Microsoft Had an Early AI Lead. Can It Stay Ahead in 2025?

Summary

WSJ Tech News Briefing: Microsoft Had an Early AI Lead. Can It Stay Ahead in 2025?
Release Date: December 26, 2024

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Introduction

In the December 26, 2024, episode of WSJ Tech News Briefing, host Bell Lin delves into Microsoft's standing in the rapidly evolving artificial intelligence (AI) landscape. With early investments in AI, particularly through partnerships with OpenAI, Microsoft faces both opportunities and challenges as it strives to maintain its leadership position by 2025. Joining the discussion is Wall Street Journal tech reporter Tom Doton, who provides in-depth analysis on Microsoft's AI ventures, competitive dynamics, regulatory hurdles, and strategic business areas.

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Microsoft's AI Position and Future Prospects

Early Leadership and Current Performance

Microsoft emerged as a frontrunner in the AI race, largely owing to its substantial investment in OpenAI and the development of AI-driven products like Copilot. However, Tom Doton highlights that Microsoft's AI offerings have yet to fully demonstrate their potential:

"There are a lot of products they have on the marketplace, specifically Copilot... have had like middling to low middling success and investors have been okay with that because it's early" (01:21).

Despite the initial enthusiasm, the pressure is mounting for Microsoft to showcase tangible results and broader adoption of its AI tools. The success of products like Copilot—integrated into applications such as Word and Excel—and the AI-enhanced Bing search engine will be critical in validating Microsoft's AI strategy.

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Relationship with OpenAI: Collaboration and Competition

Strategic Partnership Dynamics

Microsoft's collaboration with OpenAI has been pivotal, providing foundational models that power Microsoft's AI initiatives. However, this relationship is nuanced, as both companies navigate collaboration and competition:

"Microsoft is in this dramatic intrigue right now when it comes to their AI providers... they've also been building up this team internally that is supposed to at some levels compete with OpenAI" (01:21).

Doton observes that while Microsoft remains OpenAI's biggest backer, contributing approximately $750 million in the latest funding round, the competitive tension persists:

"OpenAI is very publicly trying to remain on good terms with Microsoft... they have been building up this team internally that is supposed to at some levels compete with OpenAI" (03:42).

The interplay between cooperation and rivalry will continue to shape the trajectory of both companies as they innovate in the AI space.

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Outlook for Microsoft's Copilot AI Assistant

Adoption and Market Penetration

Copilot, Microsoft's flagship AI assistant, promises to transform workplace productivity. However, its real-world impact remains under scrutiny:

"Copilot as a tool has been on the market for over a year now... they have a huge sales team and that's like the game" (04:38).

Doton suggests that while Copilot offers valuable functionalities, its adoption is incremental, appealing to a specific segment of users. Microsoft's extensive bundling strategies and robust sales force are key factors in driving adoption, but widespread success hinges on demonstrating clear value to businesses and consumers alike.

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Microsoft's Video Game Business: The Activision Blizzard Acquisition

Strategic Asset vs. Immediate Impact

Microsoft's acquisition of Activision Blizzard aimed to bolster its presence in the gaming industry, particularly with popular franchises like Call of Duty. However, the merger's immediate financial impact appears muted:

"Activision... has not been that transformative to Microsoft. They would rather have the asset than not" (05:27).

Despite significant attention and regulatory hurdles, the stock's minimal movement post-acquisition indicates that gaming remains a secondary priority compared to AI. Investors are more focused on Microsoft's AI endeavors, relegating video gaming to a supportive role within the broader corporate strategy.

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Antitrust Challenges and Regulatory Scrutiny

Legal Battles and Market Practices

Microsoft faces antitrust lawsuits both in the United States and the United Kingdom, challenging its business practices in cloud software sales. In the UK, the company is embroiled in a $1.27 billion dispute over allegedly favoring its own cloud services over competitors':

"The stuff in the UK they're paying a lot of attention to that because the UK and Europe... tends to set a lot of the trends when it comes to antitrust" (07:11).

Doton explains that Microsoft's proactive efforts to appease European regulators—such as committing to expanding cloud infrastructure and job creation—are ongoing strategies to mitigate regulatory backlash. However, the effectiveness of these measures remains uncertain.

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Impact of the Incoming Trump Administration

Potential Shifts in Regulatory Approach

The transition to a Trump administration introduces variables into Microsoft's regulatory landscape. Speculation surrounds how the administration will handle ongoing and future antitrust cases:

"Everyone in Silicon Valley is waiting to see what the approach from the Trump administration is going to be towards the tech industry" (08:00).

A notable factor is Elon Musk's involvement as an advisor, given his history with OpenAI and recent legal actions against the company. These developments could influence the administration's stance and, consequently, Microsoft's regulatory challenges.

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Key Watchpoints Moving into 2025

Customer Adoption and Partnership Dynamics

Looking ahead, Doton emphasizes two critical areas for Microsoft's AI strategy:

1. Customer Subscription and Revenue Growth:

   "Whether they can get enough customers to businesses to sign up for these things is super relevant" (08:52).

   The success of Microsoft's AI products, particularly Copilot, will be measured by subscription numbers and revenue generation, serving as a barometer for the overall effectiveness of their AI investments.

2. Evolving Relationship with OpenAI:

   "And then the other thing is OpenAI and how that dynamic and relationship plays out" (08:52).

   The balance between collaboration and competition with OpenAI will significantly impact Microsoft's ability to innovate and maintain its AI leadership.

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Conclusion

As Microsoft navigates the complex terrain of AI innovation, regulatory scrutiny, and competitive partnerships, the company's ability to sustain its early lead in artificial intelligence remains contingent on several factors. Effective adoption of AI tools like Copilot, strategic maneuvering in its relationship with OpenAI, and adept handling of antitrust challenges will be pivotal. As we approach 2025, stakeholders will keenly observe Microsoft's strategies and performance to assess whether it can uphold its AI dominance amidst evolving technological and regulatory landscapes.

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This summary captures the key discussions and insights from the WSJ Tech News Briefing episode featuring Tom Doton. For further details, listening to the full episode is recommended.

Transcript

[Amazon Representative]

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[Bell Lin]

For [e-mail] learnmore welcome to Tech News Briefing. It's Thursday, December 26th. I'm Bell Lin for the Wall Street Journal. We're hearing from our reporters and columnists about some of biggest companies, trends and people in tech and what could be store for 2025. Microsoft was one of the early winners of the artificial intelligence race, but rivals have threatened the tech giant's early lead, which began with its multi billion dollar investment in OpenAI and beyond AI. Microsoft also has hardware, video, gaming and cloud businesses and is facing various legal challenges to its Dominan positions. Our tech reporter Tom Doton covers Microsoft and he joins us to discuss what's ahead for the company next year. So Tom, what do you expect will be in store for the tech giant next year?

[Tom Doton]

There's a lot of questions for the next year because a lot of things may come to a head that were set in play this year that haven't fully been resolved. And so first of all, just on the outset, the AI business needs to start proving itself more. And there are a lot of products they have on the marketplace, specifically Copilot, which is their AI assistant for things like Word and Excel. And also they have one that's been attached to its Bing search engine. All that stuff has had like middling to low middling success and investors have been okay with that because it's early and they have seen growth in their cloud business, Azure that they attach to AI. But there's going to be a lot more pressure on them to start showing real results and adoption of their AI Copilot tools. That's one thing. And then the other thing is Microsoft is in this dramatic intrigue right now when it comes to their AI providers. They have this relationship with OpenAI which is always complicated, and that OpenAI provides the foundational models for Copilots. But then they've also been building up this team internally that is supposed to at some levels compete with OpenAI and potentially build a model that is at the same level of quality as what OpenAI has built. The other big thing that Microsoft is going to contend with in the next year, in the coming year, is the suit by the FTC that it is violated antitrust law and specifically on their cloud businesses. And we've seen all the other Tech giants basically dealing with regulatory scrutiny, most famously Google and now Microsoft. It's their turn under the spotlight. And how that plays out, if that even plays out, is going to be a major question for the company. But will the incoming head of the FTC want to take on this case that was started under a different administration or regime is totally up in the air. But if they do and they decide to press forward with the complaints against Microsoft, that will be an incredible distraction for the company and could have huge consequences depending on the results.

[Bell Lin]

So we will go back to antitrust in a moment. But going back to OpenAI for a moment, Microsoft is still the AI company's biggest backer. How do you think the relationship between the two companies might change over the next year?

[Tom Doton]

OpenAI is very publicly trying to remain on good terms with Microsoft. And you have Sam Altman at every conference that he goes to say it's complicated, but for the most part, we get along really well. They're an extremely valued partner. And even in the most recent funding round, Microsoft put in around 750 million. So you can't say that things are all bad. Microsoft is competing with them on the product level. They sell competing products from day one of this relationship. But definitely since the ChatGPT moment, the dynamic between these two companies has been one of the most fascinating things to watch in all of tech. And it definitely stands to be the case next year as well.

[Bell Lin]

Okay, so let's go back to talking about AI tools for a moment. You mentioned Copilot already. Microsoft has said that it will transform the way people work. What's the outlook for Microsoft's Copilot AI assistant?

[Tom Doton]

Copilot as a tool has been on the market for over a year now. Are there differences in the way people work in terms of like, another tool that exists out there to maybe help you do research or write emails? Sure, it's to maybe somewhat on the margins or it works for a certain percentage of people, but they're the largest enterprise software maker in the world. And part of the reason is that they bundle stuff and also that they have a huge sales team and that's like the game. And they'll try very hard next year to keep that game alive and hopefully winning.

[Bell Lin]

So speaking of consumer, what about Call of Duty, which, you know, is arguably a very popular video game franchise that Microsoft has bet pretty big on, including with its acquisition of Activision Blizzard. How is its video game business doing.

[Tom Doton]

Activision, for all the attention that it raised because the government attempted to block the merger, by and large, has not been that transformative to Microsoft. They would rather have the asset than not. But their stock didn't move a ton after the deal was finally allowed to go through at the beginning of the year. But when you look at the priorities for Microsoft, and especially since AI has become like the alpha and omega of their strategy, video gaming just doesn't really rank and you rarely hear investors asking a ton about it.

[Bell Lin]

Coming up, what do regulators have in store for Microsoft next year? And how might the new Trump administration impact the company? That's after the break.

[Amazon Representative]

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[Bell Lin]

Okay, so let's talk about the other challenges that Microsoft has faced over the last year. He started talking about antitrust in the United States, but Also in the UK Microsoft is facing this $1.27 billion dispute over how it charges customers buy cloud software that rivals its own. Where do you think Microsoft stands on antitrust lawsuits like these?

[Tom Doton]

Well, the stuff in the UK they're paying a lot of attention to that because the UK and Europe in general more broadly tends to set a lot of the trends when it comes to antitrust. And their head of policy, their president Brad Smith, has been on a charm offensive tour for the last couple of years trying to make good with European governments. You know, they've been signing all of these commitments to build up cloud infrastructure in various countries in Europe and will create jobs as part of that. So whether that mollifies regulators in these countries is very unclear.

[Bell Lin]

Let's talk a little bit more about the regulatory landscape. What kind of regulatory oversight do you expect that Microsoft might get under the incoming Trump administration?

[Tom Doton]

Huge question. Everyone in Silicon Valley is waiting to see what the approach from the Trump administration is going to be towards the tech industry and tech giants. Specifically, the 1x factor potentially in all of this is Elon Musk and the role that he will play as an advisor in the Trump administration. Musk has a history with Sam Altman from their days co founding OpenAI and in the most recent lawsuit that Elon and Xai have filed against OpenAI for breaching contract because they ended up becoming more of a for profit than a nonprofit Microsoft was included in the suit.

[Bell Lin]

Okay, last one for you, Tom. What are you most keeping your eye on as we head into 2025 as it relates to Microsoft AI products and.

[Tom Doton]

Whether they can get enough customers to businesses to sign up for these things is super relevant. And you're going to start seeing a lot more questions from investors if they can't. And you're going to want to see numbers. We don't have a ton of numbers yet on how many subscriptions they've sold, but this is supposed to be big new revenue for Microsoft, and that's kind of like the rubber meeting. The road of the whole AI strategy is whether people are going to want to pay for this stuff. And we're at a point now where we really should start seeing that. And then the other thing is OpenAI and how that dynamic and relationship plays out.

[Bell Lin]

That was our reporter Tom Doton. And that's it for Tech News Briefing. Today's show was produced by Julie Chang, with supervising producer Kathryn Millsop logging off. I'm Bell Lin for the Wall Street Journal. Thanks for listening.

[Amazon Representative]

Amazon Q Business is the new generative AI assistant from aws because many tasks can make business slow, as if wading through mud help. Luckily, there's a faster, easier, less messy choice. Amazon Q can securely understand your business data and use that knowledge to streamline tasks. Now you can summarize quarterly results or do complex analysis in no time. Q got this? Learn what Amazon Q Business can do for [e-mail] learnmore.