Microsoft Shows AI Won’t Be a Loss Leader

How much is it worth to have a robot make boring PowerPoint presentations? A lot, it seems. 

Microsoft announced long-awaited pricing Tuesday for its Copilot artificial-intelligence tool: An additional $30 per user of the company’s Microsoft 365 bundle of cloud-based business-software offerings. The company also said it would introduce a version of its chatbot for the Bing search engine specially designed for business customers, along with a team-up with Meta Platforms to make the Facebook parent’s AI language model available to developers who are building software on Microsoft’s Azure cloud-computing platform. 

But it was the Copilot pricing that stole the show, sending Microsoft’s stock price up 4% by the closing bell. That is no trivial amount—$102 billion in market cap for a company whose stock price is now just 12% away from pushing its market value above the $3 trillion mark. That market response might seem excessive for what is essentially a new premium feature. But just how Microsoft will turn its extensive AI ambitions into profitable business lines has been a major question hanging over the company since it first unveiled Copilot in March. 

Analysts think the company’s pricing announcement hit the mark. Several noted on Tuesday that $30 a month was well above expectations; Mark Moerdler of Bernstein said the price represented a jump in the range of 53% to 240% to the list price of the various editions of the current Microsoft 365 bundle. That could run the risk of limiting adoption among business customers that are already watching their tech spending closely. 

But Microsoft is the world’s largest vendor of software tools used by large corporations, and it has been testing Copilot with a number of those clients over the past few months. The tests likely gave the company insight into what customers would be willing to pay for a chatbot-like tool that can automate tasks such as PowerPoint creations, spreadsheet analysis and even email replies. Brent Thill of Jefferies described the latest development as Microsoft “flexing pricing muscle.”

Pricing Copilot lower could spur more adoption, but likely also would run the risk of crimping Microsoft’s profit margins, which are paramount to the company’s investors. Powering generative AI services such as Copilot—which is modeled on chatbots such as ChatGPT—is demanding from a computing standpoint and thus expensive. But while Microsoft’s revenue growth has decelerated to mid-single digits of late because of the global economic slowdown, Wall Street expects the company’s operating margin to stay above 40% over at least the next two years, according to FactSet. 

Microsoft has been in the news a lot lately—mostly over its long-running battle to acquire Activision Blizzard. That deal is nearing completion; as of Tuesday afternoon, the two companies were working with British regulators to overcome the last remaining regulatory hurdle. But while buying the videogame publisher would be an important win for Microsoft, getting its AI pricing right could prove far more crucial to the company’s core business. The armies of “Call of Duty” are still dwarfed by the world’s spreadsheet warriors.

Write to Dan Gallagher at [email protected]