Microsoft is being investigated in the UK over whether it has effectively merged with an artificial intelligence (AI) start-up firm by hiring its staff.
Key employees at Inflection AI left the company in March to join the tech giant, with co-founder Mustafa Suleyman becoming head of its new AI division.
The Competition and Markets Authority (CMA) said it would investigate whether this constituted a merger, and if so, whether it could lessen competition.
"We are confident that the hiring of talent promotes competition and should not be treated as a merger," a Microsoft spokesperson told the BBC.
The CMA also said Microsoft had entered into a "non-exclusive licensing deal" to use the company's AI models.
The initial probe, also referred to as a phase one inquiry, comes after the CMA called for views on Microsoft's hiring of Inflection staff in April.
Mr Suleyman previously said in a post on X he was "excited" to take up his new position at Microsoft - and would be taking several Inflection colleagues with him.
This included the company's chief scientist and Mr Suleyman's "friend and long time collaborator" Karén Simonyan.
If the CMA finds that there is enough evidence to suggest there has been a "merger" between Microsoft and Inflection that could lessen competition, it will progress to a more in-depth investigation.
It says it will make a decision on whether the transaction should be cleared or investigated further by 11 September.
Generative AI
Inflection AI specialises in so-called generative AI - where media such as text and images can be created by computers trained on vast libraries of existing data.
The hype around the tech and the language models underpinning it has spurred several big deals between tech giants and smaller developers.
Chief among them is Microsoft's multi-billion dollar backing of OpenAI, which enabled it to bring popular chatbot ChatGPT to its search engine Bing.
Other firms, including Google and Meta, have likewise embedded generative AI products such as chatbots and image generators across their services to try and capitalise on investor and consumer interest in the technology.
And the reliance of tech firms on powerful hardware to provide these buzzy, energy-intensive services has seen firms like Nvidia soar to new heights of market value and prominence.
The CMA previously hinted at its "real concerns" over big tech's AI dominance and the risk of larger firms leveraging their resourced to control access to AI hardware and products in April.
Its chief executive Sarah Cardell said in a speech the watchdog had identified an "interconnected web" of AI partnerships involving Google, Apple, Microsoft, Meta and Amazon.
"Without fair, open, and effective competition and strong consumer protection, underpinned by these principles, we see a real risk that the full potential of organisations or individuals to use AI to innovate and disrupt will not be realised, nor its benefits shared widely across society," she said.
