Microsoft’s Acquisition of Inflection AI: What the CMA Found and What It Means

The UK’s Competition and Markets Authority (CMA) has completed its investigation into Microsoft’s acquisition of assets from Inflection AI, Inc.

The CMA determined that while this deal falls under its merger control jurisdiction, it does not pose a significant threat to competition in the UK market. The main concern was whether this acquisition might reduce competition, particularly in consumer chatbots and foundation models (FMs).

What Happened?

On March 19, 2024, Microsoft announced that it had hired almost all of Inflection AI’s team, including its co-founders, Mustafa Suleyman and Karén Simonyan. Alongside this, Microsoft also made several agreements with Inflection AI, including a non-exclusive license to use its intellectual property. Together, these actions were referred to as the “Transaction” by the CMA.

Microsoft is a global leader in technology, heavily involved in artificial intelligence (AI), including developing foundation models and AI applications like chatbots. Inflection AI, before the acquisition, was also working on similar AI projects, including its chatbot called Pi. Due to these overlapping activities, the CMA reviewed the merger to ensure it wouldn’t remove a significant competitor from the market.

Why Did the CMA Get Involved?

The CMA’s main job is to protect competition for the benefit of consumers. It investigates mergers that might reduce competition. In this case, the CMA decided that the Microsoft-Inflection AI deal created what they call a “relevant merger situation,” which they needed to examine more closely. They based this decision on three key points:

1. Combining Businesses: The CMA found that Microsoft acquired enough of Inflection AI’s assets, including its key team members, to be considered a business acquisition. This is crucial because these assets, especially the team’s expertise, are vital for developing FMs and chatbots.
2. Market Share: The CMA determined that the combined share of Microsoft and Inflection AI in the UK chatbot market was over 25%, meeting the threshold for further scrutiny.
3. Timing: The CMA made its decision within the legal deadline, which confirmed its authority to review the transaction.

How Might This Affect Competition?

The CMA focused on two main areas: consumer chatbots and foundation models.

1. Consumer Chatbots: The CMA looked at whether the deal would reduce competition by removing a close competitor. They found that Inflection AI had only a small share of the UK market and was not seen as a major competitor to Microsoft’s chatbots, such as Copilot and ChatGPT. While Inflection’s products emphasized emotional intelligence (EQ), this was not enough to significantly challenge Microsoft or other players in the market.
2. Foundation Models: Similarly, the CMA found that Inflection AI’s foundation model offerings were still in the early stages and did not pose a serious competitive threat to Microsoft or other established FM providers. Inflection’s plans to use its FM capabilities for enterprise customers were just beginning and didn’t have enough momentum to compete effectively.

What’s Next?

The CMA concluded that Microsoft’s acquisition of Inflection AI’s assets does not significantly reduce competition in the UK. Therefore, the transaction will not be referred for further investigation. Joel Bamford, the CMA’s executive director, stated that while the deal qualifies as a merger under UK law, it is unlikely to have a major impact on the consumer chatbot market.

This decision closes the CMA’s investigation, allowing Microsoft to move forward with integrating Inflection AI’s assets into its broader AI strategy. The findings highlight the CMA’s careful approach to balancing innovation with maintaining a competitive market.