Key Points
- Microsoft anticipates a $1.5 billion income reduction this quarter, largely due to OpenAI’s projected losses.
- OpenAI expects $5 billion in losses on $4 billion in revenue this year, reflecting the high-cost nature of the generative AI market.
- Microsoft’s OpenAI investment is reported using the equity method, aligning with the company’s share of OpenAI’s financial outcomes.
- Microsoft’s GitHub subsidiary will now allow developers to use AI models from Google or Anthropic, providing alternatives to OpenAI’s GPT-4.
Microsoft announced in its latest quarterly earnings report that it expects a $1.5 billion reduction in income this quarter due to anticipated losses from OpenAI, the company behind the popular ChatGPT application. Although Microsoft has invested around $14 billion into OpenAI, the generative AI sector’s revenue-boosting potential is expensive. OpenAI anticipates $5 billion in losses this year despite forecasting $4 billion in revenue.
Microsoft CFO Amy Hood clarified that these losses are recorded using the equity method, which accounts for Microsoft’s share of OpenAI’s financial outcomes, rather than a shift in their strategic relationship. Hood emphasized that the partnership remains strong, benefiting Microsoft through intellectual property development and significant revenue opportunities tied to generative AI.
Despite these OpenAI losses, Microsoft posted earnings and revenue growth for the fiscal first quarter. However, its stock took a hit in extended trading due to a lower-than-expected growth forecast. OpenAI is a cornerstone of Microsoft’s growth strategy, which is evident in its integration of OpenAI’s models into multiple Microsoft products. However, Microsoft’s GitHub subsidiary announced that it would permit developers to use models from competitors such as Google and Anthropic, allowing alternatives to OpenAI’s GPT-4 for GitHub’s Copilot Chat feature.
In addition to its cumulative $13 billion investment in OpenAI, Microsoft recently contributed another $750 million, participating in a funding round valued OpenAI at $157 billion as of October. This deep investment aligns with the aggressive AI spending across the tech sector, with Amazon recently investing $4 billion in OpenAI competitor Anthropic.
The disclosure of OpenAI losses marks a shift in Microsoft’s approach to transparency about its AI investments. However, its recent reports have shown over $2.3 billion in “other expense” related to this sector over the past four quarters. During the earnings call, Microsoft CEO Satya Nadella underscored the advantages of the OpenAI partnership, noting the mutual benefits and value derived from Microsoft’s substantial investment stake.
While this investment may impact short-term earnings, Microsoft’s strategic alignment with OpenAI positions it to remain a leader in the expanding generative AI space, a sector that has already proven transformative for both revenue and product innovation within the company.
