Microsoft's $650 million Inflection deal could be a ploy to poach AI talent while avoiding FTC trouble

Microsoft is paying AI startup Inflection $650 million, primarily to make Inflection's models available in its Azure cloud service. But the deal looks like a covert takeover.

The strange agreement between the two companies stipulates that Microsoft will hire two of Inflection's co-founders and most of its 70 employees, but will not acquire the company.

The financial details include a $620 million license fee to deploy Inflection models in the Azure cloud, and a $30 million payment to waive legal rights related to the mass hiring of employees.

Inflection will distribute a portion of the royalties to investors. Inflection's CEO and co-founder of Deepmind, Mustafa Suleyman, is joining Microsoft to lead its consumer AI offering.

The licensing fee seems excessive, as Inflection's models can't compete with those of OpenAI, Google, and Anthropic, and Microsoft didn't even buy exclusive rights.

Perhaps Microsoft wanted to bolster its AI team with an acquisition, but it also wanted to avoid further trouble with the FTC and the EU. Microsoft's investment in OpenAI is already under regulatory scrutiny.

Inflection lives on as AI service provider

Inflection AI will continue to operate as an "AI studio" to help other companies train and fine-tune their AI models. The new CEO is former Mozilla executive Sean White. It sounds like Inflection has dropped out of the model race with OpenAI, Anthropic, and others, despite heavy investments.

Just a few days ago, the startup presented its latest language model Inflection 2.5, which scores well in terms of efficiency, but ultimately lags OpenAI and Anthropic and therefore doesn't really have a market. Who wants to use the third or fourth-best language model when GPT-4 and Claude 3 are just good enough for many text tasks?

Inflection AI has raised about $1.5 billion from investors, making it one of the best-funded AI startups, well ahead of EU companies like Aleph Alpha and Mistral, but still behind Anthropic (> $6 billion) and OpenAI (> $10 billion).