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UPDATE 7-Microsoft, OpenAI tie-up draws UK antitrust regulator scrutiny

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UK regulator to look at whether Microsoft/OpenAI deal harms competition

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Microsoft says to work with the CMA in its review

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Expert says other regulators should follow

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Move comes as rapid advances in AI use

(Updates with report on the U.S. FTC's preliminary inquiries in paragraph 13)

By Muvija M and Chavi Mehta

LONDON, Dec 8 (Reuters) - Britain's antitrust regulator said on Friday it will review whether to launch a merger probe of Microsoft's multi-billion dollar partnership with ChatGPT maker OpenAI, weighing in on the U.S. software giant's tie-ups for a second time this year.

The move comes after a November announcement that Microsoft , which has committed to invest over $10 billion into OpenAI, will take a non-voting position on the board. That followed a tumultuous boardroom battle which saw the sudden ouster and return of OpenAI CEO and founder Sam Altman.

"There have recently been a number of developments in the governance of OpenAI, some of which involved Microsoft," the Competition and Markets Authority (CMA) said on Friday.

Consequently, its review will consider whether the OpenAI tie-up has resulted in a merger situation, and if it could hurt UK competition, the CMA said.

Microsoft owns 49% of the for-profit operating company, according to sources familiar with the matter. OpenAI has a non-profit parent which owns 2%, those sources said.

The speed at which the use of AI technology is growing is unrivalled in economic history, while advances in powerful foundation models, such as the one underpinning ChatGPT mean that this is a pivotal moment in the development of this transformative technology, the CMA said.

"The only thing that has changed is that Microsoft will now have a non-voting observer on OpenAI's board, which is very different from an acquisition such as Google's purchase of DeepMind in the UK," said Microsoft vice-chair and president Brad Smith in a statement, taking a swipe at its main rival.

He said the company will work closely with the CMA. OpenAI did not immediately respond to a request for comment.

The observer position means Microsoft's representative can attend OpenAI's board meetings and access confidential information, but it does not have voting rights on matters including electing or choosing directors.

MOVE QUICKLY

Max von Thun, Europe director at Open Markets Institute, a non-profit organisation focused on strengthening antitrust law, said other regulators could follow the CMA given the growing concentration in AI.

"It is essential that antitrust authorities move quickly to investigate these deals, including unwinding them if necessary, to preserve competition and prevent this critical emerging technology from being monopolised.

European Union antitrust regulators said they have been following "very closely the situation of control" at OpenAI, including recent management changes as well as Microsoft's investment in the company and its role on the AI firm's board.

The U.S. Federal Trade Commission (FTC) is examining the nature of Microsoft's investment in OpenAI, and whether it may violate antitrust laws, Bloomberg News reported on Friday, citing a person familiar with the matter.

The two companies and the FTC, which had declined to comment on the CMA's move, did not immediately respond to requests for comment on the report.

A range of transactions and arrangements may constitute a relevant merger situation, including, for example, the acquisition of a minority shareholding or, in some circumstances, commercial arrangements such as outsourcing arrangements, the CMA said.

The CMA will review whether the partnership has resulted in an acquisition of control. That refers to one party having material influence, de facto control or more than 50% of the voting rights over another entity or change in the nature of control by one entity over another.

The CMA will need to find evidence that the recent fall-out from the Altman affair has led to material changes in the governance of Open AI and Microsoft's influence over its affairs, said Alex Haffner, competition lawyer and partner at Fladgate.

Even if it doesn't pursue a full probe, the preliminary investigation will better inform the CMA's broader oversight of the fast-developing AI sector, he said.

On Friday, the CMA kickstarted its review with an invitation to interested parties like Google to comment by Jan. 3 2024.

The regulator, which has made global headlines with a combative approach since Britain's departure from the European Union, blocked Microsoft's $69 billion acquisition of Activision Blizzard, the "Call of Duty" video game maker, earlier in the year to the fury of the two U.S. companies.

It later changed its mind after Microsoft amended its acquisition plan. (Reporting by Muvija M and Sarah Young in London and Chavi Mehta in Bangalore; Additional reporting by Martin Coulter in London and Foo Yun Chee in Brussels; Writing by Josephine Mason; Editing by Kylie MacLellan, Kate Holton, Elaine Hardcastle and David Evans)

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