#089 SATURDAY SPECIAL - Microsoft and OpenAI: A $3 Trillion Success Story in Artificial Intelligence
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AI BYTE #1 📢: Microsoft and OpenAI: A $3 Trillion Success Story in Artificial Intelligence
⭐ Microsoft has achieved a remarkable feat: it has become the second company ever to end the trading day valued at more than $3 trillion, a milestone reflecting investor optimism that one of the oldest tech companies is leading an AI revolution.
In the past decade, Microsoft’s success has come from smart bets by Chief Executive Satya Nadella. One of his biggest gambles in recent years has been partnering with an untested nonprofit startup—generative AI pioneer OpenAI—and quickly folding its technology into Microsoft’s bestselling products.
That move made Microsoft a de facto leader in a burgeoning AI field many believe will retool the tech industry.
OpenAI is the creator of ChatGPT, a chatbot that uses so-called “Large Language Models” to write poems, craft emails and generate computer code. Microsoft is the largest investor in OpenAI.
In multiple rounds over the past five years, it has agreed to invest $13 billion in OpenAI in exchange for what is essentially a 49% stake in the earnings of its for-profit arm. The relationship has also given Microsoft early access to OpenAI’s latest models, which are trained and hosted on the company’s cloud computing service, Azure.
Microsoft’s aggressive adoption and expansion of the technology have helped it leapfrog rivals in investors’ minds. Since Microsoft’s multibillion-dollar investment in OpenAI in January 2023, the stock has gained nearly 70%, adding more than $1.2 trillion to Microsoft’s market value.
Nadella has forged a close relationship with OpenAI’s CEO Sam Altman and incorporated his startup’s technology into top Microsoft products. Investors have been bullish on the prospect that these AI tools—including an assistant Copilot that plugs into key Microsoft software like Word, Outlook and Teams—will become a major new revenue stream for the company.
The AI boom unofficially kicked off in November 2022 with the release of ChatGPT, which has since spawned a wave of innovation and competition in the field of generative AI. Companies like Google, Amazon, Meta and Nvidia have all launched their own versions of large language models, hoping to capture a share of the lucrative market.
But Microsoft has a clear edge over its competitors, thanks to its exclusive cloud provider deal with OpenAI. As OpenAI’s models grow larger and more complex, they require more computing power and storage, which Azure can provide at scale and speed. Azure also offers a range of AI services and tools for developers and customers who want to build and deploy their own AI applications.
The AI hype has boosted stocks across the tech sector, but Microsoft has ridden the wave better than the rest. In 2023, Microsoft’s stock rose more than 55%, outpacing the Nasdaq Composite Index, which rose less than 45%.
Some investors worry there could be a bubble forming around the soaring prices of AI-driven stocks. It is still unclear how much new revenue the AI boom will add to any of the companies. Even for some of the biggest beneficiaries, it could take years before enterprises and individuals embrace AI tools at the scale the technology’s biggest proponents expect.
Microsoft’s recent success is the latest capper for one of the oldest companies in tech that has ridden its tight ties with corporate customers to thrive through multiple waves of technological change.
Started in 1975, Microsoft has navigated the evolution from personal computers to the internet to mobile devices—some shifts better than others. Through it all, its operating systems are still in most of the world’s computers, and its workplace software remains a stalwart in companies across the globe.
In recent years, as some tech companies have struggled with slowdowns, Microsoft has found ways to boost revenue. Its core businesses have generated enough cash to allow it to become one of the most acquisitive companies in tech.
Not long ago, the Redmond, Wash., company was considered the stodgy old uncle of technology, not on par with the leading names in the industry. Despite its size, it was left out of the FAANG acronym some investors once used to describe what were considered the most dynamic names in tech: Facebook, Amazon, Apple, Netflix and Google.
“There was a time when Microsoft was not part of FAANG and now Microsoft is absolutely in the magnificent seven,” said Soma Somasegar, a venture capitalist with Madrona Ventures and a former Microsoft executive.
The magnificent seven refers to the leaders in tech today: Google parent Alphabet, Amazon.com, Apple, Meta Platforms, Nvidia, Tesla and Microsoft.
Nadella, who is nearly a decade into the CEO job, has rapidly led the company across trillion-dollar valuation landmarks. It crossed the $1 trillion market capitalization mark in 2019 and $2 trillion two years later.
Under Nadella, Microsoft’s Azure cloud service has become the main engine of its growth, and the company’s stock rises and falls based on how well the division does. Today, it is the second-largest player in the sector behind Amazon’s Web Services.
The AI boom is expected to accelerate growth at Azure. Last quarter, customer spending on Microsoft’s AI services was responsible for 3 percentage points of Azure’s revenue growth.
But not all is shiny and glamorous for Microsoft. The company is facing a FTC investigation for its relation with OpenAI, along with Google, Amazon, and their relation with AI startups that they have invested in.
The U.S. Federal Trade Commission said it had ordered the companies to provide information on recent investments and partnerships involving Gen AI companies and cloud service providers.
The FTC is concerned that these deals could harm competition and innovation in the AI sector, as well as raise privacy and security risks for consumers. The FTC also wants to examine the potential impact of these deals on the labor market, especially for AI researchers and engineers.
Microsoft has defended its partnership with OpenAI, saying that it is aligned with its mission to responsibly advance cutting-edge AI research and democratize AI as a new technology platform. It also said that it is committed to complying with the FTC’s inquiry and providing the information requested3.