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Microsoft turns 50, future success built on ability to ‘win the new’

admin — Fri, 04 Apr 2025 12:28:44 +0000

Microsoft CEO Satya Nadella speaks during the Microsoft Build conference at Microsoft headquarters in Redmond, Washington, on May 21, 2024.

Jason Redmond | AFP | Getty Images

A half-century ago, childhood friends Bill Gates and Paul Allen started Microsoft from a strip mall in Albuquerque, New Mexico. Five decades and almost $3 trillion later, the company celebrates its 50th birthday on Friday from its sprawling campus in Redmond, Washington.

Now the second most valuable publicly traded company in the world, Microsoft has only had three CEOs in its history, and all of them are in attendance for the monumental event. One is current CEO Satya Nadella. The other two are Gates and Steve Ballmer, both among the 11 richest people in the world due to their Microsoft fortunes.

While Microsoft has mostly been on the ascent of late, with Nadella turning the company into a major power player in cloud computing and artificial intelligence, the birthday party lands at an awkward moment.

The company’s stock price has dropped for four consecutive months for the first time since 2009 and just suffered its steepest quarterly drop in three years. That was all before President Donald Trump’s announcement this week of sweeping tariffs, which sent the Nasdaq tumbling on Thursday and Microsoft down another 2.4%.

Cloud computing has been Microsoft’s main source of new revenue since Nadella took over from Ballmer as CEO in 2014. But the Azure cloud reported disappointing revenue in the latest quarter, a miss that finance chief Amy Hood attributed in January to power and space shortages and a sales posture that focused too much on AI. Hood said revenue growth in the current quarter will fall to 10% from 17% a year earlier

Nadella said management is refining sales incentives to maximize revenue from traditional workloads, while positioning the company to benefit from the ongoing AI boom.

“You would rather win the new than just protect the past,” Nadella told analysts on a conference call.

The past remains healthy. Microsoft still generates around one-fifth of its roughly $262 billion in annual revenue from productivity software, mostly from commercial clients. Windows makes up around 10% of sales.

Meanwhile, the company has used its massive cash pile to orchestrate its three largest acquisitions on record in a little over eight years, snapping up LinkedIn in late 2016, Nuance Communications in 2022 and Activision Blizzard in 2023, for a combined $121 billion.

“Microsoft has figured out how to stay ahead of the curve, and 50 years later, this is a company that can still be on the forefront of technology innovation,” said Soma Somasegar, a former Microsoft executive who now invests in startups at venture firm Madrona. “That’s a commendable place for the company to be in.”

When Somasegar gave up his corporate vice president position at Microsoft in 2015, the company was fresh off a $7.6 billion write-down from Ballmer’s ill-timed purchase of Nokia’s devices and services business.

Microsoft is now in a historic phase of investment. The company has built a $13.8 billion stake in OpenAI and last year spent almost $76 billion on capital expenditures and finance leases, up 83% from a year prior, partly to enable the use of AI models in the Azure cloud. In January, Nadella said Microsoft has $13 billion in annualized AI revenue, more even than OpenAI, which just closed a financing round valuing the company at $300 billion.

Microsoft’s spending spree has constrained free cash flow growth. Guggenheim analysts wrote in a note after the company’s earnings report in January, “You just have to believe in the future.”

Of the 35 Microsoft analysts tracked by FactSet, 32 recommend buying the stock, which has appreciated tenfold since Nadella became CEO. Azure has become a fearsome threat to Amazon Web Services, which pioneered the cloud market in the 2000s, and startups as well as enterprises are flocking to its cloud technology.

Winston Weinberg, CEO of legal AI startup Harvey, uses OpenAI models through Azure. Weinberg lauded Nadella’s focus on customers of all sizes.

“Satya has literally responded to emails within 15 minutes of us having a technical problem, and he’ll route it to the right person,” Weinberg said.

Still, technology is moving at an increasingly rapid pace and Microsoft’s ability to stay on top is far from guaranteed. Industry experts highlighted four key issues the company has to address as it pushes into its next half-century.

Microsoft didn’t respond to a request for comment.

Regulation

There’s some optimism that the Trump administration and a new head of the Federal Trade Commission will open up the door to the kinds of deal-making that proved very challenging during Joe Biden’s presidency, when Lina Khan headed the FTC.

But regulatory uncertainty remains.

It’s not a new risk for Microsoft. In 1995, the company paid a $46 million breakup fee to tax software maker Intuit after the Justice Department filed suit to block the proposed deal. Years later, the DOJ got Microsoft to revamp some of its practices after a landmark antitrust case.

Microsoft pushed through its largest acquisition ever, the $75 billion purchase of video game publisher Activision, during Biden’s term. But only after a protracted legal battle with the FTC.

At the very end of Biden’s time in office, the FTC opened an antitrust investigation on Microsoft. That probe is ongoing, Bloomberg reported in March.

Nadella has cultivated a relationship with Trump. In January, the two reportedly met for lunch at Trump’s Mar-a-Lago resort in Florida, alongside Tesla CEO Elon Musk.

President Donald Trump shakes hands with Microsoft CEO Satya Nadella during an American Technology Council roundtable at the White House in Washington on June 19, 2017.

Nicholas Kamm | AFP | Getty Images

The U.S. isn’t the only concern. The U.K.’s Competition and Markets Authority said in January that an independent inquiry found that “Microsoft is using its strong position in software to make it harder for AWS and Google to compete effectively for cloud customers that wish to use Microsoft software on the cloud.”

Microsoft last year committed to unbundling Teams from Microsoft 365 productivity software subscriptions globally to address concerns from the European Union’s executive arm, the European Commission.

Noncore markets

Fairly early in Microsoft’s history the company became the world’s largest software maker. And in cloud, Microsoft is the biggest challenger to AWS. Most of the company’s revenue comes from corporations, schools and governments.

But Microsoft is in other markets where its position is weaker. Those include video games, laptops and search advertising.

Mary Jo Foley, editor in chief at advisory group Directions on Microsoft, said the company may be better off focusing on what it does best, rather than continuing to offer Xbox consoles and Surface tablets.

“Microsoft is not good at anything in the consumer space (with the possible exception of gaming),” wrote Foley, who has covered the company on and off since 1984. “You’re wasting time and money on trying to figure it out. Microsoft is an enterprise company — and that is more than OK.”

It’s unlikely Microsoft will back away from games, particularly after the Activision deal. Nearly $12 billion of Microsoft’s $69.6 billion in fourth-quarter revenue came from gaming, search and news advertising, and consumer subscriptions to the Microsoft 365 productivity bundle. That doesn’t include sales of devices, Windows licenses or advertising on LinkedIn.

“As a company, Microsoft’s all-in on gaming,” Nadella said in 2021 in an appearance alongside gaming unit head Phil Spencer. “We believe we can play a leading role in democratizing gaming and defining that future of interactive entertainment, quite frankly, at scale.”

AI pressure

Microsoft has an unquestionably strong position in AI today, thanks in no small part to its early alliance with OpenAI. Microsoft has added the startup’s AI models to Windows, Excel, Bing and other products.

The breakout has been GitHub Copilot, which generates source code and answers developers’ questions. GitHub reached $2 billion in annualized revenue last year, with Copilot accounting for more than 40% of sales growth for the business. Microsoft bought GitHub in 2018 for $7.5 billion.

Microsoft CEO Satya Nadella, right, speaks as OpenAI CEO Sam Altman looks on during the OpenAI DevDay event in San Francisco on Nov. 6, 2023.

Justin Sullivan | Getty Images

But speedy deployment in AI can be worrisome.

The company is “not providing the underpinnings needed to deploy AI properly, in terms of security and governance — all because they care more about being ‘first,'” Foley wrote. Microsoft also hasn’t been great at helping customers understand the return on investment, she wrote.

AI-ready Copilot+ PCs, which Microsoft introduced last year, aren’t gaining much traction. The company had to delay the release of the Recall search feature to prevent data breaches. And the Copilot assistant subscription, at $30 a month for customers of the Microsoft 365 productivity suite, hasn’t become pervasive in the business world.

“Copilot was really their chance to take the lead,” said Jason Wong, an analyst at technology industry researcher Gartner. “But increasingly, what it’s seeming like is Copilot is just an add-on and not like a net-new thing to drive AI.”

Innovation

At 50, the biggest question facing Microsoft is whether it can still build impressive technology on its own. Products like the Surface and HoloLens augmented reality headset generated buzz, but they hit the market years ago.

Teams was a novel addition to its software bundle, though the app’s success came during the Covid pandemic after the explosive growth in products like Zoom and Slack, which Salesforce acquired. And Microsoft is still researching quantum computing.

In AI, Microsoft’s best bet so far was its investment in OpenAI. Somasegar said Microsoft is in prime position to be a big player in the market.

“To me, it’s been 2½ years since ChatGPT showed up, and we are not even at the Uber and Airbnb moment,” Somasegar said. “There is a tremendous amount of value creation that needs to happen in AI. Microsoft as much as everybody else is thinking, ‘What does that mean? How do we get there?'”

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What DeepSeek’s Success Tells Us About China’s Ability to Nurture Talent

admin — Mon, 10 Feb 2025 15:23:34 +0000

To many Chinese, DeepSeek’s success is a victory for China’s education system, proof that it equals that of the United States or has even surpassed it.

The core team of developers and scientists behind DeepSeek, the Chinese start-up that has jolted the A.I. world, all attended university in China, according to the company’s founder. That’s a contrast with many Chinese tech companies, which have often sought talent educated abroad.

As Chinese commenters online basked in Americans’ shocked reactions, some pointed to the high number of science Ph.D.s that China produces annually. “DeepSeek’s success proves that our education is awesome,” read one blog post’s headline.

Acclaim has even poured in from overseas. Pavel Durov, the founder of the messaging platform Telegram, said last month that fierce competition in Chinese schools had fueled the country’s successes in artificial intelligence. “If the U.S. doesn’t reform its education system, it risks ceding tech leadership to China,” he wrote online.

The reality is more complicated. Yes, China has invested heavily in education, especially in science and technology, which has helped nurture a significant pool of talent, key to its ambition of becoming a world leader in A.I. by 2025.

But outside of the classroom, those graduates must also contend with obstacles that include a grinding corporate culture and the political whims of the ruling Communist Party. Under its current top leader, Xi Jinping, the party has emphasized control, rather than economic growth, and has been willing to crack down on tech firms it deems too influential.

DeepSeek has managed to evade many of those pressures, in part because it kept a low profile and its founder declared his commitment to intellectual exploration, rather than quick profits. It remains to be seen, though, how long it can continue doing so.

“There are many young, energetic and talented researchers and engineers inside China. I don’t think there’s a big gap in terms of education between China and the U.S. in that perspective, especially in A.I.,” said Yiran Chen, a professor of electrical and computer engineering at Duke University. “But the constraint is really from other parts.”

For many in China, the strength of its education system is closely tied to the nation’s global status. The government has invested heavily in higher education, and the number of university graduates each year, once minuscule, has grown more than 14-fold in the past two decades. Several Chinese universities now rank among the world’s best. Still, for decades, China’s best and brightest students have gone abroad, and many have stayed there.

By some metrics, that is starting to change.

China produced more than four times as many STEM graduates in 2020 as the United States. Specifically in A.I., it has added more than 2,300 undergraduate programs since 2018, according to research by MacroPolo, a Chicago-based research group that studies China.

By 2022, nearly half of the world’s top A.I. researchers came from Chinese undergraduate institutions, as opposed to about 18 percent from American ones, MacroPolo found. And while the majority of those top researchers still work in the United States, a growing number are working in China.

“You’re churning out all this talent over the last few years. They’ve got to go somewhere,” said Damien Ma, MacroPolo’s founder.

Washington has also made it harder for Chinese students in certain fields, including A.I., to obtain visas to the United States, citing national security concerns.

“If they’re not going to go abroad, they’re going to start some company” or work for a Chinese one, Mr. Ma said.

Some have criticized China’s educational system as overly exam-oriented and stifling to creativity and innovation. The expansion of China’s A.I. education has been uneven, and not every program is producing top-tier talent, Mr. Ma acknowledged. But China’s top schools, such as Tsinghua University and Peking University, are world-class; many of DeepSeek’s employees studied there.

The Chinese government has also helped foster more robust ties between academia and enterprises than in the West, said Marina Zhang, a professor at the University of Technology Sydney who studies Chinese innovation. It has poured money into research projects and encouraged academics to contribute to national A.I. initiatives.

Yet government involvement is also one of the biggest potential threats to Chinese innovation.

Beijing has blessed the A.I. sector — for now. But in 2020, after deciding that it had too little control over major companies like Alibaba, it launched a sweeping, yearslong crackdown on the Chinese tech industry. (DeepSeek’s founder, Liang Wenfeng, pivoted to A.I. from his previous focus on speculative trading, in part because of a separate government crackdown there.)

The resulting layoffs at tech companies, combined with the uncertainty of the sector’s future, helped diminish the appeal of a sector that once attracted many of China’s top students. Record numbers of young people have opted instead to compete for civil service jobs, which are low-paying but stable.

A.I. has been somewhat shielded from the brain drain so far, in part because of its political imprimatur, said Yanbo Wang, a professor at the University of Hong Kong who studies China’s tech entrepreneurship. He added that he expected more successful Chinese A.I. start-ups to emerge soon, driven by young people. But it is impossible to say what China’s A.I. landscape would have looked like if Beijing had been more tolerant toward big tech companies in recent years, he added.

“China’s long-term A.I. competitiveness hinges not only on its STEM education system, but also on its handling of private investors, entrepreneurs and for-profit companies,” he added.

Even within private companies, employees often must contend with a focus on quick results. That has led to a widely accepted stereotype, including within China, that Chinese engineers are better at improving on other people’s innovations than at coming up with their own.

Mr. Liang, DeepSeek’s founder, has lamented as much, noting last year that “top talents in China are underestimated. Because there’s so little hard-core innovation happening at the societal level, they don’t have the opportunity to be recognized.”

DeepSeek’s success may hinge as much on how it differed from other Chinese tech companies as on how it shared their strengths. It was financed by the profits from its parent hedge fund. And Mr. Liang has described hiring humanities graduates in addition to computer scientists, in the spirit of fostering a freewheeling intellectual atmosphere.

Since DeepSeek’s breakout success, some voices have urged more Chinese firms to emulate its model. An online commentary from the Communist Party committee of Zhejiang Province, where DeepSeek has its headquarters, declared the need to “trust in young talent” and give leading companies “greater control over innovation resources.”

But the best way for China to capitalize on its well-educated, ambitious A.I. work force may be for the government to get out of the way.

“Innovation requires as little intervention and management as possible,” Mr. Liang said in another interview. “Innovation often comes by itself, not as something deliberately planned, let alone taught.”

Siyi Zhao contributed research.

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