In the global cloud computing market competition, Microsoft successfully turned its cloud computing service into a profitable business by integrating OpenAI's artificial intelligence technology. Taking TikTok as an example, according to a person who has seen internal financial documents, as of March this year, TikTok's monthly cost for purchasing OpenAI's artificial intelligence model service through Microsoft was nearly 20 million US dollars, which almost accounted for 25% of Microsoft's total revenue in that business. At that time, Microsoft's annual revenue from that business was expected to reach 1 billion US dollars, or 83 million US dollars per month. In terms of product structure, the operating income of products valued at 10-30 billion yuan respectively was 401/1288/60 million yuan.

However, behind this success lies the risk of high customer concentration. TikTok and its parent company ByteDance also have ambitious plans in the field of AI, intending to develop dialogue and image generation software comparable to OpenAI. This may mean that once TikTok's AI technology matures, its dependence on Microsoft will decrease, leading to a rapid slowdown in Microsoft's cloud business revenue growth.

To alleviate this risk, Microsoft needs to expand the number and types of companies purchasing such artificial intelligence. Microsoft is seeking other reliable corporate clients such as Walmart and financial software company Intuit. These clients pay millions of dollars per month to Microsoft in order to access OpenAI models. Intuit's participation is particularly noteworthy because the company previously mainly spent money renting Amazon servers.

At the same time, Microsoft is pursuing a diversified strategy and is using AI technology in multiple ways to make money. Microsoft's cloud service is not limited to Azure OpenAI service. The company also sells AI writing, coding, and summarizing functions to existing customers of Office 365 and other enterprise software, collectively referred to as Copilot. CEO Satya Nadella said that the subscription volume of Copilot has doubled in the past three months, with financial services companies being one of its main buyers.

TikTok becomes a major customer of Microsoft's AI

It is reported that Microsoft has successfully taken away customers and market share from its main competitors Google, Amazon, and Oracle. For example, TikTok originally mainly used its competitors' cloud services, but now turns to purchasing Microsoft's cloud services, bringing huge revenue to Microsoft's cloud business.

Intuit has developed a series of AI functions that provide financial advice based on customers' personal data. The company previously mainly spent money renting Amazon servers. Intuit CEO Sasan Goodarzi said in May that more than 24 million customers had used these functions since September, and Intuit plans to “accelerate investment” in the field in the coming year.

Walmart is a long-term customer of Microsoft's cloud service, and the company claims to use this technology to provide personalized shopping recommendations. Another customer that spends millions of dollars a month on Azure OpenAI services is G42, headquartered in Abu Dhabi, which previously announced a cooperation with OpenAI to develop artificial intelligence for Middle Eastern customers.

It is currently unclear whether Walmart or TikTok is using Azure OpenAI services to improve their own competitive AI models, and once their model technology matures, their spending on Microsoft may be reduced. It is reported that using OpenAI's technology to develop competitive AI models violates OpenAI's rules, but many customers still do so. OpenAI does not seem to enforce these rules, possibly because it has been accused of violating intellectual property rules in training its most advanced AI.

Last year, reports indicated that ByteDance was using OpenAI's GPT-4 model to train its internal AI models, partly by having OpenAI's chatbot generate text fragments and then inputting them into its own model. In response to the report, ByteDance stated at the time that it was adopting OpenAI's model to develop its own model on a "very limited scale".

Facing the risk of high customer concentration, Microsoft seeks to expand its customer base and multiple revenue streams.

However, Microsoft's profitability growth with the help of OpenAI artificial intelligence is heavily dependent on its large customers such as TikTok. To meet the high expectations of the market for Microsoft's business, Microsoft needs to continue to attract and retain more large customers, because investors demand that it deliver on its promise to the business prospect. Previously, the company had spent billions of dollars sponsoring OpenAI's technology and data center servers. It is widely expected that these investments will eventually turn into profits.

On Tuesday, Microsoft released its financial report, which showed that its second-quarter cloud revenue overall sales growth was 29%, lower than market expectations. After the market closed, Microsoft's stock price fell by more than 7%, followed by Amazon, Datadog and Snowflake. Microsoft's stock price fell more than 2.5% on Wednesday morning.

Google Cloud's sales also increased by 29% in the quarter ending in June, but the business scale is much smaller than Azure, which means that Microsoft is taking away market share. Despite the negative market reaction, Microsoft is still optimistic and expects Azure revenue to accelerate next year.

Microsoft is leveraging AI technology in multiple ways to make money. In addition to Azure OpenAI services, Microsoft is selling existing customers of its Office 365 applications and other enterprise software artificial intelligence writing, coding, and summarizing features (collectively referred to as Copilot). On Tuesday, CEO Satya Nadella said the number of customers who bought 10,000 or more Copilot subscriptions between March and June doubled. Financial services companies have been among the biggest buyers, but it is unclear how large the business is overall.

In addition, Microsoft is directly selling a certain percentage of revenue from models to enterprises through OpenAI, and this year that number unexpectedly exceeded that of Azure's OpenAI services. Additionally, Microsoft creates billions of dollars in revenue each year by renting servers to OpenAI (although the profit margin is not high) so that this startup can run ChatGPT and develop related technology.