Written by 9:56 am AI, Discussions

‘Microsoft is back.’ How AI put the five decade old tech giant on top again

The tech giant is back on top, after years of ups and downs, thanks to AI.

SAN FRANCISCO — In the early 2010s, conversations among Microsoft’s top executives had become bleak. The smartphone revolution was in full swing, and Google and Apple were charging ahead, while Microsoft’s efforts to build a mobile business were floundering.

Employees were leaving the company in droves to go work at competitors, and Microsoft had trouble recruiting from colleges.

“Are we at risk of becoming irrelevant?” was the question hanging over the company, said Sivaramakrishnan Somasegar, an investor at Madrona Venture Group in Seattle, who at the time was a senior Microsoft executive.

How times have changed.

On Tuesday, Microsoft reported its fifth consecutive quarter of record revenue, booking $62 billion in sales, and just last week its market capitalization — the total value of all of its shares put together — surpassed $3 trillion, making it the most valuable company in the world.

It has even leapfrogged Apple, which has long held onto the crown of biggest tech giant in the world, churning out sleek iPhones and finding new ways to charge its customers monthly subscriptions for services. Microsoft CEO Satya Nadella is considered one of the most powerful leaders of the artificial intelligence boom. Start-ups and big companies alike are flocking to Microsoft, paying for access to its AI tools, even if they don’t always work like they’re supposed to. On Tuesday, the company forecast that profits would continue increasing as customers kept installing its AI products in the coming year.

With a huge budget to spend on AI, a close relationship with ChatGPT maker OpenAI and hundreds of millions of people who use its software every day, Microsoft is already wielding huge power over how AI gets built and how people will interact with it in the future.

No one is asking if the company is irrelevant today, Somasegar said. “That is absolutely not an issue for Microsoft.”

Microsoft might have failed to anticipate the shift to mobile phones 15 years ago. It didn’t make the same mistake with the current wave of excitement and investment in AI.

In 2019, it invested $1 billion in a nonprofit AI start-up dedicated to the quixotic cause of inventing human-level AI called OpenAI. When the start-up launched the ChatGPT AI chatbot in late 2022, Microsoft was best positioned among the big tech companies to ride the ensuing wave of hype.

The company quickly doubled down, investing billions more in OpenAI in return for the right to put its AI into Microsoft’s own tools. Since then, Nadella has been working to stuff AI into as many of Microsoft’s products as he can, from cybersecurity software, to its Bing search engine and even Microsoft Word.

“Microsoft got to this megatrend first,” said Gil Luria, senior software analyst at D.A. Davidson Co. “That started really paying off last year.”

Even though Google’s researchers came up with many of the underlying breakthroughs that enable tech like ChatGPT, OpenAI moved faster to turn it into working products and push those out to consumers. Microsoft’s close partnership with OpenAI and its existing connections to tens of thousands of small, medium and large businesses put it in a good position to capture the interest from the corporate world in AI, Somasegar said.

“We’ve moved from talking about AI to applying AI,” Nadella said on a Tuesday conference call after the company reported earnings. The company made $21.9 billion in profit in the final quarter of 2023, a 33 percent increase from a year earlier.

“This was another masterpiece quarter and guidance from Nadella that will send a major ripple impact across the tech world tomorrow as the AI revolution is here,” said Dan Ives, an analyst at Wedbush Securities.

To industry observers and Microsoft insiders alike, the company of today is almost unrecognizable from what it was 10 years ago. The behemoth founded by Bill Gates and Paul Allen in 1975 won dominance of the computer world in the 1980s and 1990s with its Windows operating system. When the internet exploded, it tried to use its advantage to secure similar control over the web but was stymied by a massive Justice Department lawsuit alleging the company was breaking competition law.

Microsoft survived the lawsuit only to see a scrappy tech start-up from Silicon Valley known as Google skyrocket into becoming the dominant portal to the internet. Other, younger companies like Amazon and Facebook were moving faster, hiring the smartest college grads and building the future while Microsoft lagged along.

It was still a giant thanks to the hundreds of millions of PCs still running Windows and Microsoft Office’s grip on white-collar life, but as Apple’s MacBooks became popular with a new generation of young people and cloud-delivered software like Google Docs took off, Microsoft’s very survival came under question.

“They had missed the shift to mobile,” Luria, who has been analyzing public tech companies since the early 2000s, said. The company was still insular, blocking its tools from being used on other companies’ operating systems and computers.

Nadella, who had risen the ranks since joining in 1992, took over the company in 2014 right as those big questions about Microsoft’s future were circulating. He laid off thousands of workers and shuttered work on the company’s “Windows Phone” operating system, meant to compete with Apple’s iOS and Google’s Android. He told employees the company would need to be more open and struck a deal to get Microsoft Office tools onto Apple’s iPads.

“When Satya came on board, the first public announcement he made was to announce to the world that Office is going to come to other mobile platforms” Somasegar said. “That broke a lot of shackles on what people inside Microsoft thought they could do.”

The company invested heavily in the next big trend: cloud computing. Leaning on its existing business relationships, it expanded its “Azure” cloud business. Today, it’s the second-largest in the world after Amazon’s cloud business and is the company’s biggest revenue source. The company also made several major acquisitions such as coding platform GitHub and social media platform LinkedIn to expand its customer base.

And in an ironic twist, the company has avoided much of the regulatory scrutiny that its fellow Big Tech companies have faced over the past several years. Repeated government investigations, congressional hearings and multibillion-dollar fines from the European Union have struck Google, Amazon, Meta and Apple. But Microsoft has, at least until very recently, largely avoided the same attention.

“Microsoft had to deal with that type of regulatory scrutiny so much throughout its existence,” Luria said. While its competitors were dealing with government attention for the first time, Microsoft was prepared, building its “business practices around how not to trip that regulatory wire,” he said.

That’s beginning to change as regulators wake up to the fact that Microsoft is truly one of the most powerful companies in the world. The company was able to buy video game giant Activision Blizzard, but only after fighting over the terms with regulators in multiple countries for two years. And the Federal Trade Commission is now investigating Microsoft’s deal with OpenAI.

But the days of Microsoft being an afterthought in the tech world are over. Somasegar remembers the late 2000s and early 2010s when the company would struggle to persuade new grads to join it rather than go to Google, Amazon or Facebook.

“At some point in time we were getting a run for our money from all these companies,” he said. Today, college kids see the company as a potential place to get in on the AI arms race. “Microsoft is back.”

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Tags: , Last modified: April 19, 2024
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