OpenAI taps Google in unprecedented cloud deal despite AI rivalry, sources say: Reuters

OpenAI has finalized a deal to add Google Cloud services to its infrastructure, diversifying its computing resources beyond Microsoft Azure amid surging demand and an annualized revenue run rate of $10 billion. The agreement, finalized in May after months of discussion, underscores the massive computing demands of AI and reflects OpenAI's efforts to reduce reliance on Microsoft, its primary backer. Alphabet's stock rose 2.1% on the news, which Scotiabank analysts view as a significant win for Google's cloud unit, though concerns persist regarding ChatGPT's potential threat to Google's search dominance.

Analysis

OpenAI is diversifying its computing infrastructure by finalizing a deal to utilize Google Cloud services, a move finalized in May, signaling a strategic shift beyond its primary backer Microsoft Azure. This collaboration, occurring despite direct competition between OpenAI's ChatGPT and Google's core search business, underscores the colossal compute requirements for training and deploying advanced AI models, which have propelled OpenAI's annualized revenue run rate to $10 billion as of June. For Alphabet, whose stock rose 2.1% on the news, this agreement represents a significant win for its Google Cloud unit, which contributed $43 billion (12% of Alphabet's 2024 revenue) and aims to be a neutral compute provider, leveraging its proprietary TPUs to attract major clients including Apple and AI startups. However, this also intensifies the "coopetition" dynamic, as Google Cloud will now support a major competitor to its search and AI (DeepMind) offerings, further complicating CEO Sundar Pichai's resource allocation amidst existing cloud capacity constraints reported by CFO Anat Ashkenazi and substantial AI-related capital expenditures projected at $75 billion this year. Microsoft, whose shares dipped 0.6%, faces increased competition for OpenAI's business and is reportedly renegotiating its investment terms with the AI firm. OpenAI's strategy also includes the Stargate data center project, partnerships with Oracle and CoreWeave, and in-house chip development, all aimed at securing vast computational resources and reducing single-provider dependency. Scotiabank analysts view the Google deal as "somewhat surprising," highlighting growth for Google Cloud but also continued concerns over ChatGPT's threat to Google's search dominance.

Key Decisions for Investors

• Investors in Alphabet (GOOGL) should assess the growth potential for Google Cloud against the backdrop of heightened competition in AI and search, and closely monitor the company's ability to manage its significant AI capital expenditures and existing compute capacity constraints.
• For Microsoft (MSFT) investors, the key consideration is the evolving relationship with OpenAI, including the impact of compute diversification on Azure's growth and the outcome of negotiations regarding Microsoft's future equity stake.
• Participants in the broader AI sector should recognize the escalating demand for specialized computing infrastructure as a critical investment driver, while also factoring in the complex competitive and collaborative relationships forming between major technology players.