In the wake of the OpenAI development over the weekend I wondered why Open AI is so important to Microsoft and why neither Google nor Microsoft managed to set the pace in AI.
Take for instance the evening in Seattle in September 2022 that has since become iconic, when the Open AI team showcased the capabilities of ChatGPT4 to senior Microsoft executives, including Satya Nadella and Bill Gates, during a dinner at Bill Gates' residence. The demonstration left everyone in attendance astounded by the language model's advanced abilities. I believe Satya Nadella recognized two crucial things immediately: First, the potential to forge one of the world's most productive tech partnerships and the imperative to act swiftly. And second the inability of Microsoft to innovate.
Both realizations led Microsoft to make an unprecedented investment of 10 billion dollars in OpenAI, marking the largest and most successful financial investment in the company's history. The investment in OpenAI and the subsequent announcement of the AI-powered Co-Pilot increased Microsoft's market valuation by astonishing $154 billion in a single day.
Nadella realized that ChatGPT could be a huge innovation boost for Microsoft and – as he pointed out in an interview with Springer CEO Matthias Döpfner in October 2023 – he is very much aware that in the realm of software, tradition is nothing and innovation is everything.
But I am sure during that night of the ChatGPT 4 demo he also realized that Microsoft lacks in crucial areas the capability to innovate. A feeling that was confirmed later: According to the newspaper “Information” Peter Lee, who oversees Microsoft’s sprawling research efforts, was briefing Nadella, Microsoft’s CEO, and his deputies about a series of tests Microsoft had conducted of GPT-4 after the evening with Gates. Lee told Nadella Microsoft’s researchers were blown away by the model’s ability. “But Nadella abruptly cut off Lee midsentence, demanding to know how OpenAI had managed to surpass the capabilities of the AI project Microsoft’s 1,500-person research team had been working on for decades. “OpenAI built this with 250 people,” Nadella said, according to Lee, who is executive vice president and head of Microsoft Research. “Why do we have Microsoft Research at all?”.“ A good question. Why is it that a 250-person company can outperform a company such as Microsoft in cutting technology that needs so much research, know-how and capital?
And Microsoft’s inability to innovate not only spans the realm of AI. A candid examination of Microsoft reveals that the company has faced challenges in fostering distinct innovations. The hardware division has not achieved the same level of success as Apple – not even close. And it is unlikely that anyone would describe their office suite as a beacon of innovation. Generally, Microsoft's approach to consumer business could be characterized as imitative rather than original. Leveraging their expansive distribution network, Microsoft offers reasonably priced, merely satisfactory, but well integrated software packages to businesses. Global corporations prefer to avoid the complexities of large-scale software transitions, opting for Microsoft's sufficiently functional software product bundles out of convenience.
Large corporation such as Microsoft often either buy the competition or merely act as copycats. Consider this: With the acquisitions of Skype in 2011 and Yammer in 2012, Microsoft was well-positioned to become a leader in video conferencing and corporate communication platforms. And what happened? Slack transformed corporate communication while Zoom transformed video conferencing. So, what was Microsoft’s response to Slack and Zoom? They copied it by introducing Microsoft Teams and integrating it seamlessly into their Office 365 suite (which immediately extended the reach of Teams to all their users). Slack was forced to flee in the arms of Salesforce. Was Teams – at least at the beginning – anywhere close to as good as Slack? No, of course not. But it was good enough.
Or consider the recent introduction of Microsoft Loop in November 2023. Loop provides a unified platform for collaborative document editing, team collaboration, and information sharing, which certainly has great appeal in a modern team setting. However, Loop is not a testament to Microsoft's innovative capabilities. In reality, Microsoft has once again missed an opportunity to pioneer, as Loop is not a novel concept but rather a copy of an existing product. Microsoft was in a prime position to evolve OneNote into a tool that would meet modern workplace demands—a goal Loop now aims to fulfill. Yet, instead of showcasing with OneNote how product innovation could look like, Microsoft has been outpaced by Notion, a platform that has redefined the landscape of note-taking, information management, and team collaboration. Notion's success, marked by its adoption by countless companies, evidently set a benchmark that Microsoft chose to emulate rather than surpass. Thus, with the launch of Loop, we do not witness Microsoft’s ability to innovate, but merely Microsoft’s ability to copy.
And thus, it is no wonder then that the significant growth in value and stock prices during Nadella's tenure largely stems from the expansion of cloud services through Azure and Microsoft's ability to invest substantial capital in creating extensive cloud infrastructure, a feat beyond the reach of startups due to their limited capital.
And it was exactly because of the cloud business that Microsoft's partnership with OpenAI was so opportune. OpenAI may have developed superior large language models (LLMs), but lacked the computing power and financial resources to scale them. Microsoft, while not having the leading LLM, possessed the necessary computational capacity and the financial means and technical expertise to enhance it.
So, in the end Microsoft needs to feel extremely lucky that Nadella and not Ballmer is currently CEO during this transformational technology shift since Nadella follows – when it comes to partnerships – a clear customer centric mindset. His customer-centric philosophy, as detailed in his 2014 book 'Hit Refresh', underscores his belief in the power of partnership over rivalry. In one chapter, titled 'Friends or Frenemies? Build Partnerships Before You Need Them', he underscores the importance of proactive collaboration.
Nadella is open to forming alliances with competitors if it serves the customers' interests. One of his first CEO decisions in 2014 was to end the fierce rivalry with Apple and embrace Apple products by finally bringing the Office Suite to IOS and MacOs. And this partnership ethos was evident when he set aside again in 2022 competitive instincts and partnered with OpenAI, despite its status as a contender to Microsoft's internal AI team. Thus, he priotized customer value over ego and $150 billion valuation increase in just one day over $0 increase. Funnily, I am not sure Steve Ballmer would have done the same.
Do not get me wrong. I think Satya Nadella is an incredible tech CEO who increased the market cap of Microsoft from $334.1B to 2,7 trillion in 2023. This is incredible. But it feels like he did it not by product innovation or developing own disruptive innovation such ChatGPT. But by levering the strengths of Big Tech: Invest massive amount of capital in compute and seek partnerships – that often include equity – with companies that need the compute infrastructure. Plus: Copy or buy successful consumer products, put them in a product bundle and leverage the vast distribution network. And to be fair: That is excellent business management and deserves a lot of credit. So maybe – as we can see with Open AI – Big Tech does not need to bring out disruptive innovation. They just need to be smart about their collaborations and partnerships.
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