During Microsoft‘s meticulously followed hourlong earnings call with analysts on Tuesday, Satya Nadella couldn’t resist boasting about the company’s achievements. Despite the stock being down approximately 4% after hours, Nadella proudly stated that Microsoft holds the top position in selling cloud-based AI services.
While Amazon dominates as the largest provider of cloud infrastructure for running apps and websites with an estimated 40% share (compared to Microsoft’s 20.5%), Microsoft’s prowess in the cloud-based AI services segment is undeniable. This category, although small, is experiencing rapid growth, particularly after the viral success of OpenAI’s ChatGPT chatbot hosted on Azure at the end of 2022.
An expanded artificial intelligence division could significantly bolster Microsoft’s position in the realm of cloud computing. According to Microsoft’s recent announcement, Azure and other cloud services experienced a substantial 26% year-over-year growth, surpassing the progress of all other major product categories, except for the Dynamics 365 cloud-based enterprise software.
Throughout its history, Microsoft has consistently strived for dominance, evident in its longstanding leadership in PC operating systems with Windows and productivity software with Office. Under Nadella’s leadership as CEO since 2014, the company has also continued to manage certain ventures that were not top performers, such as the Bing search engine, Surface PCs, and Azure.
Attracting Entrepreneurs and Expanding Azure’s Reach
However, in recent months, Microsoft has rapidly moved to offer access to OpenAI’s powerful large language models through Azure, targeting both established companies and startups alike. This move has resulted in some entrepreneurs opting for Microsoft’s AI models over those offered by competitors like Amazon, Google, or other startups.
Concurrently, Microsoft is seamlessly integrating these models into its own software, including Bing and Windows. Having invested billions into OpenAI, Microsoft maintains a close relationship with the startup.
The potential revenue Microsoft can generate from Azure AI services that rely on OpenAI’s technologies, as well as the additional revenue from companies using non-AI services in Azure, remains uncertain. However, Nadella expressed optimism about Microsoft’s prospects in these areas.
When discussing Azure’s growth, Nadella highlighted the company’s transformation from being a follower to a robust No. 2 player, particularly excelling in new workloads. For instance, Microsoft is attracting new customers (represented by new logos) who had previously relied on other cloud providers but are now turning to Azure for their AI-related workloads.
Additionally, there are cases of customers who use multiple cloud platforms but are now initiating new projects focused on data and AI with Microsoft Azure, despite previously utilizing other providers for such purposes.
Driving Growth and Innovative Possibilities
The idea of AI predates Microsoft, and the company has been utilizing AI models for other businesses for quite some time. However, the emergence of ChatGPT and image-generation tools like Adobe’s Firefly has sparked renewed fascination with generative AI. This field involves leveraging images or other human inputs to generate entirely new content.
Nadella informed analysts that they should anticipate Microsoft to secure a larger market share and lower customer acquisition costs. He expressed his enthusiasm for these developments, indicating that celebration is in order.
That’s why, as per Nadella, Microsoft has been transparent about the proportion of projected Azure cloud growth attributed to AI in the last two quarters.
During the earnings call, Amy Hood, Microsoft’s finance chief, revealed that in the fiscal first quarter ending on September 30, Azure revenue is expected to grow by 25% to 26% in constant currency, with 2 percentage points coming from AI services. This could potentially result in hundreds of millions of dollars in new Azure AI revenue.
Nadella explained that there are two aspects to consider in relation to AI. Firstly, There is the models themselves, with our partnership with OpenAI. That’s sort of one type of spend on computers. Secondly, there is the revenue-driven aspect, where the company monitors inference costs in relation to revenue and demand. Microsoft is already witnessing the impact of both these components in action.
Conclusion
Microsoft’s strong AI-driven cloud services attract entrepreneurs, while Azure’s 26% YoY growth highlights its rise. OpenAI integration and Nadella’s strategic approach boost prospects, despite a 4% stock dip. Transparent projections show potential revenue gains from Azure AI services, reinforcing Microsoft’s position as a No. 2 player excelling in new workloads.
