The Exchanges

Q healthy operating margins at Azure. So I guess the question is for Microsoft, how do you compete in this world? That is, uh, where people are levering up, taking lower margins. While balancing that profit and, and, and risk. And do you see any of those competitors doing deals that cause you to scratch your head and say, oh, we're just setting ourselves up for another boom and bust cycle?

A I mean, I'd say at some level, the good news for us has been competing even as a hyperscaler every day, you know, there's a lot of competition, right, between us and Amazon and Google on all of these, right? I mean, it's sort of one of those interesting things, which is everything is a commodity, right? Compute, storage. I remember everybody saying, wow, how can there be a margin? Except at scale, nothing is a commodity. Um, and so therefore, yes, so we have to have a cost structure, our supply chain efficiency, Our software efficiencies all have to kind of continue to compound in order to make sure that there's margins, but scale. And to your .1 of the things that I really love about the OpenAI partnership is it's gotten us to scale, right? This is a scale game. When you have the biggest workload there is running on your cloud, that means not only are we going to learn faster on what it means to operate with scale, that means your cost structure is going to come down faster than anything else. And guess what? That'll make us price competitive. And so I feel pretty confident about our ability to, you know, have margins and, and that this is where the portfolio helps. I've always said, you know, you know, I've been forced into giving the Azure numbers, right? Because at some level I've never thought of allocating compute. I mean, my capital allocation is for the cloud from wheth…

AI assessment note: “When you have the biggest workload... that means your cost structure is going to come down”

Q everything on their head and they said, well, if we're not doing that anymore, it's way better because we can just move on to inference, which is getting cheaper. And you won't have to spend all this capex. I'm curious. Those are two kind of views of the same coin, but what's your view on, on large LLM model scaling and training costs and where we're headed in the future?

A Yeah, I mean, you know, This, I mean, I'm a big believer in scaling laws, I'll sort of first say, and in fact, if anything, the bet we placed in 2019 was on scaling laws, and I stay on that, right? Which is, in other words, uh, don't bet against scaling laws, but at the same time, uh, let's also be grounded on a couple of different things. One is, um, these exponentials on scaling laws will become harder, uh, just because as the clusters become harder, uh, Everything. I mean, the distributed computing problem of doing large scale training becomes harder. Um, and, and, and so that's kind of one side of it. So there is, uh, but I would just still say, and I'll let the OpenAI folks speak for what they're doing, but they are, you know, continuing to, you know, pre-training, I think is not over. It sort of continues. But the exciting thing, which again, OpenAI has talked to open, I mean, uh, about, and Sam has talked about is what they've done with O. One. Right? So this chain of thought with auto grading and, uh, uh, is just a fantastic. In fact, you know, basically it is test time compute or inference time compute as another scaling law, right? So you have pre-training and then you have effectively this test time sampling that then creates the tokens that can go back into pre-training, creating even more powerful models that then are running on your inference, right? So therefore,…

AI assessment note: “I'm a big believer in scaling laws, I'll sort of first say”

Q I can just get answers? So do you think, you know, first, Can Google and Bing continue to grow the legacy search businesses in the age of answers? And then what does, you know, what does Bing need to do or your consumer efforts under Mustafa need to do in order to, you know, compete with ChatGPT, which really looks like, you know, it's broken out from a consumer perspective.

A Yeah, I mean, I think the, the first thing is what you said last, which is chat meets answers, and that's ChatGPT, both the brand, the product, uh, and it's becoming stateful, right? I mean, like ChatGPT now is not just, you know, in fact, search was a stateless for, you know, there was search history, but I think more so, uh, these agents will be a lot more stateful. So, uh, in fact, so, That's why I was so thrilled. Like, I've been trying to get an Apple search deal for, like, 10 years. And so, when Tim finally did a deal with Sam, I was, like, the most thrilled person, which is better, it's better to have ChatGPT get that deal than anybody else, because we, you know, we have that commercial and investor relationship with OpenAI. So, to that point, the way I look at it and say is, at the same time, Distribution matters, right? I mean, this is where Google has an enormous advantage, right? They have the distribution on Apple. They're the default. Uh, they are obviously the default on Android. Uh, they touch, so therefore, I think, uh, uh, and the habits don't go away, right? I mean, the number of times you just go to the browser URL and just type in your query, right? I mean, even now, even though I want to go to copilot, I mean, my usage is mostly copilot. And like, if I have to think about Bing versus Copilot, it's kind of interesting, right? Some of the navigational stuff, …

AI assessment note: “Some of the navigational stuff, I go to Bing, pretty much everything else, I go to Copilot”

Q uh, you know, Microsoft started investing in. Is invested in the ballpark at 13, fourteen billion dollars into open AI. And for that you get 27% of the business Ownership in the business on a fully diluted basis. I think it was about a third, and you took some dilution over the course of last year with all the investment. So does that sound about right in terms of ownership?

A Yeah, it does. But I would say before even our stake in it, Brad, I think what's pretty unique about OpenAI is the fact that as part of OpenAI's process of restructuring, one of the largest nonprofit gets created. I mean, let's not forget that You know, in some sense, I say at Microsoft, like I, you know, we are very proud of the fact that we were, we are associated with the two of the largest nonprofits, the Gates Foundation and now the OpenAI Foundation. So that's, I think, the big news. We obviously were, you know, are thrilled. It's not what we thought, and as I said to somebody, it's not like when we first invested our billion dollars that, oh, this is going to be the hundred bagger that I'm going to be talking about to VCs about, but here we are. But we are very thrilled to be an investor and an early backer. And, and it's a great, and it's really a testament to what Sam and team have done, quite frankly. I mean, they obviously had the vision early about what this technology could do, and, uh, they ran with it and just executed, you know, in a masterful way.

AI assessment note: “Yeah, it does. But I would say before even our stake in it”

Q And so is Microsoft benefiting from that? You know, so let's, let's think about a couple of years from now, five years from now at the current growth rate will be sooner, but let's call it five years from now, your top line is twice as big as what it is today, Satya. How many more employees will you have? If you're, if you're, if you grow revenue by,

A Like one of the best things right now is these examples that I'm hit with every day from the employees of Microsoft. There was this person who leads our network operations, right? I mean, if you think about the amount of, uh, fiber we have had to put, uh, for like this, you know, this two gigawatt data center we just built out, uh, in Fairwater, right? And the amount of fiber there, the AI-WAN and what have you, it's just crazy, right? So, and it turns out this is a real world asset. There are, I think, 400 different fiber operators we are dealing with worldwide. Every time something happens, we are literally going and dealing with all these DevOps pipelines. The person who leads it, she basically said to me, you know what, there's no way I'll ever get the headcount to go do all this. Not forget, even if I even approve the budget, I can't hire all these folks. So she, she did the next best thing. She just built herself a whole bunch of agents to automate the DevOps pipeline of how to deal with the maintenance. That is an example of, to your point, a team with AI tools being able to get more productivity. So if you have a question, I will say we will grow a headcount. But the way I look at it is that headcount we grow will grow with a lot more leverage than the headcount we had pre-AI. And that's the adjustment I think structurally you're seeing first, right? Which is one, you c…

AI assessment note: “we will grow a headcount. But the way I look at it is that headcount”

Q about thinking that the next step for them, you know, it'd be great to have them as a public company. You know, it's such an iconic, uh, you know, business, uh, early leader in, in AI. Um, Is that the path that you see, you know, for these guys on the way forward? Um, or do you think that it stays kind of in the relationship that we are today?

A And that's the place where, Brad, I want to be careful not to overstep, right? Because in some sense, you know, I'm neither, we're not, we're not in the board, we're investors like you, uh, and, uh, at the end of the day, it's their board and their management decision. And so at some level, I'm going to take whatever their cues are. Like, in other words, I'm very clear that I want to support them with whatever decision they make. Um, and, and to me, Perhaps even as an investor, it's that commercial and IP partnership that matters the most. Uh, we want to make sure we protect our interests in all of this, uh, and if anything, bolster them going forward. Uh, but I think, you know, at this point, you know, people like Sarah and Brad and Sam are, you know, are very, very smart folks on this and what makes the most sense for them to achieve their Objectives on the mission is what we would be supportive.

AI assessment note: “I want to be careful not to overstep, right? Because in some sense, you know”