The OpenAI-Microsoft Drama Is a Reminder That Profits Are King. Here’s Why.

OpenAI created a for-profit subsidiary in 2019 to raise capital but it is governed by the nonprofit organization—the company calls it a “capped profit” structure.

In announcing Sam Altman’s departure, the OpenAI board reiterated the company’s mission: “To ensure that artificial general intelligence benefits all humanity.”

As the soap opera plays out live on social media, it’s easy to forget there are broader implications for humanity. Those advocating a slowdown in the development of AI so that safety protocols can be established are learning the hard way that money talks.

Wall Street’s view on the matter is entirely predictable—Microsoft stock closed at an all-time high after the company hired Altman Monday. While it’s not implausible that Altman returns to OpenAI, Microsoft CEO Satya Nadella says he is open to both options.

Nadella will just want Altman to get on with the job—whether that’s in-house or with OpenAI, in which it has a 49% stake.

The importance and scale of AI profits are likely to materialize again Tuesday, when Nvidia reports earnings after the market closes. The chip maker has largely driven the AI stock-market rally with a series of blowout quarters this year.

Its third-quarter earnings come at a crucial time for the tech sector and the AI boom. The stock has climbed 245% this year and attention will predictably turn to future profits. It likely needs a stellar outlook to add to those gains.

Either way, Nvidia earnings will likely fuel the AI gold rush—and the argument around profits versus ethics.

—Callum Keown

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Nadella Says Governance Changes Needed

After a weekend of turmoil at OpenAI,
Microsoft
CEO Satya Nadella said oversight of the artificial intelligence developer needs to change. Microsoft has invested billions of dollars in OpenAI, and Nadella just gave its ousted CEO Sam Altman a job. Hundreds of OpenAI employees have threatened to follow him.

• Nadella said in a CNBC interview that Microsoft and OpenAI’s board would have a good dialogue about governance changes. He also said he would be open to Altman returning to OpenAI if he chooses, because the two companies would still be working together.

• Earlier Monday, Nadella said he was looking forward to getting to know OpenAI’s interim CEO Emmett Shear, who said he was starting an investigation into Altman’s firing and would produce a report on it in 30 days.

• Nadella said he hired Altman and OpenAI’s former President Greg Brockman to lead a new advanced AI research team. But reports continued to say investors were trying to get Altman reinstalled at OpenAI. On social media, Altman said: “We are all going to work together some way or other.”

• Microsoft’s stock price jumped on Monday and reached a record high at $377.44. It is up more than 57% so far this year as investor excitement about artificial intelligence boosts the technology sector.

What’s Next:
Nvidia,
which reports earnings later today, is a leading maker of processors that drive AI applications. Adjusted earnings per share are expected to jump 500% for the most recent quarter, and it is expected to be the largest contributor to quarterly profit growth for the entire S&P 500.

—Liz Moyer

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SEC Sues Kraken in Latest Crypto Crackdown

The Securities and Exchange Commission (SEC) sued Kraken on Monday, alleging the cryptocurrency exchange’s core business is illegal and accusing the group of commingling customer and company funds. The brunt of the charges is similar to those the regulator levied against peer Coinbase Global earlier this year.

• The SEC alleged that Kraken operates as an unregistered securities exchange, broker, dealer, and clearing agency, making hundreds of millions of dollars since 2018 by facilitating trade in crypto asset securities. The regulator also alleged that Kraken commingled customer funds with its own, including paying operational expenses directly from accounts that hold client cash.

• In a blog post, Kraken disagreed with the SEC’s allegations and said it would fight the regulator in court, highlighting that the crux of the charges rests on the bigger question of whether digital assets are securities. On the matter of commingling, the group clarified that the SEC “cannot and does not” allege that customer funds are missing. Kraken was contacted for comment.

• Cryptocurrency prices were little moved by the news. Bitcoin has rallied by more than one third since early October, largely propelled by hopes that the SEC will approve the first spot Bitcoin exchange-traded fund (ETF) in a move expected to usher in a fresh wave of investor interest in cryptos.

What’s Next: The latest move by the SEC is a sign that the U.S. regulatory crackdown on crypto continues, even as traders remain optimistic that the agency will soon make the unprecedented decision to approve spot Bitcoin ETFs. Charges against Kraken may underscore risks for those betting on a friendlier SEC.

—Jack Denton

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Citigroup Moves to Next Phase of Global Restructuring Effort

Citigroup
is cutting an undisclosed number of jobs in a global business restructuring, CEO Jane Fraser announced in a memo to employees. It will cut hundreds of mostly senior-level employees, with thousands of lower-level workers expected to lose their jobs in future rounds, The Wall Street Journal reported.

• Fraser ordered subordinates in September to remake their teams for a new alignment. Staff have been speculating that 10% of positions could be cut. Citigroup’s head count has climbed from 201,000 in early 2021, to 240,000 as of September.

• The restructuring aims to eliminate management layers and co-head arrangements. Citi had long operated along a matrix that had overlapping geographical and functional structures, with duplicated leadership.

• Citigroup has been narrowing its global profile. It recently completed the sale of its Indonesia retail banking business, its ninth planned overseas exit. It also noted progress on plans to wind down its consumer businesses in China and Korea, and fully leave Russia.

• Seaport Research analysts said head count reductions could save more than $2.5 billion over the next 12 to 18 months. The bank’s expense run rate could be materially lower than $50 billion by 2025, when Citigroup no longer has to factor in severance and other reorganization costs, Seaport senior analyst Jim Mitchell wrote.

What’s Next: Acknowledging the “difficult, consequential decisions” involved in the latest restructuring, Fraser said the next layers of change will be announced in early 2024, and that final changes will be completed by the end of the first quarter.

—Janet H. Cho and Carleton English

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Senate Subpoenas CEOs of Snap, Discord, X to Testify

Senate Judiciary Committee members sent subpoenas to the CEOs of social media companies
Snap,
Discord, and X (the former Twitter) to get the CEOs to testify at a Dec. 6 hearing about online child sexual exploitation as lawmakers continue to pressure the industry on child safety.

• Committee Chairman Sen. Dick Durbin (D., Ill.) and ranking member Sen. Lindsey Graham (R., S.C.) said in a letter they had to enlist the Marshals Service to subpoena the CEOs of Discord and X after the companies refused to accept service of the subpoenas on behalf of their CEOs.

• The letter said the tech industry has failed to police itself at the expense of children, and that hearing from some of the world’s largest social media companies will help the committee address the crisis.

• Discord told Barron’s that user safety is central to what it does. “We have been actively engaging with the Committee on how we can best contribute to this important industry discussion. We welcome the opportunity to work together as an industry and with the Committee.”

• A Snap representative said CEO Evan Spiegel has already agreed to testify before the committee. “Our team is coordinating with Committee staff on potential dates. We appreciate the opportunity to appear before the Committee to discuss this vital issue.”

What’s Next: The letter said the committee was still in discussion with Instagram and
Facebook
parent
Meta Platforms
and video-sharing platform TikTok and expects their CEOs, Mark Zuckerberg and Shou Zi Chew, to agree to testify voluntarily.

—Janet H. Cho

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Zoom Video Sees Beyond Pandemic With AI Technology, Docs

Zoom Video Communications
is looking beyond the videoconferencing capability that made it a darling of the Covid-19 pandemic era. Better than expected third quarter results were boosted by growth from larger customers, reduced churn by individual users, and more AI offerings.

• For the quarter ended Oct. 31, Zoom’s revenue rose 3.2% from one year ago, to $1.14 billion. Adjusted earnings of $1.29 a share were well ahead of the consensus estimate.

• CEO Eric Yuan said Zoom bolstered its all-in-one collaboration platform with advanced capabilities such as Zoom AI Companion, a generative AI digital assistant launched on Sept. 5. By Oct. 30, it had generated more than one million meeting summaries.

• The number of paying customers that contributed more than $100,000 in revenue over the past 12 months rose around 13.5%. Zoom ended the quarter with around 219,700 business customers, up 5%.

• For the fiscal fourth quarter ending in January, Zoom projects revenue of between $1.125 billion and $1.13 billion, with adjusted profit of $1.13 to $1.15 a share, beating expectations.

What’s Next: Zoom raised its forecast for fiscal year 2024 to revenue of $4.506 billion to $4.511 billion, and adjusted profit of $4.93 to $4.95 a share. Next year, Zoom plans to introduce Zoom Docs, an AI-powered workspace for documentation, project tracking, and management tasks.

—Janet H. Cho

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner