Crypto News: Microsoft’s AI promise

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Hey everyone, it's Matt in Seattle. This was the year Microsoft was supposed to demonstrate that the money to be made selling AI tools to the business world would justify the tremendous expense. As 2024 ends, that goal has moved into the New Year. But first...

Three things you need to know today:

• The US Treasury says it was breached by a Chinese-backed hacker
• Nvidia completed the purchase of Israeli startup Run:ai
• Online ticketing marketplace Vivid Seats is exploring a sale after receiving takeover interest

Time to prove it

Microsoft is perhaps the world's best test case for the utility of generative artificial intelligence in the workplace.

The company has the inside track to the most powerful models from OpenAI, the startup that kicked off this craze in late 2022 with the launch of ChatGPT. Microsoft's products – think Office, Teams, Windows — are ubiquitous. If anybody is in a position to strike gold in them thar hills, it's Microsoft.

The software giant introduced chatbots and other features based on OpenAI's products in 2023, but this past year was set up to show its investments in generative AI — tools that can generate images and text, and deploy elements of human-like reasoning — would pay off.

So, did it? Yes and no.

In the company's most recent quarterly earnings call, executives said Microsoft's AI business would soon hit a pace to produce $10 billion in sales over the course of a full year. That is an enormous sum, and AI would be Microsoft's fastest franchise to reach that mark.

It is a lot smaller, though, when stacked against the $286 billion in revenue analysts expect Microsoft to earn during that full year, or the tens of billions the company has spent in recent years building data centers and fitting them out with the pricey Nvidia Corp. chips that make AI tick.

Analysts, with a few exceptions, are giving Microsoft the benefit of the doubt.

They place much of their hope in Azure, the company's cloud-computing business. Microsoft sells software developers access to OpenAI's models under that umbrella. The startup also sells them directly, though Microsoft, as OpenAI's exclusive cloud-computing partner, reaps some of that revenue when people use ChatGPT to create an original poem about Greek yogurt or solve an algebraic equation.

Microsoft has given investors a rough sense of how that business is shaking out, disclosing the portion of Azure's sales growth that comes from such AI services. That was 12 percentage points of Azure's 33% growth in the three months ended in September.

But arguably more important for investors trying to gauge how AI is faring in the workplace, the $10 billion also includes subscriptions to Microsoft Copilot, the franchise of AI assistants being packaged into virtually every product the company sells. Microsoft hasn't yet given investors firm data on how Copilots are faring.

There's also been a robust debate about how useful the tools are in practice. The cliff notes version, as I found earlier this year: Copilot is a great meeting notetaker, but not yet an Excel wizard. It's also sometimes a setup and compliance headache. (A personal Copilot, relaunched in October with the help of folks Microsoft hired from Inflection AI, is still finding its way.)

Salesforce Chief Executive Officer Marc Benioff, the occasional Microsoft antagonist who has a competing set of AI tools to sell, has compared the whole package to Clippy, Microsoft's ill-fated document advisor of the late 1990s. Microsoft, as it has done all year, has returned fire with a list of anecdotes of blue-chip companies buying Copilot for thousands, or sometimes tens of thousands, of workers.

Microsoft CEO Satya Nadella said in November that AI's impact on knowledge work would ultimately be comparable to the lean manufacturing revolution pioneered by Toyota. Copilot, he said, was "rapidly becoming an organizing layer for work and how work gets done." Moments later, he introduced a tool to help customers assess how the use of Copilot was affecting their business metrics.

UBS analysts reckon M365 Copilot, Microsoft's main corporate assistant, will bring in $4.6 billion during Microsoft's current fiscal year, a "definitive major success" for a product that didn't exist a couple of years back. They estimate about 4% of the online Office user base has bought the assistant.

How much that can grow will depend on the assessment of people like Don Vu, chief data and analytics officer at New York Life Insurance Co. The insurer has deployed Copilot to roughly 1,000 employees this year, starting with a small test that expanded to a variety of functions.

"There's certainly some productivity gains," said Vu, who — like many customers — praised its text and meeting summarization capabilities. It's less clear, he said, how that productivity might translate into a return New York Life can use to justify the expense of the software.

"It still costs a lot of money at scale," he said in an interview. "That's one of the things we've been grappling with the most."

Microsoft might be the biggest business software beneficiary of the AI revolution to date, but it has more work to do in 2025.—Matt Day

Tech Daily will be off New Year's Day, but back on Thursday, Jan. 2.