The Federal Trade Commission (FTC) is an independent agency of the U.S. government tasked with protecting consumers from unfair business practices. It's fresh off a big loss in court against Microsoft (MSFT +0.60%) after trying to block that company's $69 billion acquisition of game developer Activision Blizzard on the basis it would reduce competition.
The FTC is now going after OpenAI, the developer behind the revolutionary artificial intelligence-powered online chatbot, ChatGPT. The agency issued a 20-page letter detailing its concerns about the company's data security practices, and it's also investigating complaints that ChatGPT is harming the reputation of consumers based on information in its responses to users.
Microsoft is OpenAI's largest investor, and ChatGPT is now integrated across much of its product portfolio. Therefore, any penalties or new regulations that hurt the chatbot's accuracy or efficiency could directly harm Microsoft's business. But the FTC's claims might have broader implications for artificial intelligence (AI) stocks on the whole. Here's why.
Image source: Getty Images.
Mishandling of data is the FTC's happy hunting ground
In the online world, data is everywhere. We as consumers share it every time we make a purchase, subscribe to a newsletter, or create a social media profile. We trust companies with our personal information under the assumption they'll use it responsibly, and do their best to protect it from malicious actors.
Over the last few years, the FTC has fined a long list of companies for either misusing their customers' data or misrepresenting their security. For example, Zoom Video Communications paid an $85 million fine in 2021 for claiming its platform was end-to-end encrypted. Twitter was forced to pay $150 million in 2022 for allowing advertisers to access users' personal information. But the biggest FTC fine of all came in 2019, when Meta Platforms -- called Facebook back then -- landed a $5 billion penalty for its role in the Cambridge Analytica scandal, among other privacy-related issues.
Data happens to be the nectar AI relies upon for survival. Most ordinary businesses can train AI models using their own data, because their goal is to improve their operations. But for large language models like ChatGPT, a broader data set is required because they need the ability to answer almost any question a person could possibly pose.
As a result, ChatGPT and its competitors like Alphabet's (GOOG +2.00%) (GOOGL +1.71%) Google Bard wouldn't work without ingesting massive amounts of public and private information. That creates a few challenges that are starting to come to light now.
The FTC has several concerns about OpenAI
Many organizations don't want their data being fed into large language models without their permission. Media and creative companies are especially against it, because generative AI models like ChatGPT can use their work to write articles or create images and videos, which technically blurs the line between originality and plagiarism.
Security and privacy is another concern. Centralizing substantial volumes of data can lead to risks -- if OpenAI suffers a major security breach, an untold amount of consumers' personal information could be released publicly, creating irreparable damage. As a result, the company must adopt stringent security measures. In March, ChatGPT experienced a bug that revealed users' names, email addresses, and even credit card details to other users, which naturally caught the attention of the FTC.
The FTC complaint specifically requests information about any and all known or attempted attacks on OpenAI and ChatGPT, and it also asks for details about how data is stored, as well as the security measures in place. The agency hopes to determine whether OpenAI has engaged in any unfair or deceptive privacy or data security practices that could have ultimately harmed consumers.
Finally, the FTC wants to know what measures OpenAI has taken to protect consumers from reputational harm; there are suggestions ChatGPT could be defaming certain individuals in its responses, which might open its parent company up to a range of civil legal liabilities if that's what the FTC investigation finds.
Here's what this means for ChatGPT and AI stocks
NASDAQ: MSFT
Key Data Points
This is the first major regulatory probe into AI-industry practices, but the FTC is an enforcement agency. It can't make new laws; it can only make recommendations to the U.S. government to help shape future legislation. Nonetheless, if the FTC finds wrongdoing in its current investigation, it will be a shot across the bow to any other companies developing AI models, and it might prompt them to change their behavior.
AI-industry insiders recognize the need for new rules and regulations. A group of experts -- which included Elon Musk -- signed a letter earlier this year calling for a six-month pause on the development of models more powerful than GPT-4, OpenAI's latest creation. That time would allow lawmakers to catch up to the rapid advancements in AI before they spin out of control.
OpenAI CEO Sam Altman himself has met with the leaders of global governments and encouraged them to formulate rules and regulations to ensure the responsible development and deployment of AI software.
But any regulation that governs what data AI developers can and can't use, for example, will almost certainly blunt the accuracy of large language models. It would negatively impact a company like Microsoft, which has integrated ChatGPT into its Bing search engine in an attempt to steal market share from Google. It will succeed or fail quite literally on the accuracy of its model compared to Google Bard, which might have an unfair advantage given the sheer volume of data it has collected over decades as the world's largest internet search engine.
Regulation can also disproportionately hurt much smaller entrants into new industries like AI because they have fewer resources with which to navigate the rules of the road. This could lead to less competition, which is counter to the FTC's goals.
In summary, if the FTC's OpenAI probe leads to new laws that slow the advancement of AI, it will likely cool this hot market down in the short term. But over time, the industry will figure out a way to progress under the new regime, just like every other tech segment has in the past. After all, the social media space is thriving right now, and it's one of the most scrutinized in history.
