Microsoft has long been the elder statesman of tech giants, a reliable cash cow for investors, but not necessarily the source of excitement for innovation or a weather vane for the future of technological development.
But under CEO Satya Nadella’s leadership, and especially in the past 15 months, Microsoft has been able to change that narrative, crossing into a $3 trillion market valuation and surpassing Apple as the world’s most valuable company earlier this year. Fueling this growth is Microsoft’s positioning as a leader in artificial intelligence and Wall Street’s belief that the generative AI Microsoft has invested billions in will be a seismic leap for technology and society.
Casual observers might see Microsoft’s rise as a rapid development, starting with the viral release of OpenAI’s ChatGPT in late 2022, followed by Microsoft’s quick move to invest further billions in the firm (having first invested $1 billion in OpenAI in 2019) and incorporate its tech in the product. But this analysis elides the slow work Nadella—ADWEEK’s Digital & Tech Executive of the Year—has been doing over the years to make generative AI a linchpin of Microsoft’s offering. Plus, the firm has been working on an aggressive acquisition strategy that strengthens its new AI prowess. During the CEO’s decade-long tenure, the company has bought LinkedIn, Xandr and Activision Blizzard.
“The speed at which Microsoft is moving to bring AI throughout the portfolio is kind of incredible,” said Rishi Jaluria, managing director of software equity research at RBC Capital Markets, who covers Microsoft. “This isn’t the situation of a company who made a lucky investment.”
Winning the AI race
For years, investment in AI didn’t meaningfully unseat tech rivals—Microsoft deprecated its AI assistant Cortana after it failed to compete with Siri and Alexa, Jaluria noted.
“Microsoft chose OpenAI to hitch onto, versus saying, ‘We’re going to figure this out ourselves,’” said Jaluria.
Nadella’s skill was not only choosing the right startup but also acting as a good partner during rises and falls. When OpenAI had the world’s attention upon the release of ChatGPT, Microsoft reportedly invested $10 billion, amounting to a 49% stake in the company, and announced plans to incorporate the technology into its Bing search engine.
More critically, when OpenAI’s board ousted CEO Sam Altman in November 2023, Nadella made the right move in corporate chess. After OpenAI’s workers protested the move, Microsoft swiftly hired Altman itself, outflanking the board. While the companies stayed separate, Microsoft got a non-voting board seat and an opportunity to flex its muscle over OpenAI’s future.
Minting hype into dollars?
During Microsoft’s most recent earnings call on Jan. 30 for the quarter ending Dec. 31, 2023, Nadella said GitHub’s revenue increased 40% year over year, driven by GitHub’s AI-powered Copilot tool, which saw a 30% increase in subscribers quarter over quarter. GitHub was the first Microsoft business to meaningfully incorporate OpenAI’s tech, with the Office products following late last year.
On that earnings call, Nadella said one of these tools, Copilot Studio, has already been used by over 10,000 organizations.
Microsoft has also been incorporating AI into its advertising products, including new generative AI tools for marketers on LinkedIn and new formats to accompany its Bing chatbot interface. But the pathway to growth within the advertising sector is less clear.
While Microsoft’s advertising revenues are projected to grow 11.5% to $11 billion in 2024, Microsoft will only make up 3.6% of U.S. ad spend in 2024, while Google and Meta are expected to make up a quarter and a fifth of all U.S. ad spend, respectively, according to Insider Intelligence.
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This story first appeared in the March 12, 2024, issue of Adweek magazine. Click here to subscribe.
