Of all the debates surrounding the potential downsides of AI, there is one concern that is causing the most excitement among AI enthusiasts in Silicon Valley. They fear that the giant AI labs selling proprietary models are somehow behaving like Trojan horses.
The concern is that startups and companies are using AI models from labs like OpenAI and Anthropic, and the labs are gaining more and more access to these companies’ most sensitive business information. The model makers can then use this knowledge for their own benefit and possibly become competitors to their own customers. Those issuing such warnings range from VCs like Jason Calacanis to Palantir CEO Alex Karp.
Now Microsoft CEO Satya Nadella has joined that flock in a surprise blog post published on Sunday. Nadella warns that AI users (the “buyers,” as he calls them) are paying twice. You knowingly spend money on using AI tokens, but you also unknowingly pass on valuable data in the process.
“Essentially, you pay for intelligence twice, once with money and then again with something even more valuable: the proprietary knowledge you have to disclose to make that intelligence usable. The better you want the model to perform, the more knowledge you have to give it!” he writes.
The most dangerous thing, he argues, is for companies to literally teach models the nuances of their business.
“Models learn from ‘exhaustion,’ the prompts people write, the tools agents use, and especially the corrections people make when the model is wrong. Each correction is distilled into institutional know-how,” he writes.
This is “the kind of knowledge a competitor could never buy,” and yet companies pass it on.
Nadella argues that if AI companies can freely use the internet to train their models, it is only fair that companies be allowed to study or “distill” those models in return. “Distillation” is the practice of using a model’s own results to learn how it works and training a new, often cheaper model based on those findings. In February, Anthropic accused Chinese open source models of sending millions of requests to Claude to improve their own models and called on the US government to crack down on export controls.
Nadella’s argument is that modelers can’t have it both ways. It is hypocritical for them to freely train on the world’s data while preventing others from doing the same with their models.
“While the great innovation coming from model providers with fair use rights to train models on public data is necessary, I find it ironic that the status quo then reverses and imposes restrictive conditions on distillation,” writes Nadella.
Nadella is particularly concerned when modelers “reserve the right to learn from customer usage and interaction data.”
Nadella’s solution is something the CEO of a giant cloud provider would suggest. He wants companies to retain “ownership” of their data, including prompts, feedback, etc. So he urges them to build their own “proprietary learning environments” in the cloud (where their data is probably already stored anyway, and conveniently Microsoft’s cloud could mean Azure). He also wants companies to build in so-called “orchestration layers” — essentially a way to easily switch between AI models from different vendors rather than being locked into a single vendor. Tools such as AI “gateways” that enable companies to do exactly this are becoming increasingly popular.
While Nadella never uses the words “open source” as a method of ownership preservation, this is an obvious subtext. However, there is another subtext.
Large companies, many of which have their own data centers in addition to using the cloud, are already switching to open source models that are installed on their own premises (“on-prem”, in technical jargon). Idit Levine, founder and CEO of Solo.io — which makes networking and security software that helps companies manage AI systems — says she’s seeing this exact shift in her own customers. After experimenting with proprietary model makers, they ask themselves: “Can I take an open source model and run it on-premises? It will do almost 90% of what the big model does. It will cost a lot less,” she tells TechCrunch. “You understand that and you can control it.”
Solo.io’s technology was selected last year as the technology powering the Linux Foundation’s Agentgateway project. Her company counts companies such as T-Mobile, ADP and SAP among its customers. She sees companies increasingly installing on-premise open source models and sees this as the next big wave in the use of AI in companies.
She is not alone. Vercel (known as a website building and hosting platform that recently added tools for switching AI models) and OpenRouter (a company that helps developers route requests across different AI models) are both seeing an increase in traffic to open source models. In fact, open models accounted for 29% of all traffic routed through Vercel’s gateway last month.
With the CEO of Microsoft, a company that has invested in both OpenAI and Anthropic, now openly urging companies to be careful about using proprietary models, we’re betting this trend will continue to grow. “By consuming intelligence, you create intelligence. And what you create should be yours,” writes Nadella.
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https://techcrunch.com/2026/07/13/satya-nadella-has-issued-a-shocking-warning-to-companies-using-ai/
