#2 - Existing Players and their motives - MSFT
Summary:
MSFT had a series of misses over the past 15 years
OpenAI was part of a strategy to break from that past and wise move
During the past 15 years, MSFT fell behind on devices (Apple), search (Google), and cloud (Amazon). Plain and simple, these were misses by prior management1.
"We clearly missed the mobile phone, there's no question," Nadella said. "Our goal now is to make sure we grow new categories." - Satya Nadella2
"In the software world, particularly for platforms, these are winner-take-all markets. So the greatest mistake ever is whatever mismanagement I engaged in that caused Microsoft not to be what Android is. That is, Android is the standard non-Apple phone platform. That was a natural thing for Microsoft to win" - Bill Gates3
If you are MSFT, with past misses, your decision is simple: Maximize cash flow on existing businesses and hope to turn the table by placing bets. The outcomes of those bets aren’t known in advance so you construct them like a portfolio. You think of them in two parts.
Expected Value calculations (probability X magnitude).
Marginal learnings per marginal $ invested. (I will cover this in a future post)
In 2019 MSFT announced a $1B investment in OpenAI4. In 2019 this “investment” represented 0.8% of revenues, 8% of cash on hand, 2% of operating cash flow, and 6% of R&D spend. The investment increased in 2022 as reported by the WSJ5. This was a smart bet. So now what?
If you are at MSFT, you now think about this investment in a few dimensions:
DEFENSE - Defense against a competitor having this offering6
UPSELL - Add into existing products7
NEW - Increase future new offerings8
VOLUME - Future captive cloud spend9 (I will cover this in a future post).
Bottom line: The investment in OpenAI was wise.
Huge Thanks to Xander Dunn for reviewing this
To be clear - MSFT is an incredible business. The argument is that it missed opportunities and that is likely on management’s mind.
https://mashable.com/article/satya-nadella-we-missed-the-mobile-phone
https://www.cnet.com/tech/mobile/bill-gates-says-microsoft-losing-to-android-was-his-greatest-mistake/
https://openai.com/blog/microsoft/
https://www.wsj.com/articles/microsoft-in-advanced-talks-to-increase-investment-in-openai-11666299548
defend share in new + existing markets
increase pricing power / unit
unit volume
unit volume