Nadella calls out AI labs like OpenAI and Anthropic for banning distillation while training on everyone else's data

Microsoft CEO Satya Nadella calls out AI labs for banning distillation. Distillation is the process where smaller models learn from the outputs of larger ones. Providers like OpenAI and Anthropic ban the practice in their terms of service, targeting mainly Chinese AI companies. In a post on his blog, Microsoft CEO Satya Nadella now calls it "ironic" that these same providers train on public data supposedly under fair use, ban distillation, and learn from customer interactions. The result, Nadella says, is that economic value concentrates with the infrastructure operators instead of the companies that actually generate the knowledge.

In consuming intelligence, you are creating intelligence.

Satya Nadella

Nadella calls this the "reverse information paradox." Companies pay for AI twice. First with money, then with what he calls the "exhaust," meaning the corrections, ratings, and usage data from interactions with AI systems that reveal internal company knowledge. AI providers can learn from all of this and potentially build competing products. Nadella, of course, happens to have just the infrastructure to offer companies that want to control their own learning loop.