Microsoft (MSFT) Spotlight: A Window Into The Future Of AI

From Laggard To Leader

Among “Big Tech” companies, few have had as much enduring power as Microsoft (MSFT +1.05%), which has been at the forefront of the industry since the PC revolution.

It is, however, often the less popular among investors, sometimes viewed as a company mainly resting on its past success and monopoly position on products like Windows, Office, and Xbox.

And there is some truth to it, as some of the new markets emerging in tech got partially missed by the company: smartphones got mostly captured by Apple (AAPL +0.75%) and Google (GOOGL +1.6%), cloud computing by Amazon (AMZN +2.39%), social media by Meta (FB +0%).

However, this seems about to change, as Microsoft has managed through several shrewd moves to become a leader in AI. This turn to AI is now giving a refresh to the company’s entire offering, taking advantage of its dominant position in operating system (OS) and enterprise software.

The Unmovable Tech Giant

Bringing Computers To The Masses

Before discussing the newer AI side of Microsoft’s business, it is useful to remember the company’s past and present massive successes. At its core, Microsoft is a PC company. Creating Windows, the world’s most popular operating system (OS), made computers mainstream and accessible to everyone, not just IT-proficient people.

Windows was also the driving force behind the introduction of early video games into arcade and console systems, and it is still, to this day, the main operating system for PC gamers.

In contrast, Apple has always been more of a niche operating system preferred by professionals like designers and artists. And despite its technical potential, Linux never managed to really gather a mainstream reach.

Even in the context of an increasingly fragmented tech industry between China and the USA, Windows is the dominant OS on both sides of the Pacific. So even if the absolute domination of Windows OS has shrunk a little bit in the last decade, it is still very much the “default” option of the PC world.

The Center Of White Collar Jobs

Microsoft’s dominance and resilience in operating systems is replicated in office tools, through its once aptly-named Office software, which is now known as Microsoft 365. Microsoft can be said to have brought computers into the workflow of every white-collar job, and not just niche activities like accounting and engineering that were already using computers.

Software like Outlook, Word, Excel, and PowerPoint are still today, 30 years later, the most important tools for untold millions of workers globally to the point that it is a common joke that the entirety of the financial and manufacturing systems seems to rely on 20-year-old Excel sheets.

Here, too, there are plenty of alternatives, from Apple’s own version of the 365 software suite of programs to free open-source options like OpenOffice. Ultimately, it seems that short of the users locked in open source solutions or Apple’s, the only serious contender to Microsoft’s 365 is Google’s G Suite.

It is not very clear what the exact revenues Microsoft derives from 365, as it is now lumped together with cloud service in the Microsoft 365 service. But we know that this segment is booming, with year-to-year revenue growth between 15-20% depending on the quarter in 2024.

Not Just Office

Microsoft 365 offers multiple other associated services besides the original Office offerings, like company calls (Teams), cloud-shared storage (OneDrive), Visio (diagrams, charts), Loop (collaborative workspace), and Access (database).

Investors should take note that Teams has grown its revenues by 31% in 2024, driven by the integration of AI, adding useful functions, like, for example, creating summaries automatically or letting users ask questions regarding the meeting material.

This has let Teams quickly grow its market share in the remote meeting tool market, from 24.5% in 2023 to 32.3% a year later.

Cloud Computing

Regarding cloud services, Microsoft is lagging behind Amazon’s AWS service, which is by far the largest in the industry. It is, however, in a good position to lock in its existing customer base, as they are mostly enterprise clients also relying on Microsoft for their email, documents, cybersecurity, etc.

Through its Azure platform, Microsoft is making up 20% of global cloud infrastructure, as large as the combined shares of Google + Alibaba + Oracle.

This presence of Microsoft as a cybersecurity company is often missed by analysts, despite the company being actually the largest endpoint cybersecurity provider, ahead of CrowdStrike and much larger than any other smaller providers.

LinkedIn

Microsoft has a very small presence in social media. However, it has an outsized importance in professional networks, with the ownership of LinkedIn, which was bought for $26.2B in 2016.

The site is generating growing revenues, up 10% year-to-year in Q4 2024. With 65 million companies registered, its user base has been growing quickly reaching almost 1 billion registered users. 

However, where it might be the most valuable is in the data it contains, with a pool available to train specialized AI, notably in HR and technical fields. This could prove a very valuable asset for Microsoft, including optimizing business intelligence and custom AI tools.

Xbox & Videogames

Another sector in which Microsoft has a dominant position is video games. This starts with the ownership of Xbox, one of the three big console platforms alongside Sony’s PlayStation (SONY +1.52%) and Nintendo (NTDOY -4.99%).

Overall, Xbox is more popular than PlayStation in the USA and China, but less so in the rest of the world.

Xbox is not Microsoft’s only presence in the dynamic videogame market. It is also a major game developer with a strong presence in the PC game markets.

Microsoft Gaming department includes several very large publishers acquired in the past few years by Microsoft, including the massive Activision-Blizzard acquisition for $68.7B in 2022:

• Activision-Blizzard: Call of Duty, Overwatch, Warcraft, Starcraft, Diablo, etc.
• Bethesda: Elder Scrolls, Fallout, etc.
• Obsidian: role-play games like Outer Worlds and Pillars of Eternity.
• King: very popular mobile games like Candy Crush.
• Mojang: Minecraft (170 million monthly active players in 2024.)

Microsoft offers a subscription service for accessing its entire videogame catalog, with the Xbox Game Pass, for $11.99/month, instead of directly buying them one by one.

There are also clear signs that Microsoft considers the gaming division to be essential and needs further growth. Notably, Microsoft CEO’s pay will be tied to Xbox more than ever in 2025, especially games and services more than hardware (Xbox and gaming PCs).

Search Engine & Ads

Search engine is a sector that Microsoft has struggled with for a long time, with Google the uncontested winner, and Bing standing at barely 4% market share, which is still better than all other alternative search engines.

The ads segment is small by big tech standards but would be considered a solid business if it were a stand-alone, as it generated $14.7B in 2024, and is expected to grow to $17.7B in the next two years.

GitHub

In 2018, Microsoft acquired GitHub for $7.5B, the world’s leading software development platform with more than 90 million developers/users, up from just 28 million when acquired.

The acquisition has helped GitHub grow its sales, especially with large corporations, while still operating mostly as its own entity with minimal interference from Microsoft’s management.

The platform has, since the acquisition, released more tools, including coding tools and AI like CodeSpaces and Copilot.

Considering the importance of AI in the future of coding jobs, this is a very strategic asset for Microsoft, and it also went a long way in mending the relationship between the company and the open-source community, long at odds since the 1990s with its monopolistic and more closed practices.

Microsoft’s Bet On AI

Because Microsoft has been a company focused on maintaining legacy business (Windows, Office) for years or growing through acquisitions (videogames), it caught many by surprise that Microsoft’s progress in AI turned out to be at a world-class level.

This is now the core focus of the company, with AI changes entering every aspect of the company.

“AI is one of the most transformative technologies of our time, and we believe it will fundamentally bend the productivity curve for every individual, organization, and industry sector to help us address some of our most pressing global challenges.

We know Microsoft will only succeed if the world is fundamentally succeeding. We are focused on ensuring the world benefits from the broad technological shift to AI while mitigating its risks.”

Satya Nadella, Microsoft’s Chairman and CEO

 OpenAI

Microsoft invested $13 billion in OpenAI. The relation was growing to be one progressively more symbiotic, with many considering that OpenAI was essentially getting absorbed into Microsoft.

This was also the time when Microsoft services like Bing would start integrating ChatGPT technology, making it a potential threat to Google for the first time in many years.

Since then, OpenAI has experienced quite a few growth pains, with the temporary ousting of its founder Sam Altman before he was reinstated. The company is also moving from a non-profit status to a regular for-profit company, which has created tensions internally and externally, including with former OpenAI backers like Elon Musk.

In March, Microsoft invested at least $650 million to acquire most of the staff from Inflection, an OpenAI competitor. And overall Microsoft seems today to consider OpenAI as much as a competitor as a partner.

The trigger for the degradation of this relation seems to have been OpenAI’s willingness to pursue direct sales to businesses, including ads & news creation, ChatGPT plugins, and a web browsing capability.

In return, it seems that Microsoft is slowly limiting OpenAI access to computing power as well as further financing, a serious danger for the company burning through several billions a year.

“Over the next few months, Microsoft wouldn’t budge as OpenAI, which expects to lose $5 billion this year, continued to ask for more money and more computing power to build and run its A.I. systems.

Marketing AI Institute

Another possible source of tension between Microsoft and OpenAI is a clause in their contract, which could invalidate the partnership.

“If OpenAI achieves AGI, Microsoft’s access to OpenAI’s technology becomes void. Even more importantly, OpenAI’s board gets to decide when AGI has been achieved.”

Marketing AI Institute

So, as OpenAI is making claims it is getting closer to AGI  (Artificial General Intelligence) with its o3, high-accuracy AI model, it makes sense that Microsoft would be looking to have its own independent path to AI technology that does not rely on OpenAI.

From Office To Copilot

Copilot has been the name for the AI services already integrated into most Microsoft products, especially the Microsoft 365 cloud-based offer, integrating Office software.

Microsoft 365 has gone through an entire re-branding and renamed Microsoft 365 Copilot in January 2025.

The move is seen as controversial, as it seems to imply that AI solutions will be pushed in every Microsoft product, whether the end user wants it or not.

In addition, the Microsoft 365 subscription price is going up for the first time in 13 years, with Copilot now part of the base plan instead of a feature only available in Copilot Pro subscription.

New AI Division

The change to 365 Copilot is just part of a larger restructuring announced in January 2025. To achieve it, Microsoft has created a dedicated AI division called “CoreAI – Platform and Tools.”

This new division will bring together Dev Div, AI Platform, and some key teams from the Office of the CTO (AI Supercomputer, AI Agentic Runtimes, and Engineering Thrive), with the mission to build the end-to-end Copilot & AI stack for both our first-party and third-party customers to build and run AI apps and agents.

Satya Nadella, Microsoft’s Chairman and CEO

In this vision, Azure will be the background infrastructure for AI, with developer tools like Azure AI Foundry, GitHub, and Visual Studio Code used to build on top of it.

The core idea is “AI agents”, programs that are designed to replace entirely the usual human input for specific tasks. Something that the most enthusiastic AI proponent imagines potentially replacing all jobs altogether.

Agentic AI is considered a potential step forward in AI tech, beyond the general purpose LLM chatbot like ChatGPT, with much more specialized knowledge and ability to perform efficiently and reliably useful tasks.

This would be an obvious money-maker by replacing human labor in high-value fields, while more generalist LLMs have so far failed to materialize in the trillion-dollar market that AI proponents have promised.

Embracing AI Disruption

This switch to AI anyway seems to prepare at least for a radical redesign of most of Microsoft’s services to be re-centered around an AI-first approach.

This is also a dramatic departure from the company’s historical tendency to change very little about its legacy products. Clearly, the fear that new AI-powered tools could disrupt and outperform Word, Excel, PowerPoint, etc., has ultimately led Microsoft to embrace the radical change brought by AI instead of becoming vulnerable to it.

2025 will be about model-forward applications that reshape all application categories. More so than any previous platform shift, every layer of the application stack will be impacted.

It’s akin to GUI, internet servers, and cloud-native databases all being introduced into the app stack simultaneously. Thirty years of change is being compressed into three years!

Satya Nadella, Microsoft’s Chairman and CEO

Nuclear-Powered AIs

Another sign of how serious Microsoft is about AI is that the company has been the first to hunt for a reliable power supply to power its AI data centers.

Initiating what is now a trend in the tech industry, Microsoft secured in September 2024 all the future power generated in the next 20 years by restarting a nuclear power plant owned by Constellation (CEG +0.36%). Considering energy might become a bigger chokepoint in AI development than computing power, this might prove a decisive move from Microsoft.

Nuclear power produced by SMR (Small Modular Reactors) is also likely going to be a big part of Microsoft’s future power supply for its cloud and AI data centers, with Bill Gates backing the SMR company TerraPower, expected to start building its first reactor in Wyoming in 2025.

Scientific AI & Quantum Computing

Besides business cases for AI, Microsoft has been working for years, through its AI4Science program, on AIs useful for scientific research.

This includes, for example, speeding the work of material scientists to design new molecules or battery electrodes by having an AI to narrow down 32 million potential materials to 500,000 candidates, and then to 800 in less than 80 hours.

Companies like Unilever are already using this “Generative Chemistry” to speed up their scientific discoveries.

“Using advanced computing power and AI, we are able to compress decades of lab work into days, accessing a level of insight we could not previously have imagined.

This technological leap, coupled with our vast repository of proprietary data and a century of expertise in personal and household care, means our scientists are able to lead the industry in developing the next generation of consumer goods.”

Alberto Prado, Global Head of R&D Digital and Partnerships at Unilever

For complex technical calculations like this one, quantum computing could also help.

Microsoft is a pioneer in offering quantum computing cloud services with Azure Quantum. The service can also offer “hybrid computing”, mixing quantum computing with traditional cloud-based supercomputer service.

Instead of vertical integration, Microsoft’s approach to quantum computing has been to establish partnerships with leaders in the field covering virtually all the technologies possible to achieve quantum computing, and act as a sort of “reseller”. This includes IonQ (IONQ -6.4%), Pasqal, Quantinuum, QCI (QUBT -9.65%), and Rigetti (RGTI -12.54%).

Controversy

Historically, Microsoft has mostly been at the center of controversies related to its monopolistic behavior with Windows and Office.

However, the drive for more data to feed its AI effort has recently created a new type of concern among both users and regulators.

In September 2024, Microsoft revealed an AI-driven feature of Windows 11, “Intelligent Media Search” scanning all media files on the system (including text, image, audio, and video) to retrieve them on request.

This seems similar to another feature discussed previously, “Recall”, which was taking intermittent screenshots, recording everything done on the computer.

Both Recall and Intelligent Media Search pose obvious privacy concerns, as they also imply that Microsoft’s AI is aware of everything on the computer and raise questions about how directly or indirectly accessible these data are to Microsoft itself.

Such breach of privacy could be extra-problematic in the EU, where these topics are generally more tightly regulated.

It seems that data are encrypted and only stored on the concerned devices. So, in theory, this should not become a problem. It is, however, emblematic of a growing worry by users of losing control of privacy on their devices, a trend ongoing since the move to subscription-based billing and more cloud-stored data.

In the long run, it is yet to be seen if AI accessing all our data will be gradually accepted or become an issue that will need to be addressed more carefully by tech companies.

Conclusion

Microsoft has for a long time relied on the extraordinary lasting power of its core products in operating systems and office software, combined with great by not dominant cloud computing.

From 2016-2018, a new strategy emerged of intelligent investments in new sectors like professional network platforms, gaming, and coding platforms, sustaining the growth of the company. It also increased its influence in the enterprise sector.

In the past few years, a new era has seemingly opened for Microsoft, characterized by embracing AI technology. This is more focused on agentic AIs than generalized AI & LLM, with a clear path to monetization considering the very strong presence of Microsoft in enterprise software.

This should radically change how people work on computers, especially white-collar jobs. It could also open new growth paths to Microsoft, like, for example, improving Bing’s performance enough to give a new shot at challenging Google in the search engine market.

The only segment of Microsoft not much affected by AI seems to be the videogame department. However, this might change soon as well, as the company already offers AI help to predict players’ behaviors or offer real-time translation and has filed a patent to create videogame content “crafting and altering game narratives using generative AI”.

It should also be remarked that Microsoft has taken a rather unique approach to AI, ignoring some of the most hotly contested fields like general-purpose LLMs, self-driving vehicles, etc.

Instead, it seems to have chosen to double down on its position in the enterprise segment and focus its AI on where it could work in synergy with its existing strengths: operating systems, office jobs, cloud computing, programming assistance, video games, and scientific computing.