Microsoft gains major AI client as TikTok spends $20 million monthly

Where many have struggled to turn their cloud services into a profitable endeavour, Microsoft has stood out by integrating OpenAI’s successful AI technology.

For instance, take TikTok. According to internal financial documents, as of March 2022, ByteDance’s TikTok was spending nearly $20 million every month on OpenAI’s AI model services, which TikTok accessed through Microsoft. This hefty amount accounted for almost 25% of Microsoft’s total revenue in that sector. At the time, Microsoft’s annual revenue from this business was expected to hit $1 billion, or around $83 million per month.

But behind this success lies a risk: high customer concentration. While Microsoft is relying on AI in its work with TikTok, the latter company has also developed its own AI-related plans. In particular, ByteDance wants to create software that can generate dialogue and images. This means that TikTok’s AI might soon become more competent than the one utilised by Microsoft, which could negatively impact the growth of Microsoft’s cloud business revenue.

To reduce this risk, Microsoft is trying to attract more corporate clients, such as Walmart and financial software provider Intuit. These companies pay millions of dollars monthly to access OpenAI’s models through Microsoft. For Intuit, this subscription is a hopeful sign since the company used to rent its servers from Amazon.

Microsoft is also adopting a diversified strategy by utilising AI in a number of ways. Their cloud service does not just consist of Azure OpenAI; they also have a service named Copilot, through which they sell AI-powered writing, coding, and summarising features to existing Office 365, and other enterprise software customers. Three months ago, CEO Satya Nadella mentioned that the subscription volume for Copilot had doubled, with major buyers including financial services.

The success of Microsoft’s AI can be attributed to major customers like TikTok, which has significantly contributed to the company’s profits. Microsoft has also achieved success in pulling customers away from competitors like Google, Amazon, and Oracle. For instance, TikTok initially used the cloud services of these companies, but now spends money on using Microsoft’s cloud technology.

In addition, Intuit previously rented servers from Amazon. This company developed a range of AI functions aimed at providing financial advice to customers based on their data. As Intuit CEO Sasan Goodarzi mentioned, since September, more than 24 million people have used this function. In the next fiscal year, the company intends to “accelerate investments” in this area.

Walmart, one of the longest-term customers of Microsoft’s Azure OpenAI services, uses this technology at scale to deliver shopping recommendations to its customers. At the same time, a Microsoft customer from Abu Dhabi, G42, spends millions of dollars monthly on Azure OpenAI services, and has announced its partnership with OpenAI to create AI for Middle Eastern customers.

However, some uncertainty still exists. It is unclear whether Walmart or TikTok use this technology to improve their own AI models. If they do, a share of their spending on Microsoft’s products will decrease once their technology matures. Although OpenAI prohibits using its technology to create competitive AI models, many customers still do so, and OpenAI appears to tolerate this practice.

According to reports from the previous year, ByteDance trained its internal AI models using OpenAI’s GPT-4 model by having its chatbot produce text fragments that ByteDance’s model then incorporated. ByteDance responded by saying they were only “very limitedly” utilising OpenAI’s approach.

In order to reduce the risk associated with a high customer concentration, Microsoft is working to increase both its clientele and sources of income. Microsoft has benefited greatly from OpenAI’s AI technologies, but the company is still highly reliant on big clients like TikTok. Microsoft must attract and retain more large clients to meet market expectations. In the hopes that these investments will someday pay off, the corporation has put billions of dollars into OpenAI’s technologies and data centre servers.

Microsoft’s financial report was made public on Tuesday. It revealed a 29% increase in cloud revenue for the second quarter, which was less than anticipated by the market. This was followed by a more than 7% decline in Microsoft’s stock price, which impacted other tech stocks, such as Amazon, Datadog, and Snowflake. Despite the decline, Microsoft remains upbeat and anticipates a spike in Azure revenue the following year.

Additionally, Microsoft is selling a percentage of revenue from AI models directly to enterprises, with this year’s numbers unexpectedly surpassing those of Azure’s OpenAI services. Microsoft also generates billions in revenue annually by renting servers to OpenAI, allowing the startup to run ChatGPT and develop related technology, despite not having high profit margins from this.

See also: Microsoft and Apple back away from OpenAI board

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