $13 billion in cash and in kind contributions, e.g. Azure. And in my conversations with insiders, it's based on open AI delivering uncertain milestones. It's our understanding that Microsoft has the right to make derivative works from open AI IP, for example, bundling it with Bing and its other products and potentially more liberal IP usage. So you end up with this complicated structure that has investors which have rights to all the IP, including the AGI IP and one giant investor, Microsoft, that doesn't have access to that AGI IP and shares the capped profit LLC with a 51% who has a 51% ownership, the open AI side. That's the holding company which is shown here. And it includes those investors mentioned and reportedly this structure had a $90 billion valuation which is all at risk now. The point is this structure has failed in a number of ways. Microsoft capitulated on having a say, a board seat and a say in how open AI is governed and or just ignored the risks in exchange for exclusive access to open AI's GPT 3.5 and four technologies. And that left the door open for a board of directors with incredibly poor judgment to try and oust its CEO leading to a company that is now in disarray. And the post by co-founder Ilya Sutskover says it all. Says I deeply regret my participation in the board's action. I never intended to harm open AI. I love everything we built together and I will do everything I can to reunite the company, unbelievable. As one person commented in Twitter, this turns Ilya from Barzini into Fredo which is a reference to the movie The Godfather. Emilio Barzini of course was the mobster who double crossed the Corleone family and Fredo was the sensitive and troubled son of Don Corleone who was the unsuspecting dupe in the drama and it's unlikely. However, the Ilya's fate is gonna mirror Fredo's. Took a bullet in the back of the head for those of you who don't know. Okay, let's explore why this mess is so damaging and provide some context as to why the narrative that Microsoft is the big winner is dubious in our view. Essentially, and by the way nuanced, so essentially the commercial face of open AI is Microsoft and the two companies are joined at the hip. In other words, adoption of open AI tools directly benefits Microsoft because they are the exclusive partner for open AI's GP2 tooling. The success of open AI has been astounding. This data from ETR's emerging technology survey ETS of more than 1500 IT decision makers, ITDMs we call them, evaluates their use of technologies from non-public companies. This is the gen AI component of that survey. So in this survey, ETR measures net sentiment that's the blue line and mind share that's the yellow line. Open AI showed up in the February 23 survey for the first time is steadily increased on both dimensions to levels that we've not seen previously. The green and blue bars are indicators of incremental adoption and the gray and red are indicators of no adoption and the trend is clear. Open AI, its steady progression is very obvious but what is striking is when you put this in context relative to the competition. Again, this is non-public companies and excludes the big three cloud players but this chart shows data on the same two dimensions, net sentiment and mind share amongst the gen AI players. Look at the position of open AI. It is off the charts on both dimensions blowing away the likes of Anthropic and Coher, two prominent and well-funded LLM players who have raised collectively well over $3 billion. Open AI's dominant position is directly a function of its Microsoft relationship and that company's massive resources, its software estate and its cloud computing infrastructure AKA Azure. The gap between open AI and the rest of the pack as you saw in that previous slide is enormous and the reason this mess is so concerning for customers is the top challenges that they report and putting gen AI into production are concerns related to all the sticky wicket legal and compliance issues shown in this survey. Privacy, security, legal compliance, regulatory concerns and lack of accuracy and unexpected results, i.e. hallucinations, these issues as shown by the arrows the red arrows dominate the barriers to adoption. Now coming off an impressive Ignite conference, Microsoft CEO Satya Nadella spent his weekend trying to save the day and he spent this week doing damage control. Here's what he said to Kara Swisher. So one thing I'll be very, very, very clear about is we're never going to get back into a situation where we get surprised like this ever again, that's done. So look, this raises a credibility issue for Microsoft. If you're a customer, you're going to take a pause and question this disaster. If Microsoft essentially ignored the governance risks on a potentially $13 billion investment and open AI has a completely dysfunctional board and structure, would you trust them with your data and potentially the future technology roadmap of your company? You most certainly wouldn't trust open AI whether Microsoft can adequately address customer concerns remains to be seen. So who wins and who loses from this failure of the open AI board? All the folks chasing open AI and Microsoft just got a little reprieve. AWS is readying to have the last word re-invent next week. Google playing catch up with Vertex AI. Anthropic is now going to get a stress test from its investors. And if it passes, well, they're good. Tesla, IBM with Granite, Meta with Lama 2, other open source models, other companies in the mix like Oracle, Salesforce, Mark Benioff put out a tweet saying, I'll hire all, everybody, all the open AI rock stars and give the other same compensation. Dell and HP trying to bring Gen AI to sort of a hybrid model on Prime and Hybrid. Nvidia and other chip manufacturers, they want a level customer playing field. They don't want one company to completely dominate. So they went and now the AI talent hounds, you know, as they say, Benioff offering jobs. And generally the AI crowd that wants to decelerate the pace of AI. These names stand to benefit, at least in the near term. So what about the losers lost here? Well, obviously open AI and its employees, its investors and board of directors, they were staring at a $90 billion valuation that they just threw away. That asset is going to get marked down. There's a little question about it. It's customers are caught in the crossfire as well. I mean, the whole argument around accelerating AI and let the tech industry adjudicate trust and AI safety, the whole argument just got torpedoed. And despite the diving catch in the end zone by Satya Nadella, Microsoft can't be happy with the situation. Everyone is saying they're a big winner with some exceptions, Matthew Prince, for instance. But so how so? How is it Microsoft, the big winner here? They were the AI puppet master coming out of Ignite and now they're trying to put Humpty Dumpty back together. Look, what happens if Sam Altman gets lured back to open AI? Is it all suddenly good? They didn't lose any productivity. They didn't lose any sleep over this. They didn't have to slow down and put controls in place and restructure their deal somehow with open AI. That's not going to slow them down. And what if Sam Altman does end up at Microsoft? How many of those open AI employees go with him versus going to Apple or Amazon or Tesla or Google? And how long does it take for Microsoft to ramp up? Is the latter scenario better? Or is the former scenario better? It's really hard to say. So let's take a look at some of the customer comments. These just came in, ETR, real-time research here. So they're anecdotal comments. What ETR snapped into action to capture some sentiment so that we could report today. The assessment overall is that Microsoft has embedded deeply into many customers and their processes and many are going to give them a pass. But there is definite cause for concern in the data. Let me read some of the verbatims from several IT decision makers, including senior directors of architecture, a senior director of IT, a cybersecurity practitioner. All of these were from large organizations within financial services and the insurance industry and one large nonprofit, kind of ironic. Quote, open AI is dead from my point of view. Three CEOs in three days isn't good. It isn't a good signal and Microsoft is taking advantage of that, true. Next quote, having proper governance and controls and security is very critical to our business and we are partnering with Microsoft for successful solutions. Okay, so that's one that's going to give Microsoft the pass evidently. Next quote, I think the lack of transparency from open AI around the decision clouds my confidence in either side, meaning both Microsoft and open AI. Next quote, quote, this news makes me skeptical of both open AI and Microsoft and the easiest solution might be to just avoid both in lieu of other platforms until things settle down or truth, the truth behind the rapid changes is clarified. Next quote, it adds to the overall skepticism around AI and related risks. I believe it will raise awareness throughout the tech and government and inevitably lead to more attempts to regulate the platforms. This quote, next quote, this basically means we need to hedge against multiple, this just came in before recorded from a CTO. This basically means we need to hedge against multiple companies. We are using both open AI and Google extensively as well as startups. There is no clear winner yet. And the space is evolving too quickly to bet the farm on one player. This last point underscores, not only the failure of open AI, the failure of its governance. Actually, I'm referring to the previous point, literally we just inserted the last point. So the penultimate point, the one before the last underscores the failure of open AI's governance but it also affects the entire technology and ecosystem in a way that could stifle innovation. Look at policy makers who want to regulate AI now have a much stronger hand to play. So where do we go from here? Why did this all happen? Emmett Scheer, the interim CEO from Twitch tweeted when he accepted the job that he had good visibility on the whole situation and there was nothing amiss regarding Sam Altman, no big deal. Now he's saying he's not going to stay on until he finds out exactly why the board removed him and Sam Altman supposedly coming back. I mean, it's just a mess over the weekend. Evidently the board of directors tried to hire the Anthropics CEO and offered to merge companies. Anthropics said no way. But so which is it? I mean, is there clarity as to what happened or not? It's very unclear, obviously. Open AI's valuation just got crushed, possibly cut in half or worse. It was definitely not 90 billion anymore. And our initial data shows that customers are hitting the pause button as we just shared and questioning a lot of things right now, at least most customers, I wouldn't say all customers, to try to understand where they might have blind spots. This is a huge, we told you so moment for the AI hall monitors and the decelerators and the bureaucrats, which is not ideal from an innovation standpoint. It's a massive black eye on the tech industry in terms of being able to self-govern. Now let's face it, tech doesn't have the same lobbying skills as banks. And finally, the very bottom line that this brings into focus is as we've been saying since early in the cycle, there will not be one large language model to rule them all. Choice and flexibility is gonna be the operative model. And that is one thing we're pretty certain about in this whole crazy world of uncertain gen AI. Okay, that's it for now. SuperCloud five, the battle for AI supremacy kicks off next week, how timely was this drama? That's going to be live from our Palo Alto studio. John Furrier and I are going to be in Las Vegas reporting for re-invent. Lisa Martin and Savannah Peterson are going to be in studio in our Palo Alto studio and Rob Stretche with Rebecca Knight are going to be reporting live from Barcelona at HPE Discover. Our coverage starts Tuesday the 28th. So check that out at thecube.net. I want to thank Alex Morrison and Ken Schiffman who are on production and they handle our podcast. Kristen Martin and Cheryl Knight help get the word out on social media and in our newsletters and Rob Hof is our EICs over at siliconangle.com does some great editing. Thank you all. Remember all these episodes are available as podcasts wherever you listen, just search breaking analysis podcast. Thank you for subscribing. I publish each week on wikibon.com and siliconangle.com. You can email me at david.balante at siliconangle.com or DM me at davilante or comment on our LinkedIn posts and please do check out etr.ai. Not only do they have the best survey data in the business, they're about real time data. They've got a great practitioner community who loves to share ideas. Obviously it's anonymous, but the data is just incredible and can't thank ETR enough and really appreciate the partnership. This is Dave Vellante with the Cure Research Insights powered by ETR. Thanks for watching everybody and we'll see you next time, breaking analysis.