February 10, 2023

by Ignatius Chithelen

On February 7, Microsoft’s stock gained about $150 billion, lifting its market value to over $2 trillion, while that of Alphabet, which owns Google, lost over $120 billion, dropping to $1.3 trillion. That day, Satya Nadella, Chief Executive of Redmond, Washington based Microsoft, announced a limited preview of its new Bing search engine and Edge browser, which were reinvented using artificial intelligence (AI) tools.

“AI will fundamentally change every software category, starting with the largest category of all – search,” said Nadella in a blog post.

About half of the ten billion search queries a day go unanswered, Microsoft estimates. That is because people are using search to do things it was not originally designed to do. Existing search engines are good for finding a website but are not much help for more complex questions or tasks.  

The new Bing, Microsoft says, gives an improved version of results for sports scores and weather; offers summary answers for questions like what ingredients to substitute for eggs in a cake; has an interactive chat feature to refine complex searches on what TV to buy, with links to immediately buy one; and helps create a 5-day itinerary for a vacation, with links to book your travel and accommodations, or prepare for a job interview. The new Microsoft Edge browser has chat and compose capabilities.

The key part of the new Bing is a faster ChatGPT AI tool from OpenAI, customized specifically for online search. ChatGPT answers text-based questions, including follow-up questions, admits its mistakes, challenges incorrect premises, and rejects inappropriate requests, according to OpenAI.

In the field of education, school and college teachers have found that ChatGPT’s essays are good enough to pass standardized tests and even MBA programs.

Last month, Microsoft announced an extension of its partnership with OpenAI “to accelerate AI breakthroughs.” It is investing $10 billion into OpenAI - in cash and credits for its Azure cloud platform - at a valuation of $29 billion, according to Semafor..

OpenAI will use the funds to invest in the development and deployment of specialized supercomputing systems to accelerate research. Besides ChatGPT, OpenAI’s other products include DALL-E, which creates images and art from a description in natural language.

This is Microsoft’s third investment in OpenAI, with the first being $1 billion in cash and credits, in 2019. Other investors in OpenAi include LinkedIn founder Reid Hoffman’s charitable foundation and Khosla Ventures, run by Vinod Khosla.

OpenAI, based in San Francisco, has more than 600 employees. It was founded in 2015 as a non-profit organization by Elon Musk, founder of Tesla, OpenAI executives Chairman Greg Brockman, Chief Scientist Ilya Sutskever and CEO Sam Altman, and others.

OpenAI states its mission is to ensure that artificial general intelligence—highly autonomous systems that outperform humans at most economically valuable work—"benefits all of humanity.”

Microsoft plans to deploy OpenAI’s models across its consumer and enterprise products and introduce new categories of digital experiences built on OpenAI’s technology. These include Microsoft’s Azure OpenAI Service, which can be used by developers to build AI applications through direct access to OpenAI models. In turn, Microsoft’s Azure will be OpenAI’s exclusive cloud provider for its research, products, and other services.

ChatGPT went viral following its launch in November 2022, reaching 100 million active users within two months. Some tech executives and venture capitalists view it as a major innovation like the launch of the iPhone by Apple in 2007. The interest in ChatGPT, Microsoft’s Nadella told CNBC, is something he has not seen “since I would say 2007-2008, when the cloud was just first coming out…I’ve never ever felt this liberated in terms of opportunity in the days ahead.”

Nadella, 55-years-old, has been Microsoft CEO since 2014. He joined the company in 1992. Earlier he served as the head of its cloud infrastructure and services group. Under him, the cloud business outperformed the market and took share from Amazon, Google, Oracle and other rivals.

Previously, Nadella led research and development for the Online Services Division and was vice president of the Business Division. Before joining Microsoft, he worked at Sun Microsystems.

Growing up in Hyderabad, India, Nadella’s early ambition was to be a professional cricketer. He earned a bachelor’s degree in electrical engineering from the Manipal Institute of Technology, affiliated with Mangalore University, India; a master’s degree in computer science from the University of Wisconsin – Milwaukee; and, in 1998, an MBA from the University of Chicago.

Like Nadella, Pichai, 50-years-old, is also a big cricket fan. Prior to joining Google in 2004, Pichai worked in engineering and product management at Applied Materials, a semiconductor company, and as a consultant at McKinsey & Company.

He holds a Bachelor’s degree in metallurgical engineering from the Indian Institute of Technology, Kharagpur, 1993. While at IIT, he learned computer programming on his own, including in the now obsolete Fortran language. On the campus, he met Anjali, a fellow student and his future wife.

Pichai earned a Master of Science degree in materials science and engineering from Stanford University, 1995; and an MBA from The Wharton School of the University of Pennsylvania, 2002. Flying to the U.S. to study at Stanford was Pichai’s first airplane flight. Pichai took over as Google CEO in 2015.

In 2017, Google re-oriented the company around AI, spending tens of billions of dollars on the effort. So, analysts say, it could have launched a competing product well before ChatGPT. But apparently it held back since the new AI tools could hurt its massive, lucrative advertising revenues. “If Google gives you the perfect answer to each query, you won’t click on any ads,” Amr Awadallah, a former Google employee who now runs a competitor search company Vectara, told The New York Times.

Google has 93% of the search market share, according to StatCounter. It has dominated search for the past twenty years. In 2022, advertising revenues from Google search accounted for about 60% of parent Alphabet’s $283 billion in revenues. It is also a highly profitable business, with operating profit margins greater than 30%, and is the largest contributor to Alphabet’s profits.

In contrast, Bing has only 3% of the search market share. So, as Nadella told the Wall Street Journal “All I need is a few more users, and someone else that I’m competing [with] has to keep all of their users and all of their gross (profit) margin.”

But investors may be euphoric in valuing AI-powered Bing’s benefits to Microsoft, especially since the company already has a huge market value. Assume that, over the next five years, Bing, other AI tools and related cloud services bring in an additional $100 billion in revenues, with operating profits of more than 30%.

Assume that investors give this added revenue a 20 multiple – twice the current multiple for the entire company. Microsoft’s market value would double to $4 trillion by 2028. So, in the best-case scenario, investors will earn an average annual 15% return on Microsoft’s stock over the next five years, far less than the typical returns growth investors expect of a rapidly growing technology company.  

This week on February 6, apparently fearing damage to its market share, profits and stock valuation, Google launched an experimental conversational AI service called Bard, a day before the launch of Microsoft’s ChatGPT-based Bing.

Bard, Pichai said in a blog post, expands beyond Google’s current ability to answer a question such as how many keys does a piano have? Bard enables Google to offer “deeper insights and understanding”: is the piano or guitar easier to learn, and how much practice does each need? Bard will be available to all Google users shortly, Pichai added.

It is likely that the Google Bing competition will hurt profit margins of both Alphabet and Microsoft. Alphabet grew to dominate the search market and Microsoft the personal computer software market by beating several, mostly smaller competitors. Now, given that they are both equally large and well-capitalized, their battle in the search market will be intense, long, and expensive.

There is also a social issue underlying the use of AI tools. Google and Bing’s AI tools will soon be available to developers, creators, and enterprises. Studies have found that wider, unmonitored access to Bard, ChatGPT and other chat bots can lead to the generation of harmful information and false and biased content.

Pichai and Nadella say that their companies are committed to developing AI responsibly. However, the smaller companies, who utilize their tools, will likely aggressively pursue revenues and profits, and not spend enough to monitor and prevent users from creating and spreading toxic content.  

Jeetu Patel, executive vice president for security and collaboration at Cisco, told TheStreet.com, that “the biggest risk is humans with bad intentions. Imagine if AI could understand emotion and started having emotion itself with negative intentions taught by its human creators. You can’t even imagine the consequences of this."

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