Tech Giants Microsoft and Google brace for AI costs to drive future

Tech giants Microsoft and Alphabet’s Google are banking on the potential of artificial intelligence (AI) to generate substantial profits in the future. However, both companies have acknowledged that deeper investments will be necessary before these gains start trickling down to the bottom line, Reuters news report said.
Microsoft and GoogleMicrosoft’s capital expenditures jumped to $10.7 billion from $7.8 billion in the fiscal third quarter, after the company told investors spending would rise as it builds out data centers for AI work.

Microsoft revealed that its costs have escalated as it continues to build new data centers to support AI operations. The company’s capital expenditures are expected to rise further as it invests in chips from companies like Nvidia to power these data centers.

The AI expenses are incurred in two ways: to develop AI products for Microsoft’s own portfolio, such as the upcoming Copilot AI assistant priced at $30 per month, and to cater to companies seeking to create AI products using Microsoft’s Azure cloud computing services.

Industry analysts speculate that Microsoft’s AI service will begin generating substantial revenue during the second half of its fiscal year 2024, which ends on June 30. Microsoft’s investment in Nvidia’s flagship AI chips, the H100s, reflects the company’s commitment to providing powerful AI solutions to its customers.

Alphabet’s Google has been making significant AI investments over the past decade, amounting to an estimated $200 billion. However, CFO Ruth Porat noted that some of these investments may not be immediately apparent to users and investors. One cost-saving advantage Google possesses is its custom chip, the Tensor Processor Unit (TPU), specifically designed for AI work, which helps keep expenses in check.

Google’s total cost and expenses reached $52,766 million in Q2 2023 as compared with $50.232 million in Q2 2022. Google’s R&D expenditure alone touched $10,588 million. Google does not reveal its capital expenditure.

Ruth Porat, CFO of Alphabet and Google, said: “We continue investing for growth, while prioritizing our efforts to durably reengineer our cost base company-wide and create capacity to deliver sustainable value for the long term.”

In contrast to Google’s in-house AI chip, Microsoft relies heavily on purchasing Nvidia’s chips and currently lacks its own alternative silicon. Consequently, Microsoft’s aggressive buying of Nvidia chips might impact the company’s profit margins in the short term, according to analysts.

While both companies acknowledge the importance of reaching an inflection point where AI-driven profits surge, there is a difference in investor sentiment. Microsoft investors seem eager to see more concrete evidence of the anticipated revenue growth from AI ventures, whereas Google’s strategy of prudent spending is appreciated, considering the company’s existing cost-effective solutions like the TPU.

Both Microsoft and Alphabet understand that AI is the way forward for the tech industry, and they are willing to make substantial investments to secure a dominant position in this rapidly evolving field. As they build and refine their AI capabilities, the tech giants are poised to shape the future of AI-driven services, applications, and solutions for the world.