OpenAI's artificial intelligence model sales have surpassed Microsoft's annualized revenue of more than $1 billion

Tencent Technology

2024-06-28 09:43Official account of Tencent News Technology Channel

Highlights:

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  A few months ago, OpenAI's annualized revenue from selling AI models to developers exceeded $1 billion.

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  OpenAI's revenue from selling access to AI models, including GPT-4, has now surpassed Microsoft's revenue in similar business areas.

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  To alleviate antitrust concerns, Microsoft and OpenAI previously reached an agreement that would allow both parties to compete for customers.

Tencent Technology News reported on June 27 that according to foreign media reports, when Microsoft formed a strategic alliance with OpenAI in 2019 to jointly promote the startup's AI technology, Microsoft's excellent reputation, extensive network and strong sales capabilities were the key factors to win large customers. Over time, however, OpenAI has shown remarkable skill and strength in building partnerships with its customers.

OpenAI's revenue from selling access to AI models, including GPT-4, has now surpassed Microsoft's revenue in similar business areas. This achievement is particularly remarkable for OpenAI, as until the middle of last year, the company's sales team was relatively small and didn't seem to be on par with Microsoft in terms of sales capabilities. OpenAI has achieved this through a series of simple but effective strategies: promising customers priority access to the latest version of conversational AI, and assisting key customers in tailoring the software to their specific needs. These strategies have helped OpenAI effectively withstand the attractive discounts that Microsoft offers to customers of bundled services.

As of March this year, OpenAI's annualized revenue from the sale of access to its AI models was close to $1 billion, according to a person who has access to OpenAI's related businesses. In stark contrast, OpenAI CEO Sam Altman revealed to his team this month that Microsoft's similar service — Azure OpenAI Service — had not until recently reached the same annualized revenue level.

This also means that OpenAI, which has been selling access to AI models since 2020, has begun to take the lead this year. Microsoft will generally launch the Azure OpenAI service in January 2023. Both of the services from OpenAI and Microsoft are available in the form of application programming interfaces (APIs). The rapid growth of OpenAI's API business has put pressure on Microsoft's business of reselling OpenAI models. According to insiders involved in the decision-making, Microsoft's management recently adjusted the charging standard of the Azure OpenAI service to weaken OpenAI's momentum in the customer war.

For example, Microsoft has reduced the minimum amount that customers must pay upfront to guarantee access to Azure OpenAI services during peak hours. According to people familiar with the matter, Microsoft has slashed that price by 25% to about $185,000 per month. Neither Microsoft nor OpenAI's official representatives commented on the change.

According to people with direct knowledge of Microsoft, the company's executives expect the Azure OpenAI service to achieve $2 billion in annualized revenue, or $166 million per month, in a year's time. While OpenAI hasn't made a clear statement on how fast its API business will grow, it has more than tripled in the past year.

This significant growth reflects a surge in interest from business customers in large language models and conversational AI that can mimic human responses and analyze data. While these models still fall short, companies are beginning to use them to build automated customer service systems, accelerate the development of new drugs, and find trading opportunities in publicly available securities filings.

Friendly competitive situation

The latest revenue figures also reflect that the unique partnership between OpenAI and Microsoft could be tested by increased competition. For now, the competition between the two sides seems to be friendly, and they are still planning a supercomputer project that could be completed in a few years.

The company's share price has nearly doubled on Wall Street's expectation that products such as Azure OpenAI services and Copilot will drive revenue growth. Copilot is a suite of AI capabilities for software developers and Office 365 users, relying on OpenAI's technology. However, OpenAI is now a formidable competitor to Microsoft in both product areas.

In the long run, Microsoft will benefit from OpenAI's success in other ways. Microsoft can use OpenAI's technology to develop its own products indefinitely. In addition, after OpenAI repays its first investors, Microsoft will receive 75% of OpenAI's profits until its $13 billion principal investment is repaid; After that, Microsoft will receive 49% of OpenAI's profits until it reaches a theoretical upper limit. This ceiling may also be raised soon.

Even if Microsoft loses to OpenAI in some sales — big customers like Klarna and Salesforce, for example, have signed deals directly with OpenAI — Microsoft hasn't completely failed. OpenAI paid Microsoft to run its AI business in its Azure data centers, and also paid Microsoft a 20% commission on API sales. However, Microsoft has a much lower profit margin from this arrangement than by reselling OpenAI models directly to enterprise customers. Moreover, enterprise customers seem to be more inclined to buy their products directly from OpenAI.

Igor Jablokov, founder and CEO of Pryon, said: "Enterprises are now more inclined to choose AI native companies like OpenAI than to model services provided by cloud service providers, and this far-reaching change is underway. ”

For example, Holiday Extras, a European travel booking site that competes with Expedia, has decided to pay OpenAI for access to the model and ChatGPT. Previously, OpenAI's sales staff and engineers met with Holiday Extras employees in London several times to help them customize the in-house chatbot. David Lee, director of innovation at Holiday Extras, said the custom chatbot has saved employees $800,000 worth of time each year by helping the customer service team provide travel resources or insurance policies based on the customer's travel destination. "The Azure products themselves are pretty good, but we prefer to get them directly from the team that developed them," he says. ”

Shift in profit model

Overall, Microsoft's Azure business covers server leasing and various services including Azure OpenAI services, with annual revenue of more than $55 billion. According to analyst estimates, Microsoft increased revenue by about $1.6 billion last year due to AI-related cloud services; In the quarter ended March, the business generated more than $1 billion in quarterly revenue. These revenues are mainly derived from Azure OpenAI services and fees paid by OpenAI for renting Microsoft servers. OpenAI was able to bear these costs thanks to Microsoft's $10 billion equity investment in it early last year.

According to people familiar with the matter, it is more profitable for Microsoft to sell OpenAI's technology directly to enterprises than to just collect cloud server rental fees from OpenAI. Initially, OpenAI paid Microsoft only enough to cover the cost of using Azure computing power, and OpenAI would then pay additional commissions to Microsoft. It is reported that the gross profit margin of Microsoft's Azure OpenAI service is about 40%, and with the improvement of the efficiency of artificial intelligence models, the gross profit margin of this business has improved. Considering the reduction in server usage fees paid by OpenAI to Microsoft, the gross margin of OpenAI's API business is also likely to be comparable.

The gross margins of the two companies include their respective commissions: 20 cents paid by Microsoft to OpenAI for every $1 of revenue generated from Azure OpenAI services, and 20 cents paid by OpenAI to Microsoft for every $1 of revenue generated from its own API sales. At present, the revenue share of the two companies is basically balanced. As for Microsoft's Copilot and OpenAI's ChatGPT competition in the enterprise market, their sales are more difficult to assess. Neither company disclosed specific sales figures.

While Microsoft has an advantage, as millions of companies pay for Office 365, and Microsoft claims that 60% of Fortune 500 companies are paying for Copilot, this advantage has not yet been shown in its financial statements. In fact, from the fourth quarter of 2023 to the first quarter of this year, Office's enterprise sales growth rate fell by 2 percentage points.

Build a competitive relationship

Microsoft's partnership with OpenAI has included elements of competition from the start. In 2019, when Microsoft made its first investment in OpenAI, the two parties reached a consensus to jointly sell OpenAI's models as partners and share the revenue. In 2022, OpenAI's revenue was just $28 million, almost all of which came from selling APIs to startups like Jasper, as it hadn't charged ChatGPT at the time.

By the end of 2022, the two parties had renegotiated the agreement on top of Microsoft's additional $10 billion investment. According to people familiar with the matter, the new agreement adds a clause that allows the two parties to operate as separate entities and compete for customers. Microsoft executives said the adjustment was partly to ease the pressure of antitrust scrutiny because of the unusual nature of the deal.

In March 2023, Microsoft began emphasizing Azure's privacy and security benefits to customers, trying to convince businesses to buy technology through Azure rather than directly from OpenAI. At the same time, OpenAI is also actively expanding its API business. By the end of June 2023, the business's annualized revenue had reached $333 million, accounting for one-third of the company's total revenue at the time.

OpenAI has also strengthened its sales team. James Dyett, the company's head of strategic accounts, said in a recent podcast interview that his team has grown from about 10 a year ago to more than 200 people. Dait said his current priority is to win some big customers and ensure they are satisfied. For example, mobile payments startup Stripe previously purchased models both through Azure and directly from OpenAI, but recently seems to be leaning more towards paying OpenAI directly. According to people familiar with the matter, AI search startup Perplexity has made a similar shift.

OpenAI's biggest advantage is that, under one of the terms of the agreement between the parties, it only needs to hand over the model to Microsoft after it has been developed, so it can sell its latest model to customers before Microsoft. This gives OpenAI the opportunity to charge customers for an early preview that in many cases is almost as good as the final version. As happened last year, OpenAI opened access to GPT-4 to customers weeks in advance, while the version offered by Microsoft through Azure went live later.

Discount services are available

Microsoft is relying on its greatest strength – bundling to win the deal. Takeshi Numoto, the chief marketing officer responsible for Microsoft's cloud services bundling strategy, has asked Azure management several times this year if they have the ability to get customers of Azure OpenAI services to invest in other Microsoft products as well. One of the challenges they face is that many Azure OpenAI service customers, like Intuit, are primarily using competitor cloud services like AWS.

Expedia, for example, buys models directly from OpenAI rather than through Azure in part because it uses AWS for most of its cloud services. Rajesh Naidu, senior vice president at Expedia, said another advantage of OpenAI is that its customer service appears more "agile." However, he also said that the company is open to moving to Azure in the future.

Microsoft's bundling strategy has already paid off with some high-profile customers. Earlier this year, Visa chose Azure OpenAI services over OpenAI to support its new fraud prevention tool, with plans to invest millions of dollars in the service each year. A spokesperson for the company said in a statement that the deal is part of a "strategic" partnership with Microsoft to purchase Microsoft's AI services.

It's a similar story with Wix, a website builder. The company began paying for AI models in 2022, when it was mainly paying directly to OpenAI. Recently, the company started using Azure to buy some OpenAI models, in part because it could get discounts on other Microsoft products. Wix CEO Avishai Abrahami said that overall, Wix is investing "millions" of dollars a year in these models. "When you make a deal with Microsoft, you usually get a discount," he says. (Compiler/Mowgli)

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