Satya Nadella couldn’t help himself. He had something to brag about, and he did it on Microsoft’s painstakingly followed hourlong earnings call with analysts on Tuesday. Never mind that the stock was down about 4% after hours.
Nadella said that while Microsoft isn’t the largest provider of cloud infrastructure for other companies to use to run apps and websites (that would be Amazon, with an estimated 40% share compared to Microsoft’s 20.5%), the company is No. 1 when it comes to selling cloud-based AI services. That category is small but growing quickly after startup OpenAI’s ChatGPT chatbot, which is hosted on Azure, went viral at the end of 2022.
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A bigger artificial intelligence business might help Microsoft grow its position in cloud computing overall. On Tuesday, Microsoft said Azure and other cloud services increased by 26% year over year, faster than all other major product areas other than the Dynamics 365 cloud-based enterprise software.
Historically, Microsoft cares deeply about being dominant. For decades it has done that in PC operating systems with Windows and productivity software with Office. Since becoming CEO in 2014, Nadella has overseen a company that has continued to operate some laggards, including the Bing search engine, Surface PCs and Azure.
But in recent months Microsoft has been on a speed run to sell access to OpenAI’s underlying large language models in Azure to companies big and small, and some entrepreneurs have chosen to use them instead of models from Amazon, Google or startups.
Simultaneously, Microsoft is weaving the models into its own software, including Bing and Windows. Microsoft maintains a deep relationship with OpenAI after having invested billions into the startup.
What’s unclear is how much revenue Microsoft can accumulate from Azure AI services that depend on OpenAI’s technologies, and how much extra revenue that will bring in from companies using non-AI services in Azure. But Nadella sounded hopeful about Microsoft’s prospects in those areas.
“If you think about Azure, we have grown Azure over the years, coming from behind, and here we are as a strong No. 2 — in the lead when it comes to these new workloads,” he said. ”So, for example, we are seeing new logos, customers who may have used another cloud for most of what they do are for the first time sort of starting to use Azure for some of their new AI workloads. We also have even customers who have used multiple clouds who used us for a class of sort of workloads also start new projects in data and AI, which they were using other clouds for.”
The concept of AI has been around longer than Microsoft, and Microsoft has been running AI models for other companies for several years. But ChatGPT and image-generation tools such as Adobe’s Firefly have kicked off fresh interest in generative AI, which involves taking a picture or other human input and creating new content with it.
Nadella told analysts to expect the company to win more market share and reduce the cost of acquiring customers.
“And so, yes, we celebrate,” he said.
That’s the reason Microsoft has disclosed how much of the expected Azure cloud growth will come from AI for the past two quarters, Nadella said.
Amy Hood, Microsoft’s finance chief, said on the call that in the fiscal first quarter, which will end on Sept. 30, Azure revenue should grow by 25% to 26% in constant currency, including 2 points from AI services. That could be worth hundreds of millions of dollars in new Azure AI revenue.
“There are two parts to even the AI,” Nadella said. “There is the models themselves, with our partnership with OpenAI. That’s sort of one type of spend on compute. And the other is much more revenue-driven, which is we will track the inference cost to the revenue and demand. And you’re already seeing both of those play out.”
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