The Pact: Why OpenAI Refuses to Close the Deal

Microsoft has silently emerged as the primary provider of OpenAI models in China, distributing the technology to major internet companies in the country despite OpenAI and Anthropic’s decision to withhold their models from the market due to intellectual property and misuse concerns. This unique arrangement, recently revealed by Bloomberg, gives Microsoft a significant advantage as it sells the GPT series to Chinese firms that the models’ creators refuse to engage with directly.

The extent of this collaboration is substantial. ByteDance has been identified as Microsoft’s largest AI client, heavily relying on OpenAI models and projected to invest over US$1 billion annually in Microsoft’s AI and cloud services, according to sources cited by Bloomberg. Additionally, companies like Ant Group, Meituan, and Tencent also purchase AI models through Azure, with Ant Group claiming to develop its own models and not depend on external systems for its core products.

Internally at Microsoft, the growth in the Chinese market has been celebrated. Azure’s AI revenue in China has seen rapid expansion, tripling in the financial year leading up to June 2025 and experiencing a 400% increase the preceding year, as disclosed by then-chief commercial officer Judson Althoff during a sales meeting in July 2025, as reported by Bloomberg.

Althoff emphasized Microsoft’s role as a bridge between the AI hubs of the US West Coast and China’s east, positioning the company uniquely in the market. President Brad Smith indicated to US lawmakers that the China business accounted for approximately 1.5% of the company’s revenue in 2024.

The exclusivity of Microsoft’s position as the sole intermediary for OpenAI models in China stems from a specific contract with OpenAI, granting Microsoft autonomy in selling GPT models internationally. Both OpenAI and Anthropic have opted not to directly sell into the Chinese market, with Anthropic’s models notably absent from Microsoft’s offerings in China. Consequently, Microsoft acts as the go-between for models that their creators have deemed too risky to distribute in China.

Central to this arrangement is the issue of risk, a persistent concern. Microsoft has faced pressure from OpenAI to prevent Chinese customers from “distilling” its models, a method that involves using one model’s outputs to train another, as reported by Bloomberg. Microsoft asserts that it employs automated monitoring and a policy of selling exclusively to established companies rather than individual developers as safeguards. However, sources suggest that Chinese buyers do not face heightened scrutiny, and policing synthetic data derived from the models poses challenges. To mitigate risks, Microsoft does not host the OpenAI models within China, with customers accessing them via the internet from data centers located elsewhere, including Singapore.

The complexity of the situation becomes more apparent when considering Microsoft’s hosting of other models alongside GPT. For instance, DeepSeek’s R1 was integrated into Azure AI Foundry in January 2025, and Microsoft is currently testing a modified, Azure-hosted version of DeepSeek-V4 for Copilot Cowork, an enterprise agent powered by OpenAI and Anthropic models. This demonstrates Microsoft’s involvement in selling a Chinese model to Western enterprises while also offering American models to Chinese entities, thereby profiting from both ends of the transaction.

The sustainability of this balancing act amidst political pressures remains uncertain. The China business has stirred controversy in Washington, where lawmakers view the country’s AI advancements as a threat to American industries. OpenAI’s objections may intensify over time. Presently, Microsoft holds the exclusive market for OpenAI models in China, standing as the sole beneficiary from both sides of the transaction.

In conclusion, Microsoft’s strategic positioning in the Chinese AI market underscores its unique role as an intermediary for OpenAI models, navigating complex geopolitical and technological landscapes to capitalize on opportunities while managing risks. The dynamic nature of this ecosystem necessitates ongoing vigilance and adaptability to ensure sustained success in a rapidly evolving industry.

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