Microsoft and Google must both bear the costs of AI

Microsoft and Google must both bear the costs of AI

The competition for Google has long been just a click away. But even Microsoft MSFT -1.00% might find that the cost of delivering those clicks is pretty high in an AI-driven world — especially when even highly profitable tech giants need to pay close attention to their bottom line.

Microsoft said Tuesday that it is moving quickly to integrate OpenAI artificial intelligence tools into its products and services. These include OpenAI’s chatbot called ChatGPT, which launched just over a month ago and has skyrocketed in popularity as users flocked to the tool, which spits out answers to questions in conversation and – much to the dismay of educators everywhere – also write full essays and can even write poetry.

Warning heard on the road

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Chief Executive Satya Nadella told a Wall Street Journal panel at the World Economic Forum in Davos, Switzerland that “every Microsoft product will have some of the same AI capabilities to completely transform the product.”

Microsoft has already invested $1 billion in OpenAI and reportedly wants to invest even more in the startup, so its interest in leveraging the technology is not surprising. But the news was also another unwelcome development for Google, whose core search business could be threatened by question-and-answer technologies like ChatGPT.

The New York Times reported last month that the November 30 launch of ChatGPT prompted Google management to declare a “Code Red” internally. Microsoft is Google’s biggest web search rival, although its search engine, Bing, still accounts for a low single-digit percentage of the global market.

Shares in Google parent Alphabet GOOG -0.09% slid nearly 1% on Tuesday and are down nearly 10% since ChatGPT launched — the worst performance of big tech companies and triple the percentage loss of the Nasdaq during that period . Microsoft shares rose a fraction on Tuesday, while Nvidia, which specializes in artificial intelligence chips used in both companies’ data centers, rose nearly 5%.

“We see ChatGPT’s prowess and consumer appeal as a near-term threat to Alphabet’s multiple and a boost to Microsoft and Nvidia,” UBS analysts wrote in a recent report.

ChatGPT seems to be more than a flash in the pan indeed. Data from Similarweb shows that the number of daily visits to the tool’s homepage recently surpassed 20 million – almost double the daily traffic the site generated two weeks after its launch.

But investors may be overtaking each other in terms of impact on Google. Not all web requests are created equal – especially those that generate revenue from ad links. ChatGPT specializes in natural language queries that generate human-like responses.

However, not all of these answers contain correct information and it is difficult to trace the source of this information. In a recent report, Bernstein analyst Mark Shmulik said there is “an ocean of differences between a general information search request and a monetizable one,” adding that ChatGPT’s shortcomings in the latter are “quite evident.”

Google can also draw on the ingrained behavior of the masses. According to StatCounter, the company has powered more than 90% of the world’s web searches since at least 2009. Even Microsoft’s introduction of Bing mid-year didn’t really take away from Google’s share.

Ultimately, given the computing power required, integrating AI tools like ChatGPT could be costly for both companies. Morgan Stanley’s Brian Nowak estimates that ChatGPT’s cost per query is about seven times what Google costs for a traditional search query.

That multiple could drop to four times if OpenAI is able to access the lowest price tiers of Microsoft’s cloud service Azure, Nowak estimates. But that’s still quite a gap, and one that reflects the costs Microsoft could bear as it embeds ChatGPT and other OpenAI tools deeper into its products.

Such pressure would be premature. Investors are turning their attention to earnings at both companies as revenue growth is expected to slow significantly this year. Alphabet’s operating margins are expected to be 27% this year — down from 2022, but still about 5 percentage points above the average for the three years before the pandemic. Meanwhile, Microsoft is expected to keep its own margins above 40% for the third straight year — an achievement not seen since 1999.

Both companies have so far avoided major job cuts, but that could change soon. The Wall Street Journal reports that Microsoft could announce layoffs as early as Wednesday morning, and many expect Google’s parent company to make a similar move soon.

How to spend more when investors want to see them spend less is a question that even ChatGPT couldn’t answer.

ChatGPT, OpenAI’s new artificially intelligent chatbot, can write essays on complex topics. Joanna Stern went back to high school AP Literature for a day to see if she could pass the class using only AI. Photo illustration: Elena Scotti

Write to Dan Gallagher at [email protected]

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