Sam Altman is a co-founder of OpenAI, an artificial intelligence (AI) start-up that took the world by storm thanks to the screaming success of ChatGPT. Tech giant Microsoft (MSFT -0.51%) was quick to invest a reported $10 billion in OpenAI in January, forming a strategic partnership and elevating Altman to his status as the top dog in AI.

Fellow tech giant Amazon (AMZN -0.66%) might have missed the boat on OpenAI, but it's making a bet of its own. On Sept. 25, the company announced that it was investing up to $4 billion in AI start-up Anthropic, led by up-and-coming AI power duo Dario and Daniela Amodei.

It's an AI arms race

Consumer-facing AI product ChatGPT is built using AI models from OpenAI. When Microsoft partnered with the start-up, part of the deal was to bring these models to its cloud-computing platform Azure. And the integration of these AI models has been a huge success.

During September's Goldman Sachs Communacopia Technology Conference, Microsoft CFO Amy Hood shared that Azure OpenAI services already had 11,000 customers. For perspective, the company's partnership with OpenAI was only expanded back in January.

Turning to Amazon, the company's cloud-computing platform Amazon Web Services (AWS) grew 14% year over year in the first half of 2023, which was faster than its e-commerce operations. Moreover, AWS has accounted for 84% of the company's operating income so far this year.

In short, AWS is an indispensable part of Amazon's business. Therefore, it can't afford to fall behind in AI because it can't risk losing business to a cloud competitor like Microsoft's Azure.

To mitigate the risk, Amazon is choosing to work with Anthropic. And it's not the first tech giant to do so.

What is Anthropic?

As reported by Time, Anthropic's seven co-founders all previously worked for OpenAI, including CEO Dario Amodei and his sister Daniela, who serves as president. As evidenced by Altman's testimony to U.S. Congress earlier this year, AI safety and regulation are issues on everyone's minds as the technology advances. And this emphasis on AI safety is what led Dario and Daniela to help start Anthropic.

Anthropic develops AI models much like OpenAI. But it has certain protocols in place to prevent what it's identified as "catastrophic" risks, including a terrorist using AI for dangerous purposes.

Perhaps because of its emphasis on safety, Anthropic has attracted several household names as investors, including Zoom Video Communications, Salesforce, Alphabet (GOOG -1.16%) (GOOGL -1.11%), and now Amazon.

Technically, it wasn't Alphabet, but rather its subsidiary Google that invested $300 million in Anthropic late last year. A report from the Financial Times said that Google acquired a 10% ownership stake in the AI start-up at the time. Shortly thereafter, the two announced that Google Cloud was Anthropic's preferred cloud provider.

Now that Amazon is investing up to $4 billion, it too will get a minority stake in Anthropic (the press release didn't identify a percentage). However, in an apparent shift away from Google Cloud, Anthropic says that AWS will now be its primary cloud provider.

Amazon will provide Anthropic with cloud-computing services through AWS and supply it with its specialized AI hardware Trainium and Inferentia. The two companies are hoping to push generative AI capabilities forward. And that's why Anthropic is also working with Amazon's generative AI service Bedrock.

Investors should keep a close eye

On one hand, it's exciting to see Amazon finally make a bigger splash in the AI pool. On the other hand, there are still unanswered questions regarding its partnership with Anthropic. For starters, both Google and Amazon have ownership stakes in Anthropic now. Therefore, it's fair to wonder how much of Anthropic's upside will be shared by the two companies. 

Additionally, Amazon's market capitalization may be $1.35 trillion as of this writing, but $4 billion is still a lot of money. Consider that the company's free cash flow, while on the rise, is only $7.9 billion in the last 12 months. A $4 billion investment is over half of that. Therefore, it's consequential, and shareholders will need to see some return on that investment.

Finally, I believe it's fair to wonder if the buzz surrounding generative AI has already passed its peak. Traffic for ChatGPT is reportedly starting to drop, and Microsoft is rumored to be cutting back on hardware orders for building AI infrastructure. Would Amazon get a bigger stake in Anthropic by simply waiting for the buzz to cool a little more?

Overall, I do believe it's important for Amazon to stay at the front of technological advancements, including AI. And its partnership with Anthropic will likely help it do that. But shareholders should keep watching how everything unfolds before taking a resounding victory lap.