AI-Powered Cloud from Microsoft Poses Threat to Amazon’s Dominance

There are indications that Microsoft is closing the gap on cloud leader Amazon.com, propelled by the adoption of its AI-powered services by businesses. This trend is fueled by generative AI features, powered by OpenAI’s technology, offered by Microsoft.
Microsoft’s Copilot ProThe Redmond, Washington-based software supplier has outpaced rivals such as Amazon and Google-parent Alphabet in introducing AI services, including Copilot, a set of genAI tools integrated into Microsoft’s business applications. Launched in November at a monthly subscription of $30, Copilot has emerged as a compelling offering driving Microsoft’s growth in the sector.

Microsoft’s earnings report, scheduled for Thursday, is poised to serve as a significant indicator of AI adoption trends and could potentially influence the movement of technology stocks, Reuters news report said.

Microsoft, having overtaken Apple as the world’s most valuable firm, will report substantial gains attributed to its significant investments in generative AI, particularly in attracting clients to its Azure cloud-computing service.

“AWS has been slower than its competitors to make AI advances, which may explain why its growth is not accelerating as rapidly as that of Azure and Google Cloud,” said Yi Zhang, Analyst at Canalys, in a February 2024 report.

Google recently introduced its rebranded Gemini large language model into Workspace applications, such as Gmail and Docs. At the same time, Microsoft launched Copilot for Microsoft 365 last November, embedding its generative AI platform into Word, Excel and other office applications.

“This trend underscores the growing importance of AI in enhancing user experiences, productivity and efficiency within software ecosystems,” said Alex Smith, VP at Canalys, in a report on Cloud market.
Cloud market trends in 2023Rishi Jaluria, an analyst at RBC Capital Markets, highlighted the “halo effect” surrounding Microsoft’s AI strategy, forecasting Microsoft’s potential to seize market share from Amazon. He noted that cloud providers, including Microsoft, stand to benefit from indications of stabilization in technology spending amidst economic uncertainty and high-interest rates.

According to estimates from Visible Alpha, Azure, Microsoft’s cloud platform, is projected to have experienced robust growth of 28.9 percent in the January-to-March period, outpacing its competitors. This growth is supported by a significant revenue contribution from AI services, with analysts estimating up to 8 percentage points of Azure’s growth attributed to AI offerings.

Recently, Coco-Cola has announced a $1.1 billion technology deal with Microsoft to use its AI and Cloud services.

Looking ahead, analysts foresee Microsoft’s AI-driven revenue to further accelerate in the coming years. Morgan Stanley analysts anticipate a substantial $5 billion revenue contribution from Copilot alone in Microsoft’s fiscal 2025, set to commence in July. However, they caution that broader elements of the generative AI story may require additional time to mature and navigate through enterprise purchasing cycles.

In contrast, while Alphabet has witnessed a surge in its shares on the back of optimism surrounding its AI initiatives, analysts caution that the monetization of these technologies, particularly within Google Cloud, may take longer to materialize. Despite Google’s extensive AI features integrated into Workspace productivity apps, analysts suggest a more meaningful impact on revenue is not expected until 2025.

Amazon has yet to make significant AI-related announcements but is gradually incorporating the technology into AWS, leveraging its investment in OpenAI competitor Anthropic. Analysts believe Amazon is poised to catch up with Microsoft’s AI capabilities over the next few years, despite Microsoft’s significant gains in the past year.

Microsoft’s AI-powered offerings are reshaping the competitive landscape in the cloud-computing market, posing a tangible threat to Amazon’s (AWS) dominance while Google navigates a longer path towards monetizing its AI investments.

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