What OpenAI’s Restructuring Means for Microsoft, AGI — and a Future IPO

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0:01:32 Welcome to Prof G Markets.
0:01:34 I’m Ed Elson.
0:01:38 We are kicking it off with one of our worst jokes in history, but we love it.
0:01:39 It is October 29th.
0:01:42 Let’s check in on yesterday’s market vitals.
0:01:48 The major indices closed at record highs, driven by new AI deals and strong third quarter earnings.
0:01:56 NVIDIA led the gains up 5% after making several announcements at its GTC conference, including a partnership with Nokia.
0:02:00 Microsoft rose 2% and rejoined the $4 trillion club.
0:02:01 So did Apple.
0:02:03 More on that in a second.
0:02:09 Gold fell to a three-week low as investors maintained optimism for a US-China trade deal.
0:02:13 And all eyes were on the Fed as they kicked off their two-day policy meeting.
0:02:17 Investors are expecting a 25 basis point cut today.
0:02:20 Okay, what else is happening?
0:02:23 OpenAI is officially going corporate.
0:02:28 The company announced that it has completed its long-awaited restructuring
0:02:32 and has established its for-profit entity, OpenAI Group.
0:02:36 This shift gives OpenAI the flexibility to raise billions in new funding,
0:02:41 and crucially, it clears the path towards a potential IPO.
0:02:45 Under the new setup, OpenAI’s non-profit arm legally controls OpenAI Group
0:02:49 with a 26% equity stake valued at $130 billion.
0:02:53 The non-profit also has the power to appoint the company’s board.
0:02:57 Meanwhile, Microsoft, which first invested in OpenAI in 2019,
0:03:00 they own roughly 27%.
0:03:04 The remaining 47% is split among the employees and other investors.
0:03:08 The deal solidifies Microsoft’s role as a major partner.
0:03:11 It expands Microsoft’s rights to use OpenAI’s models.
0:03:17 It also means OpenAI will purchase $250 billion worth of Azure services over time.
0:03:18 There is a caveat, though.
0:03:22 That is that Microsoft will no longer have a right of first refusal to serve
0:03:24 as OpenAI as a compute provider.
0:03:28 That will give OpenAI the freedom to work with other cloud partners.
0:03:29 A lot there.
0:03:33 Here to unpack what this restructuring really means,
0:03:36 we are speaking with Alex Heath, author of the Sources newsletter
0:03:38 and co-host of the Access podcast.
0:03:40 Alex, good to see you.
0:03:41 Good to see you, Ed.
0:03:45 We want to get your reactions to this OpenAI restructuring,
0:03:48 or at least the announcement of the restructuring.
0:03:52 It’s a little complicated, but that’s the nature of OpenAI.
0:03:56 Give us your read on what this actually means and what we’re seeing here.
0:03:57 Yeah, a few things.
0:04:01 I mean, for OpenAI top level, it means an IPO is definitely coming.
0:04:05 I wouldn’t be surprised if it happens next year, honestly.
0:04:08 I think they want to take advantage of the hype.
0:04:12 And if they didn’t have this nonprofit structure,
0:04:14 they would have probably gone out this year, is my guess,
0:04:16 just given the momentum that they have.
0:04:20 So that’s the OpenAI top level.
0:04:27 The Microsoft top level is that Microsoft has essentially traded upside in equity.
0:04:30 I mean, they still own a significant portion,
0:04:36 but they’re actually diluting their ownership stake from, I think, 32.5-ish percent to 27 percent.
0:04:44 But they extracted $250 billion in Azure contract commitments from OpenAI in return.
0:04:52 So basically, accepting that dilution and upside on equity for this massive Azure buy.
0:04:54 So you can read into that how you will.
0:04:59 And then OpenAI gets a little more flexibility, but not a ton, honestly.
0:05:03 They didn’t get a ton of concessions from Microsoft on exclusivity.
0:05:06 They can use different cloud vendors, which they already were.
0:05:12 But Microsoft still has exclusive rights to the IP through at least 2030.
0:05:18 And I guess, lastly, that would be the other top line is we’re definitely going to get OpenAI calling AGI by 2030
0:05:29 because a key line in this is that basically by then they’ll have the ability to back out of parts of the exclusivity arrangement with Microsoft if AGI is achieved.
0:05:33 I have more questions on that.
0:05:46 Just on the restructuring non-profit versus for-profit, I think most people know OpenAI is slash was a non-profit, but it’s not totally clear to people.
0:05:51 Could you just give us like the history of is this a non-profit or is it not?
0:05:52 And what does the history look like?
0:06:01 Well, the reason this has taken so long for them to do this restructuring and why attorney generals have been looking into it, there’s been lawsuits about it, Elon has been suing about it,
0:06:08 is that OpenAI has been this whole time, even the last few years, legally a non-profit in California.
0:06:17 And what they’ve been trying to do is create this public benefit corporation subsidiary, which they finally are now saying they have done, to be able to offer equity like a normal company.
0:06:29 And for people to understand, I mean, the last time we were really reminded of OpenAI being a non-profit was when Sam Altman was suddenly fired for a weekend a few years ago.
0:06:34 And it was because the non-profit board had the ability to do that and they surprised him and did that.
0:06:37 Technically, that can still happen under this.
0:06:51 So the non-profit, that was the key thing in the deliberations with the attorneys general in Delaware and California, is that the non-profit board is still, from a governance perspective, in control of the for-profit subsidiary.
0:06:52 So that hasn’t really changed.
0:06:59 What’s changed is that the people on that non-profit board, I would say, are more friendly to Sam Altman than they were a few years ago.
0:07:02 And obviously, OpenAI was in a very different phase.
0:07:09 But that’s a curious part of this, is like the governance isn’t really changing, but for some reason, this is okay with regulators.
0:07:17 I mean, the non-profit is getting a massive stake in OpenAI, you know, 26-ish percent stake worth a lot of money.
0:07:21 It’s the most, you know, technically valuable non-profit in the country by far.
0:07:25 But I’ll be waiting to see how empowered this non-profit actually is.
0:07:29 Is that fund, are those funds going to be liquid at all?
0:07:34 Are they going to be something they actually use for social good use cases, whatever?
0:07:36 I think all that very much remains to be seen.
0:07:44 And then another just random part of this, that is Sam Altman still does not own any direct equity in OpenAI, even after this restructuring.
0:07:50 I think some people were expecting him to get like maybe 5, 10 percent of the company as the face.
0:07:55 And he still has no direct equity, as far as we know, which is very unusual.
0:07:57 Just want to read you from the press release.
0:08:00 OpenAI was founded in 2015 as a non-profit.
0:08:04 Its mission is to ensure artificial general intelligence benefits all of humanity.
0:08:08 Today, OpenAI remains a non-profit dedicated to that same mission.
0:08:18 So, they’re still a non-profit, but there’s a subsidiary that is a for-profit, which they own a stake of.
0:08:23 But there does seem to be a lot of emphasis coming from OpenAI that, no, no, our values haven’t changed.
0:08:25 We’re still a non-profit.
0:08:29 We’re still interested in benefiting humanity.
0:08:34 The for-profit entity is a public benefit corporation.
0:08:35 It’s a B Corp.
0:08:39 So, it’s kind of about, you know, helping people.
0:08:44 I guess my BS meter goes way up when I start hearing about this.
0:08:46 Me too.
0:08:47 So, I’m glad you agree.
0:08:54 We hear about the governance, and you mention that, you know, the board still has, you know, some control.
0:08:58 But I think what is so interesting is that’s what they said last time.
0:09:05 They kicked out Sam Altman when it was tested whether or not this was really about benefiting humanity versus making profits.
0:09:12 The board said, no, he’s flouting safety precautions, and we’re going to kick him out.
0:09:15 And then they got Sam Altman back in.
0:09:18 They got rid of all of the board directors who didn’t like him.
0:09:24 And now they have a bunch of board directors who do like him, who are business leaders and pro-AI.
0:09:27 To me, it all smells a little bit like BS.
0:09:28 They say it’s non-profit.
0:09:29 They say it’s cap profit.
0:09:32 Ultimately, this is just a company, and they’re going to make money.
0:09:35 And Sam Altman may not have some equity, but he’s going to make money somehow.
0:09:37 Your reactions?
0:09:39 I think you’re right.
0:09:41 My BS meter is very high on this as well.
0:09:43 I think—I know he’s already a billionaire.
0:09:47 I know he makes fun of people who ask him this question about, like, why don’t you have equities?
0:09:48 Like, I don’t need the money.
0:09:53 There’s that famous clip of him talking to senators where he’s like, you know, I do this because I love it, right?
0:09:55 I get all that.
0:10:03 At the same time, you are not the face of the hottest company in the world and not owning direct equity in it if you had any say in it.
0:10:11 There’s something weird going on with this that raises the fishy meter for me, and I assume will come out at some point.
0:10:17 But I think the big picture here, because this is very confusing, as we’re saying, like, it’s still a nonprofit.
0:10:18 What’s really changing?
0:10:25 The headline for me this week was the Microsoft relationship changing and how they’re going to declare AGI, which was very contentious before.
0:10:35 Basically, before, if OpenAI said, hey, we’ve got AGI now, then all of a sudden Microsoft would lose access, IP rights, to all of OpenAI’s products.
0:10:39 And it would also stop getting 20% of its revenue, which is something that’s going to continue.
0:10:44 Microsoft is going to continue to be entitled to 20% of OpenAI’s revenue.
0:10:51 And now what’s basically happened is there’s going to be this independent panel that verifies if AGI has been reached.
0:10:54 We don’t know who’s going to be on that panel, how that governance will work.
0:10:55 Still a lot of questions there.
0:11:04 And then after they say that AGI has achieved this panel, Microsoft would only then lose access to the research that OpenAI does.
0:11:07 So basically research into future models.
0:11:10 But Microsoft will continue to have access to the IP.
0:11:18 So I guess this post-AGI IP is not so important for OpenAI to fight for and have on its own as it was before.
0:11:21 They’re willing to let that also be used by Microsoft.
0:11:24 So maybe AGI isn’t going to be as transformational as we all thought.
0:11:29 It sounds like we’re going to see an absolute storm of lawsuits down the road.
0:11:34 I mean, when we achieve AGI, who’s to say what that actually means?
0:11:43 I think of this as we just see, OpenAI is going to purchase $250 billion worth of compute from Azure, from Microsoft.
0:11:50 That’s in addition to the trillion dollars in spending that they are promising to spend over the next several years.
0:11:57 I don’t know if you saw this Financial Times report, but they basically learned that a lot of the deals that OpenAI is making,
0:12:01 they’re not even getting legal counsel on these deals.
0:12:08 In fact, he’s giving it to Greg Brockman, who’s like the technologist, and letting him hash out these deals.
0:12:10 This looks like the same thing.
0:12:15 So I just want to get your reactions to like, you know, how buttoned up are these deals really?
0:12:20 That $250 billion number, do you believe that’s actually going to happen?
0:12:23 Um, do I believe that’s going to happen?
0:12:31 I mean, do I believe that, you know, uh, I’m going to make millions and millions of dollars next year?
0:12:32 Like, yes, I believe it.
0:12:33 Will it happen?
0:12:33 Who knows?
0:12:34 I hope so.
0:12:35 That would be awesome.
0:12:45 Um, I think, I think these numbers, including this $250 billion Azure thing is like, if everything goes according to plan, that’s the number then that you should anchor to.
0:12:56 I would actually say that for all these deals, the NVIDIA one, the AMD one, all these, like, these big trillion plus numbers are, that is what will happen if everything works.
0:13:00 I think that’s like the pie in the sky, best case scenario.
0:13:06 So no, I don’t, I would be shocked if OpenEye actually spends an additional $250 billion with Azure.
0:13:07 Maybe they do.
0:13:08 Maybe I’ll eat my words there.
0:13:13 But yeah, these, these deals are very much handshake-like if it works right now.
0:13:14 All right.
0:13:18 Alex Heath, author of The Sources newsletter, co-host of the Access podcast.
0:13:21 And you’ve got your launch party next week, which I am very excited for.
0:13:21 Yeah.
0:13:22 You’re going to be there, right?
0:13:23 I will be.
0:13:24 I’m very excited.
0:13:25 It’ll be great.
0:13:26 Thanks for joining us.
0:13:27 Thanks for having me.
0:13:32 After the break, a look at Amazon’s layoffs.
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0:15:14 Scott, we’re hitting the road, bringing Pivot Live to the people.
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0:16:02 We’re back with Prof G Markets.
0:16:06 Amazon just announced its largest layoff in company history.
0:16:10 The company plans to cut as many as 30,000 white-collar workers in total,
0:16:14 or about 10% of its corporate staff.
0:16:19 The first wave of layoffs started yesterday with an initial 14,000 firings.
0:16:25 Amazon says that the goal is to run Lina in order to fund its AI efforts.
0:16:30 Ultimately, they hope to, quote, operate like the world’s biggest startup.
0:16:35 For more on this and Amazon’s approach to cutting jobs, we’re going to give Scott a call.
0:16:41 Scott, good to see you.
0:16:42 Good to see you, Ed.
0:16:44 We want to get your reactions to this Amazon news.
0:16:51 They are cutting as many as 30,000 white-collar jobs, 10% of the corporate staff.
0:16:58 This is one of the biggest layoffs we’ve ever seen, certainly the biggest layoffs we’ve seen in the history of Amazon.
0:17:00 Your reactions to the news?
0:17:02 Well, I think it’s important to just set some context.
0:17:05 I think hiring is up more than 50% since COVID.
0:17:12 So, while this is definitely a huge layoff, and I don’t want to diminish the impact on the people who are getting layoffs,
0:17:15 what does this take them back, 12 or 24 months?
0:17:21 I mean, it’s not, this isn’t, you know, it’s a dramatic top line or a headline number.
0:17:31 But the reality is, when you’re growing as fast as these companies, it’s good business practice to occasionally hit the pause button and reevaluate the size of the company.
0:17:36 I mean, Alphabet has done this a bunch of times since they went public 20 years ago.
0:17:48 And the thing that sort of blows me away here is that I think that Amazon is on the precipice of just an absolute monster quarter in terms of earnings.
0:17:54 I don’t think it’ll happen in their next earnings call because they’ll have to expense a lot of the severance costs,
0:17:57 and they’ll still effectively be paying most of these people.
0:18:07 But say the earnings call after the holiday season, I think what we’re going to see is a replay of what I think is one of the most seminal earnings calls in history.
0:18:18 And that’s when Meta announced that they had grown their revenue 23% with 20% fewer headcount, taking the earnings up 70%, and it just sent the stock skyrocketing.
0:18:22 I think that’s what Amazon is setting up to do.
0:18:35 And the other thing to keep in mind is this was coming because if you look at what’s happened over the last several years at Meta, Alphabet, and I don’t know if it’s Apple.
0:18:41 At Meta and Alphabet, their revenue per employee is up between 30% and 60%.
0:18:46 The revenue per employee at Amazon is off or has declined 25%.
0:19:00 And I believe that while everyone’s talking about AI, the killer application of AI may not be getting therapy or trying to figure out how to power an Uber without the driver in front.
0:19:07 It might be making automation more efficient and that much more productive and bringing down the cost of automation.
0:19:12 So, the ultimate application of AI might be robotics.
0:19:17 And Amazon has been making these huge investments early and often.
0:19:21 And I think they’re on the verge of recognizing the return on that.
0:19:37 It’s also kind of an interesting evolution of the company because the thing that has driven margin expansion for Amazon has been AWS and Amazon Media Group, which is basically forcing third-party retailers to buy ads on their platform, which, as you can imagine, has extraordinary margins.
0:19:46 But I now believe they’re turning their focus back on their biggest business by gross dollar revenue, and that’s their retail business.
0:19:51 And they’re about to show remarkable efficiencies at the hands of automation.
0:19:56 So, the net-net is last year, every year we do a predictions deck.
0:19:59 Last year we predicted and we like to pick our big tech stock of the year.
0:20:05 Last year we picked Alphabet because it was trading at a P of 17 versus the average of 24 at the S&P.
0:20:07 Stock is up 60%.
0:20:15 Amazon’s a relative underperformer, only up 20%, which is not that amazing given the kind of the acceleration in the broader market.
0:20:19 I think our pick this year for 26 is going to be Amazon.
0:20:26 I think Amazon is about to, in two earnings calls, announce a meta-like earnings call from last year.
0:20:29 Yeah, meanwhile trading at its lowest multiple in many years.
0:20:32 The layoffs, is it AI?
0:20:35 I mean, you mentioned that there’s the bloat that we saw.
0:20:42 After COVID, a lot of these companies are hiring, now they’re going to get rid of 30,000 jobs.
0:20:44 Is that AI replacing them, you think?
0:20:47 Yeah, I think it’s essentially productivity.
0:20:58 I mean, if you look at Europe, Europe was at $45 per employee in 1995, and the U.S. was at $45 per employee.
0:21:04 As we sit here today on an inflation-adjusted basis, the U.S. is at $70, and Europe is at $45.
0:21:08 And is it because American workers are working harder?
0:21:12 No, it’s because they are armed with technology to make them more productive.
0:21:20 So the remaining Amazon employees, which is still an enormous employee base, I think they’re now the largest employer outside of the armed services.
0:21:25 I think they’re the largest employer in America, is about to get much more productive.
0:21:33 And I think, to your point, I think Amazon trades at its five-year average P.E. is like 60, and it’s down to 30 or 33.
0:21:45 So it looks relatively cheap for a company that’s the second biggest retailer in the world growing faster than any other, you know, growing faster than Walmart with the number one cloud unit.
0:21:53 And also, you know, throw in rocket launch capabilities that might end up being a big growth vehicle.
0:22:03 But this is, I think Amazon is poised to be, to sort of catch up, if you will, and recognize kind of some of that monster growth.
0:22:23 The existential threat that has taken their P.E. from whatever it is, 60 to 33, has been that their dominant position in the cloud feels threatened because the AI component or the AI capabilities of their cloud offering are reportedly substandard to, say, a Gemini.
0:22:26 Or what Microsoft Azure is offering.
0:22:31 But I think Andy Jassy doesn’t get the credit he deserves as an operator.
0:22:37 I would describe kind of Bezos as a Jobs-like visionary, and Jassy as a Tim Cook-like operator.
0:22:40 I think he’s just very focused on the blocking and tackling.
0:22:47 But I think they’re setting themselves up for an absolute explosion in earnings.
0:22:50 All right. Thank you, Scott. Appreciate your time.
0:22:51 All right, brother. Good night.
0:23:02 Nearly 50 years after its founding, Apple is officially a $4 trillion company.
0:23:06 The iPhone maker reached that milestone yesterday for the first time ever.
0:23:14 It joins Microsoft and NVIDIA as the only companies in history to hit $4 trillion in market cap.
0:23:18 Now, what pushed it to $4 trillion yesterday?
0:23:20 Actually, not much.
0:23:22 The stock rose only 0.1%.
0:23:25 It was already teetering at $4 trillion.
0:23:35 The real rally actually happened last week when a company called Counterpoint Research published a research report on iPhone sales,
0:23:37 a report that Wall Street was quite happy about.
0:23:43 The report basically found that in the 10 days after the release of the new iPhone 17,
0:23:48 sales were up 14% compared to the release of the previous iPhone, the iPhone 16.
0:23:57 And basically, that news restored investors’ faith, not just in the iPhone, but also in Apple itself, the long-term potential of Apple.
0:23:59 The iPhone is the engine of the company.
0:24:01 And it appears sales are going up.
0:24:03 So that’s what drove the stock up.
0:24:09 The market was very excited about this report and what it says about Apple’s future.
0:24:10 Fair enough.
0:24:13 We, however, take a different view.
0:24:21 We were actually less impressed by this report, in which we learned that it’s actually sales volume that is up 14%,
0:24:26 i.e. they’re selling more devices, but not necessarily generating more dollars.
0:24:33 And the reason that is important is because the main driver of that growth was volume sales of the cheaper model.
0:24:39 In other words, many consumers of the iPhone appear to be downgrading.
0:24:46 So the questions you have to ask here are, one, will this translate to a meaningful increase in revenue?
0:24:47 Not totally clear.
0:24:53 And two, how much does a third-party report on the first 10 days of sales actually tell you
0:24:56 about the long-term trajectory of the business?
0:24:58 And does it warrant this valuation?
0:25:01 And does it warrant $4 trillion in market cap?
0:25:03 We’re not so sure.
0:25:05 So, yes, Apple hit $4 trillion.
0:25:07 And yes, investors are optimistic.
0:25:10 But we think the company is still overvalued.
0:25:16 And we don’t think this justifies a higher multiple than every other big tech company.
0:25:16 Why?
0:25:20 Well, there are still some major question marks for Apple.
0:25:22 For one, there’s AI.
0:25:26 Apple is behind on AI, not just in terms of spending.
0:25:27 They’ve spent $12 billion.
0:25:29 The others have spent nearly $400 billion.
0:25:31 But also in terms of performance.
0:25:37 Siri 2.0, which was supposed to be the future of AI at Apple, that is still nowhere to be found.
0:25:39 Meanwhile, they are losing talent.
0:25:47 Several executives working on Apple’s AI, they have been poached by Meta, including the leader of the foundational model team.
0:25:52 And this is important because Apple’s growth opportunities are quite slim.
0:25:55 The iPhone has basically hit critical mass.
0:26:00 In fact, their share of global phone shipments is actually lower than it was in the 2010s.
0:26:04 Meanwhile, their watch sales have been falling, down 20% last year.
0:26:13 And the growth engine that they pitched us, that is the Vision Pro headset, the VR AR headset, that has been a total flop.
0:26:16 An estimated half a million units have been sold.
0:26:18 That is essentially a rounding error for Apple.
0:26:23 And the plans for the Apple Vision Pro 2 have actually been abandoned.
0:26:29 Now, this isn’t to say that Apple isn’t one of the most impressive and dominant companies in the world.
0:26:30 And in history, really.
0:26:34 And this isn’t to take away from that $4 trillion milestone.
0:26:35 It is incredible.
0:26:39 But we do want to be clear about where we stand right now.
0:26:42 The company is now trading at 37 times earnings.
0:26:48 It’s trading at a higher multiple than any of the MAG7 stocks apart from Tesla.
0:26:51 It is being valued as if it were a growth company.
0:26:54 But it isn’t a growth company.
0:26:56 It’s a legacy company.
0:27:02 And this research report, promising as it is, doesn’t do much to dispute that central point.
0:27:05 The company will report earnings this week.
0:27:07 Perhaps they’ll tell us something new.
0:27:10 Perhaps they’ll tell us something very impressive that will change our minds.
0:27:13 But for now, our position remains the same.
0:27:16 We are not very bullish on Apple, not at $4 trillion.
0:27:21 If we had to invest in a MAG7 stock, the last on our list would be Tesla.
0:27:24 The second to last would be Apple.
0:27:28 Okay, that’s it for today.
0:27:32 This episode was produced by Claire Miller, edited by Joel Patterson, and engineered by
0:27:33 Benjamin Spencer.
0:27:35 Our associate producer is Alison Weiss.
0:27:39 Our research team is Dan Chalon, Isabella Kinsel, Kristen O’Donoghue, and Mia Silverio.
0:27:42 And our technical director is Drew Burrows.
0:27:45 Thank you for listening to Prof G Markets from Prof G Media.
0:27:47 If you liked what you heard, give us a follow.
0:27:49 I’m Ed Elson.
0:27:50 I will see you tomorrow.