A Breakdown of the New Microsoft and OpenAI Partnership

Microsoft’s relationship with OpenAI has always been a bit of a rollercoaster, so it was no surprise when their partnership took a turn this week. After a series of executive disagreements and frustrations over AI infrastructure, the two have officially parted ways, but it seems to be on surprisingly good terms.

On Monday, Microsoft revealed updates to its long-standing deal with OpenAI, the most significant being that OpenAI can now offer its products and services across all cloud platforms. Just a day later, OpenAI announced it would be launching its latest AI models, including Codex, on AWS, which is Microsoft’s biggest cloud competitor.

This shift felt inevitable after Amazon struck a $50 billion deal with OpenAI earlier this year, initially framed as a way for AWS to serve as a third-party provider for OpenAI Frontier, along with some collaborative work on custom models for Alexa. Microsoft was understandably displeased with OpenAI’s partnership with its main rival and was even considering legal action before this renegotiation.

Both Amazon and OpenAI clearly sought a closer collaboration, especially as Amazon tries to catch up in the AI space and promote its Bedrock service to businesses. OpenAI informed its employees that its agreement with Microsoft had limited its ability to meet enterprise needs, particularly for those looking to use Bedrock. That’s a tough pill for Microsoft to swallow.

While Microsoft may not be thrilled about OpenAI’s models being available to Amazon, it stands to gain from this new arrangement. Reports indicate that under the revised agreement, Microsoft will continue to receive 20 percent of the revenue OpenAI generates from ChatGPT and its API platform, including any revenue from services offered on rival cloud platforms like AWS. Although there’s a revenue cap, this setup appears to be beneficial for both parties, even if the Amazon deal initially ruffled Microsoft’s feathers.

Microsoft will still be OpenAI’s primary cloud partner and will launch OpenAI’s latest products on Azure first, but the lack of exclusivity means that OpenAI’s new models could be available on competing platforms shortly after. It wouldn’t be surprising to see OpenAI’s models pop up on Google’s Gemini Enterprise Agent Platform in the future.

This change reduces Microsoft’s competitive edge, particularly regarding its Azure OpenAI service and Foundry initiatives. The non-exclusive license for OpenAI’s models now extends through 2032, a two-year extension from the previous 2030 deadline.

Additionally, the revenue-sharing model has shifted, meaning Microsoft no longer has to pay 20 percent of its Azure OpenAI revenue back to OpenAI. The new agreement also stipulates that Microsoft won’t owe OpenAI a revenue share if its search and news advertising revenue increases by 15 percent year over year. Microsoft still holds about 27 percent of OpenAI’s for-profit arm, making it a significant stakeholder in OpenAI’s future.

This amicable yet complex split was made possible by removing a clause related to artificial general intelligence (AGI), which had long governed the partnership. With the AGI clause gone, Microsoft won’t lose access to OpenAI’s most advanced models once AGI is theoretically achieved, and OpenAI is no longer incentivized to declare AGI to escape the deal.

The two had been at odds over the AGI clause for over a year, with tensions escalating when OpenAI considered acquiring the AI coding tool Windsurf last year. OpenAI wanted Windsurf to be exempt from its deal with Microsoft and even contemplated accusing Microsoft of anticompetitive behavior. Although OpenAI eventually dropped its acquisition plans, sources indicate that this led to months of tense negotiations regarding OpenAI’s controversial restructuring.

Microsoft’s concerns about OpenAI as a partner began when Sam Altman was ousted as CEO in 2023. This prompted Microsoft CEO Satya Nadella to recruit DeepMind co-founder Mustafa Suleyman to lead its AI business. Altman was reportedly upset by Suleyman’s hiring, especially as Suleyman’s team began working directly with OpenAI engineers.

Tensions peaked when Microsoft’s AI chief confronted former OpenAI CTO Mira Murati during a meeting in 2024, demanding access to OpenAI’s code. While Microsoft co-founders Bill Gates and Kevin Scott, along with Nadella, had carefully nurtured the OpenAI partnership, Suleyman was brought in to shake things up and develop Microsoft’s own AI models to reduce reliance on OpenAI.

The recent changes in their agreement seem aimed at distancing Microsoft from the turmoil surrounding OpenAI and Sam Altman. OpenAI is currently navigating public controversies, strategic shifts, and executive changes, and the contract update coincides with ongoing legal battles between Elon Musk and Altman over the future of the AI company, which has drawn Microsoft into the drama.

Despite the courtroom chaos, Microsoft is quietly working on developing its own AI models to compete with OpenAI’s. It has seen some success with models like MAI-Transcribe-1, a speech-to-text model that supports 25 languages. However, many of Microsoft’s AI models remain task-specific or smaller compared to OpenAI’s large language models.

To bridge this gap, Microsoft is increasingly looking at options from Anthropic, which offer more powerful capabilities for certain tasks than OpenAI’s models. Reports suggest that Microsoft has even considered utilizing Google’s Gemini models for specific products, similar to how it quickly began trialing Anthropic’s Claude Code.

Microsoft is committed to using the best AI model for each task to keep businesses engaged with its enterprise software and fend off competition from AI startups and OpenAI itself. Much of the tension in the Microsoft-OpenAI partnership has stemmed from both companies vying for the same customers.

Ultimately, this points to a future where Microsoft’s AI strategy is a blend of internally developed models and those from OpenAI, Anthropic, and others. The partnership now seems more focused on financial arrangements than on close collaboration in AI development. While they will remain connected, the partnership has become less complicated than before.

* Microsoft is reviving the Xbox brand, moving away from Microsoft Gaming. Just days after announcing a price cut for Xbox Game Pass, Xbox CEO Asha Sharma informed employees that Microsoft Gaming is reverting to the Xbox brand. This change comes after the branding switch to Microsoft Gaming coincided with the announcement of the Activision Blizzard acquisition in 2022. Sharma emphasized that “Xbox needs to be our identity.”

* The “We Are Xbox” initiative aims to unite the team. Along with the rebranding, Sharma and Xbox chief content officer Matt Booty sent a memo to employees outlining their vision for Xbox’s future. The message, “We Are Xbox,” encourages employees to focus on player frustrations. Xbox will now be evaluated based on daily active players and prioritize hardware, content, experience, and services. Although Sharma is new to the role, she is already making her presence felt. There are still significant questions about how her strategy will differ from previous leadership, especially regarding console focus and game exclusivity.

* A new Xbox logo has been unveiled. As part of Sharma’s all-hands meeting, Microsoft showcased a new Xbox logo on its campus this week. The logo features a glassy, transparent design, and Microsoft has also begun using this new look for some internal Project Helix materials. The “return of Xbox” slogan has been prominently displayed in Xbox offices, along with messages about “great games” and the “future of play.”

* GitHub experienced another major outage. Following last week’s report on employee concerns about GitHub’s reliability, the platform suffered a significant outage due to a bug that randomly reverted previously merged commits. On Monday, GitHub faced another outage related to search functionality. GitHub’s CTO acknowledged that these incidents were unacceptable and promised greater transparency moving forward. It appears GitHub is struggling to keep up with the increased demand for AI development workflows, which is putting a strain on its systems. The transition to Azure may also be complicating matters in the short term.

* Windows 11 users can now pause updates indefinitely, for up to 35 days. Microsoft is rolling out changes to Windows Update, allowing users to delay updates indefinitely in 35-day increments. This means players won’t have to worry about updates interrupting their gaming sessions or work. While Microsoft won’t allow users to turn off updates completely, this new flexibility should make the process less disruptive.

* A leak reveals a new Xbox Game Pass ‘Starter Edition’ linked to Discord Nitro. Microsoft teased a partnership between Discord and Xbox Game Pass last week, and a new leak has revealed details about an Xbox Game Pass “Starter Edition” that will be included with Discord Nitro. This edition reportedly offers access to over 50 games from the Game Pass library, 10 hours of Xbox Cloud Gaming streaming per month, and the ability to earn Xbox Rewards points while playing. Games like Stardew Valley, Grounded, and Fallout 4 are expected to be included, and we’re awaiting official confirmation from Microsoft.

* Microsoft Office can now be controlled with Logitech’s MX Creative Console. Logitech has introduced a suite of productivity plug-ins for its MX accessories, including shortcuts for Word, Excel, and PowerPoint on the MX Creative Console. This makes it easier for users to access their favorite Office tasks without navigating through the Ribbon.

* Xbox employees are getting new email addresses. Following the rebranding to Xbox, Microsoft is providing Xbox employees with Xbox email addresses. This new address will replace the existing @microsoft.com format for sending emails, although employees can opt to keep their Microsoft email as the default. This change is part of an effort to strengthen the Xbox identity both internally and externally, as noted in an internal memo. Activision and Bethesda employees already use their own email domains, and this update allows the broader Xbox team to present a similar appearance in communications with partners and developers.

* GitHub quickly addressed a critical vulnerability in under six hours. Despite ongoing reliability concerns, Microsoft engineers managed to fix a critical vulnerability in GitHub last month in less than six hours. Researchers used AI models to identify a flaw in GitHub’s internal infrastructure that could have exposed millions of public and private repositories. The engineering team developed and deployed a fix just over an hour after pinpointing the issue, safeguarding both GitHub.com and GitHub Enterprise Server.

* Microsoft reports declining Xbox revenue amid rising cloud business. In its Q3 2026 fiscal earnings report, Microsoft revealed a downturn in its Xbox gaming division. Xbox hardware revenue dropped by 33 percent, content and services revenue fell by 5 percent, and overall gaming revenue decreased by 7 percent. CEO Satya Nadella reflected on recent leadership changes and a renewed focus on Windows during the earnings call, stating that the company aims to “win back fans across Windows, Xbox, Bing, and Edge.” Sharma acknowledged on social media that “player and revenue growth has not yet met our ambition,” indicating that there’s work to be done to attract players now and in the future. Meanwhile, Microsoft’s cloud business continues to thrive, reporting $54.5 billion in revenue, a 29 percent year-over-year increase. Microsoft 365 Copilot also saw growth, with paid seats rising from 15 million to 20 million in the last quarter.

* GitHub Copilot is transitioning to usage-based billing. Starting in June, all GitHub Copilot plans will shift to usage-based billing. Each plan will include a monthly allocation of GitHub AI Credits, with the option to purchase additional credits. Usage will be calculated based on token consumption, including input, output, and cached tokens, according to GitHub’s chief product officer. This change has sparked controversy as companies are increasingly introducing ads, rate limits, or feature restrictions to encourage more users to pay for AI services.

* Outlook is getting a Copilot upgrade. Microsoft is enhancing its Copilot integration in Outlook to make it more proactive, allowing it to triage emails, reschedule meetings, and more. One of the most notable updates is that Copilot will be able to fully manage your calendar, resolving conflicts and prioritizing meetings—tasks typically handled by executive assistants. However, Copilot will still require prompts to manage calendar tasks effectively.