I think this is a really good take, and not one I’ve seen mentioned a lot. Pre-Internet (the world Microsoft was started for), the man expense for a software company was R&D. Once the code was written, it was all profit. You’d have some level of maintenance and new features, but really - the cost of sale was super low.
In the Internet age (the likes of Google and Netflix), it’s not much different, but now the cost of doing business is increased to include data centers, power, and bandwidth - we’re talking physical infrastructure. The cost of sale is now more expensive, but they can have significantly more users/customers.
For AI companies, these costs have only increased. Not only do they need the physical infrastructure, but that infrastructure is more expensive (RAM and GPUs) and power hungry. So it’s like the cost centers have gone up in expense by log-units. Yes, Anthropic and OpenAI can still access a huge potential customer base, but the cost of servicing each request is significantly more expensive. It’s hard to have a high profit margin when your costs are this high.
So what is a tech company founded in the 1970s to do? They were used to the profit margins from enterprise software licensing, and now they are trying to make a business case for answering AI requests as cheaply as possible. They are trying to move from low CapEx + low OpEx to and market that is high in both. I can’t see how they square this circle.
It’s probably time for Microsoft to acknowledge that they are a veteran company and stop trying to chase the market. It might be better to partner with a new AI company that is be better equipped to manage the risks than to try to force a solo AI product.
> cost of doing business is increased to include data centers, power, and bandwidth
Microsoft Azure was launched in 2010. They've been a "cloud" company for a while. AI just represents a sharp acceleration in that course. Unfortunately this means the software products have been rather neglected and subject to annoying product marketing whims.
They've had cloud products for a long time, but I don't think that Microsoft fundamentally changed. I still see them organized and treated as an Enterprise software company. (This is from my N=1 outside perspective.)
ChatGPT says that "productivity and business processes" is still the largest division in Microsoft with 43% of revenues and 54% of operating income (from their FY2025 10K). The "intelligent cloud" division is second with 38% revenue and 35% operating income. Which helps to support my point -- their legacy enterprise software (and OS) is still their main product line and makes more relative profits than the capital heavy cloud division.
Yeah. Hyperscalers who are building compute capacities became asset heavy industries. Today's Google, MSFT, META are completely different than 10 years ago and market has not repriced that yet. These are no longer asset light businesses.
ITT: we assume that "computer rooms", mainframes, and other dev tools weren't a thing for software companies pre-cloud
I se no one that assumes that.