MICROSOFT AND OPEN AI: AN INTELLIGENT BET ON ARTIFICIAL INTELLIGENCE?

Social Media was abuzz this week with the release of Chat GPT, an artificial intelligence that produces essays, letters and literature with uncanny skill and lightning speed. The organization behind this is Open AI, a research outfit founded in 2015. But just under the surface lies Microsoft, one of the organization’s principal investors. As one of Open AI’s largest and earliest investors, Microsoft should have privileged access to this new technology. This powerful AI may be just the thing to turbo charge the tech giant’s sprawling portfolio of digital assets. 

By The Sick Economist

If there has been one tech giant that has defined the word “growth” over the last ten years, it has been Microsoft. From 2013, on the eve of the transition from Steve Ballmer to new CEO Satya Nadella, the share price has gone from $38 to $240. During that same period of time, the quarterly dividend has almost tripled, going from $.23 per share in 2013 to $.68 per share today. Investors who bought the shares in 2013 have an effective yield on cost of 7.1%. In addition to all of the share price growth investors have enjoyed, they also receive a lightly taxed 7.1% income from their investment annually. 

Prior to this period, the tech giant had lumbered along aimlessly for at least a decade. The comeback story of this sleeping giant is a corporate tale for the ages, but suffice it to say that it wasn’t just new management that led to the shareholder renaissance. Rather, it was the new leadership’s ability to spot a new technology early, and that leadership’s willingness and ability to harness the new technology as a source of growth. 

New CEO Satya Nadella is almost synonymous with the cloud, and Microsoft’s successful launch and the subsequent growth of the Azure line of products. Rather than fight change, the new CEO realized that all of computing was moving away from fixed, physical locations, and towards cloud computing, a new process by which most data and computation occurs remotely via the internet. Microsoft did a masterful job of adopting that new technology early, and integrating cloud technology across all of its product lines. The result of this initiative has been the impressive growth that shareholders have reaped over the last decade. 

Can Lightning Strike Twice? 

While the transition from a world of physical computing to a world of cloud computing has been the centerpiece of the Nadella era, it seems that the cloud was only one part of the chieftain’s bold vision. He has long emphasized “intelligent” applications, and it now seems obvious that he has been taking action to realize that vision all along. 

Open AI was originally founded as a non-profit research institution in 2015, with early financial backing from Elon Musk, Reid Hoffman, and other Silicon Valley intelligencia. But by 2019, CEO Sam Altman realized that the organization simply couldn’t gather the necessary resources to create breakthrough technology without institutional level investment. He started a for profit subsidiary, Open AI, LP. His first big investor? Microsoft. After a quick demonstration of the progress the group had already made, CEO Nadella invested a cool $1,000,000,000 in the aspiring AI provider. 

It’s only over the last few days that the general public has gotten a peak at what Nadella saw three years ago. Open AI released a beta test version of its new AI to the general public. In less than one week, more than a million visitors to the website had put the software through its paces. The result has been nothing less than a media sensation. The software looks so good at writing essays that Atlantic magazine declares, “The College Essay is Dead.”    Other commentators have had the free software write thank you notes to colleagues, while still others have had their new digital friend spit out poems at least as good as what you would typically find in your college English class. 

No one knows exactly how much of Open AI Microsoft owns, or what arrangement would be required for them to slap the Microsoft brand on variations of this tech. However, as one of the earliest, largest investors in the entity, it’s safe to assume that $1,000,000,000 bought Nadella a lot of access to today’s coveted intellectual property. 

As well as Microsoft shareholders have done over the last decade, the company is now worth 1.6 TRILLION dollars on the open market. This makes it one of the ten largest companies in the world. It’s not crazy for an investor to ask, “can this company really keep on growing?” 

With the power of Open AI, the answer is very likely to be a resounding, “yes!” 

Remember, the company’s transition to the cloud did not really mean too many fully new products for Microsoft. Rather, cloud functionality was slowly but surely integrated into existing products, making them work better, offering more valuable services, and costing less to deliver. The result has been ever growing revenue with absurd profit margins. In the latest quarterly report, Microsoft boasted $50 Billion in revenue, with a whopping $21.5 Billion in operational profit. These are unheard of profit margins for such a behemoth of a company. These metrics only became achievable because the company’s transition to the cloud helped it offer improved products to the public at sensational margins for the company. 

Can CEO Nadella pull off the same trick all over again by integrating Chat GPT into the established Microsoft constellation of products? 

Endless Possibilities

Microsoft has always considered itself a provider of productivity tools. The original MS Office enabled a writer to get a lot more done, more quickly, than if she were using a typewriter. MS Powerpoint helped legions of junior Wall Street executives create presentations more quickly and more artistically, then if they had needed to cut and paste images physically to create pitchbooks. 

What if, rather than simply editing your words, MS word now actually wrote the essay for you? What if, rather than just helping to arrange the images that you select, the MS Powerpoint actually created the entire presentation for you based on a few simple data points that you feed into your laptop? 

Lately, one big source of growth for Microsoft has been the business social media site, LinkedIN, which they bought in 2016. This division grew 17% in 2022. Everyone knows that this is a great network on which a professional can see and be seen. But it requires a lot of time and effort to post enough material to attract a steady following. What if the AI just did it all for you? How much would you be willing to pay for a constant social media presence that just updates itself based on your instructions? 

Azure is a digital infrastructure where corporate data lives. Major corporations across the world use the digital infrastructure to store information and collaborate across continents and oceans. What if they could also hire virtual secretaries to parse this data and perform all kinds of administrative tasks that would have formerly cost $50, $60, or $70 thousand per employee? Over the last ten years, corporations have chosen digital infrastructure like Azure to store data because it was cheaper and easier than storing the data physically at their own facilities. What if Microsoft could offer custom made digital employees on the same basis? Wouldn’t you like to have a secretary that could write a letter, create a presentation for you, or even make phone calls, all after just pressing a few buttons?  

These ideas would be just scraping the surface of what Microsoft could potentially do with Open AI’s new technology. Where other start up software companies have fallen victim to a gap that sometimes emerges between theoretical value and real commercial value, Microsoft under Nadella has displayed an extraordinary ability to translate novel technology into new, profitable, offerings. They have already set up an impressive foundry where they forge commercial offerings by combining old customers and new technology. There is no reason to believe this time will be any different. 

In the last week, ChatGPT has emerged as one of the internet’s favorite party tricks. Everyone knows this will change everything, but few are sure what, exactly, “changing everything” means. The team at Microsoft has at least a three year headstart on the rest of the world. It would only be natural for them to use artificial intelligence to create even more profits for their shareholders. 

Disclosure: The Sick Economist Owns shares in $MSFT