Microsoft’s latest investment in OpenAI is widely seen as a last-ditch bid to revive Bing’s search engine from obscurity, but could it be more than that?
Cathie Wood’s ARK Invest believes that Google should lose more than just dominating internet search demand, which generates nearly 60% of parent company Alphabet’s overall revenue through online advertising sales.
In a research note published on Monday, ARK analyst Will Summerlin said that Microsoft CEO Satya Nadella could have another motive: to capture Google’s customers especially in the dynamic market of cloud computing.
“We believe that Microsoft aims not only to lower Google’s search margins, but also to prevent Alphabet from running Google Cloud and other businesses at a loss,” he wrote in the note.
There are currently three dominant global players that lease server hardware to third-party companies looking for scalable computing power.
The biggest is Amazon, which effectively builds its business model through its AWS unit. While most people might suspect that the e-commerce giant’s income comes from online sales, it is actually an annual loss. Only $23 billion in revenue from AWS saved the company year from disaster.
Next is Microsoft Azure, number two, followed by the newest and smallest entrant in the business, Google Cloud Platform.
Collectively known as hyperscalers. Whatever data processing your business needs from one day to the next, it can provide it flexibly and dynamically by increasing or decreasing the available computing power.
Year after year, the trio has generated impressive growth in cloud computing services. Here, recent quarterly gains of 20% to 30% or more—which largely reflect cautious corporate IT spending due to recession fears—are actually considered poor by historical standards.
Microsoft CEO Satya Nadella however remains bullish on the fact that the company can quickly cut costs by outsourcing its computing requirements and therefore reduce expensive investments in its own hardware.
“We’re still in the early stages when it comes to long-term cloud opportunities,” investors said late last month.
AI-enabled search is less profitable for Google
Summerlin argued that the roughly 8.5 billion Internet searches processed each day by Google subsidized large investments in strategic areas like the cloud, which reported a Q4 loss of $480 million.
Nadella’s recent multi-year, multi-billion-dollar investment in OpenAI, the creator of the revolutionary ChatGPT, could force Google to release AI features in search that could reduce its finances, Summerlin believes.
That’s because inference costs for language models like OpenAI’s pioneering GPT-3.5 are “significantly higher” than search engines, Google’s bread and butter business, according to Summerlin.
Furthermore, the monetization model for AI-based chat is still uncertain compared to the ad-based model that Google has mastered so well.
In other words, any attempt to balance Microsoft and OpenAI could paint Alphabet into a financial corner.
If the result is to protect margins by reducing investment in current loss-making activities such as Google Cloud, this could result in market share going to Microsoft and its Azure platform.
“By lowering Google’s search margins, Microsoft can put pressure on other Alphabet businesses, many of which compete with Microsoft,” Summerlin said.
Neither Microsoft nor Google could immediately be reached for comment.
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