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Wednesday, March 29, 2023

Microsoft's AI lead is far from guaranteed

When it comes to generative AI, Microsoft (MSFT) is dominating the conversation. After pouring billions into ChatGPT developer OpenAI, the tech giant is building out a small AI empire, adding the technology to everything from its Dynamics 365 to Office 365, and, of course, Bing. Now Microsoft is bringing generative AI to its cybersecurity offerings via its Microsoft Security Copilot.

It's all part of Microsoft’s strategy to ensure that when it comes to the latest generation of AI, it’s the company that you think of first. And it’s working.

“They are clearly out in front of everybody else,” Frank Dickson, group VP of security and trust at International Data Corporation, told Yahoo Finance.

But a head start doesn’t mean that Microsoft will stay in the lead forever. Google parent Alphabet (GOOG, GOOGL) is making big bets of its own, while Facebook parent Meta (META) is building a team of engineers to focus on the generative AI space.

“This is a baseball game,” Dickson said. “Microsoft is throwing the first pitch right now. The other team hasn't shown up for the game. And so we don't know when they're gonna show up for the game, and we don't know what they're going to bring to that game.”

The competition is coming

Microsoft’s big AI moves came at just the right time for the tech giant. It debuted its OpenAI-powered Bing search engine and Edge web browser in February as ChatGPT’s popularity exploded into the mainstream.

It kept riding that wave earlier this month when it announced that Bing hit a total of 100 million daily active users and that the software is running on OpenAI’s latest GPT-4 model.

By contrast, Google flubbed the debut of its competing generative AI chatbot Bard, with even employees calling the announcement “botched,” according to CNBC.

But Google has been packing different types of AI into nearly all of its products for years. And the fact that it debuted Bard a day before Bing and its AI assistant for Workspaces two days before Microsoft’s Office 365 Copilot, proves that it’s not willing to take Microsoft’s incursion into the AI space lying down.

Even more troublesome for Microsoft, though, is the fact that the attention it’s brought to generative AI is helping to spawn a host of other potential rivals.

“In driving so much excitement and attention around generative AI, you know, [Microsoft has] obviously driven a lot of new prospects and customers to themselves,” Forrester Analyst Rowan Curran told Yahoo Finance.

“But they've also really excited the market and driven a huge acceleration in the investment and development of generative AI capabilities across a whole host of other companies,” he said.

Microsoft can still take advantage of its lead

While the competition is clearly coming for Microsoft, the company can still make use of its current lead to grab precious market share from its biggest rivals.

“The last few months have made clear that Microsoft has been feverishly working behind the scenes, as has OpenAI, of course, at pushing the envelope on what is possible as it relates to generative AI and integrating it pervasively across their product portfolio,” Mizuho Analyst Gregg Moskowitz told Yahoo Finance.

Microsoft is already the second largest cloud provider behind industry leader Amazon (AMZN) and ahead of third place contender Google, and adding its generative AI capabilities could make it all the more attractive to potential customers. That’s especially important as cloud revenue growth slows from its pandemic highs.

In Q2 2023, Microsoft’s Azure platform revenue grew 26% year-over-year, down from 46% growth in Q2 2022. Rolling generative AI into the mix, though, could help buoy the business.

“This is just the first step on the AI front as we expect much more cloud integration with Azure during the course of 2023 as its AI arms race takes place among Big Tech,” Wedbush Managing Director Dan Ives told Yahoo Finance.

To stay on top, Microsoft will have to continue to steal attention away from its rivals while building out its AI capabilities across its offerings. If it doesn’t, Google will be happy to take its place.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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