Home / Technology / News /  Microsoft and Google will both have to bear AI’s costs

Competition for Google has long been just a click away. But even Microsoft might find the cost of serving those clicks to be quite high in an AI-driven world—especially when even highly profitable tech giants have to closely mind their bottom lines.

Microsoft said Tuesday that it is moving quickly to incorporate artificial-intelligence tools from OpenAI into its products and services. This includes OpenAI’s chatbot called ChatGPT, which launched just over a month ago and has skyrocketed in popularity as users have flocked to the tool, which spits out conversational answers to queries and—much to the chagrin of educators everywhere—can also pen full essays and even poems.

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

Microsoft already invested $1 billion in OpenAI and is reportedly looking to put even more into the startup, so its interest in making use of the technology is unsurprising. But the news was also another unwelcome development for Google, whose core search business could be threatened by the question-answering function of technologies such as ChatGPT.

The New York Times reported last month that ChatGPT’s launch Nov. 30 triggered Google’s management to declare a “code red" internally. Microsoft is Google’s largest rival in web search, though its Bing search engine still only accounts for a low single-digit percentage of the global market.

Shares of Google-parent Alphabet slipped nearly 1% on Tuesday and have fallen nearly 10% since the ChatGPT launch—the worst performance of the big techs and triple the percentage loss of the Nasdaq during that time. Microsoft’s shares rose Tuesday by a fraction while Nvidia, which specializes in artificial-intelligence chips used in data centers by both companies, jumped nearly 5%.

“We see ChatGPT’s prowess and traction with consumers as a near-term threat to Alphabet’s multiple and a boost for Microsoft and Nvidia," UBS analysts wrote in a recent report.

ChatGPT indeed seems more than a flash in the pan. Data from Similarweb shows daily visits to the tool’s home page recently surpassed 20 million—nearly double the daily hits the site was generating two weeks after its launch.

But investors might be getting ahead of themselves as far as the impact on Google goes. Not all web queries are created equal—especially ones that will generate revenue through advertising links. ChatGPT specializes in natural-language queries that generate humanlike answers.

Not all of those answers contain correct information, however, and tracing the source of that information is difficult. In a recent report, Bernstein analyst Mark Shmulik said there is “an ocean of difference between a general information search query and a monetizable one," adding that ChatGPT’s shortcomings on the latter were “glaringly obvious."

Google also has the deeply ingrained behavior of the masses to fall back on. The company has powered more than 90% of global internet searches since at least 2009, according to StatCounter. Even Microsoft’s launch of Bing in the middle of that year didn’t really dent Google’s share.

Ultimately, incorporating AI tools such as ChatGPT could be costly for both companies given the computing horsepower required. Brian Nowak of Morgan Stanley estimates that ChatGPT’s cost per query is about seven times as much as the cost to Google 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 Azure cloud service, Mr. Nowak estimates. But that is still quite a gap, and one that is reflective of the costs Microsoft might bear as it works ChatGPT and other OpenAI tools deeper into its products.

Such pressure would be untimely. Investors are placing greater focus on both companies’ profits as revenue growth is projected to slow considerably this year. Alphabet’s operating margins are expected to come in at 27% this year—down from 2022 but still about 5 percentage points above what it averaged in the three years before the pandemic. Meanwhile, Microsoft is expected to keep its own margins above the 40% line for the third consecutive year—a feat not managed since 1999.

That may explain why Microsoft finally elected to follow other major techs in reducing its headcount. The company said Wednesday morning that it plans to lay off about 10,000 employees, or less than 5% of its workforce. Many expect Google’s parent to make a similar move soon.

How to spend more when investors want to see less going out the door is a question even ChatGPT wouldn’t be able to answer.

This story has been published from a wire agency feed without modifications to the text

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