Microsoft’s big investment in ChatGPT should shake up the competition

Wednesday, January 25, 2023

Microsoft’s $10 billion investment in OpenAI draws the attention of Amazon, Google, and others

Microsoft (MSFT) is doing everything in its power to ensure it is the dominant force in AI among its Big Tech competitors. And the Redmond software giant’s $10 billion investment in ChatGPT developer OpenAI could be the key to that goal.

The move, which Microsoft and OpenAI announced on Monday, will allow Microsoft to deploy GPT-3, the service on which ChatGPT’s generative AI chatbot is based, and other platforms across various cloud services. And that could spell trouble for rivals ranging from Amazon (AMZN) and Google (GOOG, GOOGL) to Salesforce (CRM).

“It says a lot that within a week of announcing quite significant layoffs, Microsoft is also announcing a significant investment in OpenAI,” said Yahoo Finance Gil Luria, technology strategist at DA Davidson. Microsoft laid off 10,000 employees in multiple departments last week.

FILE - On Wednesday, November 30, 2016, photo from file, Microsoft CEO Satya Nadella answers a question at Microsoft's annual shareholder meeting in Bellevue, Washington.  Nadella has written an autobiography about his efforts to transform a tech company with an emphasis on empathy and changing the culture of the workplace.  The book Hit Refresh also reveals some personal challenges, such as risking changing his green card to a temporary work visa in the 1990s so his wife could join him in the United States.  (AP Photo/Elaine Thompson, file)

Microsoft CEO Satya Nadella is investing billions in AI technology to keep Microsoft ahead of rivals including Amazon, Google and Salesforce. (AP Photo/Elaine Thompson, file)

“It tells you that they believe that this is where Microsoft’s future growth could come from, and that the technology OpenAI is developing could bring significant improvements to a wide range of products for them.”

Microsoft’s investments should help it create AI-powered improvements on Azure, offer better features for various productivity and enterprise programs, and even make its Bing search engine a worthy competitor to market leader Google.

But GPT-3 is not without its flaws, and Microsoft’s rivals aren’t just waiting for the creator of Windows to become an AI giant. They are making their own investments in hopes of cutting off Microsoft.

OpenAI could give Microsoft a competitive advantage

OpenAI gained popularity with the 2021 release of the AI-based image generation software DALL-E. The company introduced the second version last year. The platform generates images based on prompts you specify. For example, typing “Cat riding a dinosaur” will create an image of a cat riding a dino in a digital art style. They’re not perfect images, but they get the point across pretty well.

Image generated by DALL-E 2 using the prompt

Image generated by DALL-E 2 using the prompt “Photo of a cat riding a dinosaur digital art”. (Image credit: OpenAI)

Meanwhile, ChatGPT is a generative AI chatbot that can spit out human responses to prompts. Ask him how far the moon is from the earth and he will tell you. Ask him to write a story about a maniacal hairdresser who eats human hair and you’ll get an incredibly bizarre story about it.

But there’s more to OpenAI than just cats and hair-hungry stylists. Analysts say this could be a boon for Microsoft’s cloud, enterprise, and search engine business.

“OpenAI tools can be integrated with various [Microsoft] platforms including Outlook and Office 365 productivity tools,” wrote Wedbush analyst Dan Ives in a research note.

“With ChapGPT, Azure’s cloud infrastructure can deliver new services that have yet to be seen in the Azure ecosystem, including digital assistants and AI-powered financial services to tap into a new customer base looking for alternatives to cloud products,” he added.

Such investments would help Microsoft cope with both Amazon, which is the leader in cloud services and holds 34% of the global market, according to Synergy Research Group, and Google, which owns 11% of the market. Microsoft holds 21% of the market.

Both Amazon and Google offer their own AI capabilities within their cloud platforms, but OpenAI technologies are much more popular and could attract more customers to Microsoft’s services.

Story generated by ChatGPT using the prompt

Story generated by ChatGPT using the prompt “Tell me a story about a crazy hairdresser who eats human hair.” (Image credit: OpenAI)

Ives predicts that Microsoft could also combine its investment in OpenAI with various gaming initiatives, giving it a competitive advantage over companies such as Sony (SONY) and Nintendo (NTODY).

One of the biggest potential opportunities for Microsoft is to use OpenAI technology to improve Bing search engine. With just 3% of the global market share, Bing ranks a distant second to Google’s search engine, which holds 92% of the market.

But Google’s search engine answers questions in a rigid, mechanical language. With GPT-3-like capabilities, Bing would be able to respond to queries with more natural wording and even allow users to ask additional questions and answers.

“Once we start incorporating generative AI into search, it’s going to fundamentally change the nature of search competition and give Bing an opportunity it hasn’t really had in decades to compete with Google Search,” said Luria. “This is a very significant opportunity now that the search market is once again… a bouncing ball.”

Microsoft’s dominance is by no means certain

That said, there’s no guarantee that the billions Microsoft is pouring into OpenAI will drive away its rivals. ChatGPT, GPT-3, DALL-E and the like are impressive technologies, but they are not foolproof.

The platform requires huge amounts of data to learn how to respond to queries. Specifically, ChatGPT is an offline-only platform that has been trained on 2021 data, meaning you can’t do things like ask about the weather or even who won the midterm elections.

And while the software impresses with how it responds more naturally than other platforms, it’s not always accurate. OpenAI says the same thing when you sign up for ChatGPT.

It will also be difficult for Microsoft to remove Google’s search engine from the position of the world leader in terms of search engine market share. The name of the company is ubiquitous in search engines. Heck, it is even used as a verb to search for information on the Internet.

“Google is part of the structure of the Internet based on the number of users,” Deepwater Asset Management managing partner Gene Munster wrote in a research note.

“I believe the company has four products with over a billion monthly users, including Search, Chrome, Gmail, and YouTube. Also, I believe they have two products with over 500 million monthly users, including Google Drive and Google Photos. User retention is a powerful competitive advantage for Google, and that means GPT-3 needs to be 10x better than what Google announces,” he said.

For Microsoft to win, it will have to continue working with OpenAI to develop tools that can put competitors to shame. This could take months or years, depending on how quickly the duo can iterate and combine OpenAI technologies with Microsoft services. But if it succeeds, Amazon, Google and Salesforce could be in big trouble.

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

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