May 24, 2023

AI is a major focus for big tech

• Microsoft expanded its partnership with OpenAI in January 2023, and went all in, launching Bing AI (for search) and Copilot (a tool for its Office products), and reporting over 2,500 customers for Azure OpenAI (advanced language models) and 36,000 users of the AI capabilities on its Power Platform (a series of business applications) at the end of the quarter. AI will be a key driver of its cloud services, with Azure growing by 27% since a year ago. But the impact of AI will not be immediate in terms of revenues, and is expected to account for a very small share of 27% revenue growth expected from Azure in the second quarter.
• Alphabet is also doubling down on AI, underlined by its decision to combine DeepMind and Google Brain in April 2023. The company launched Bard (an AI chatbot) in March. At the just concluded IO conference, it also showcased new AI-focused search functions as well as a large language model (LLM) known as PaLM 2. Like Microsoft, Alphabet is hoping AI will boost its cloud revenues, which grew by 28% and reported its first profit in the first quarter of 2023.
• Amazon, the leading cloud provider, is also looking at AI, especially with cloud revenue growth dropping to 16% and expected to decline to 11% in the second quarter. The company will continue to invest in both generative AI and LLMs, and has launched two products to drive growth. AWS Bedrock, which makes LLMs from Amazon (including its most advanced model, AWS Titan) as well as other third parties available via an application programme interface (API). Amazon will also use AI to drive its advertising business, its fastest-growing segment in the first quarter of the year.
• Meta has seen strong R&D growth in the past year, with AI and the metaverse the two main drivers. The latter is still a priority, even if it will continue to report heavy losses in the next few quarters. The investment in AI has helped to monetise Reels and other content on its platforms. AI recommends 20% of content across its platforms, and this increases to 40% for Instagram. AI will also help its business messaging segment, which the company has focused on in the last few quarters as a way to monetise WhatsApp.
• Apple also focuses on AI, and many of the applications in its products use the technology. But it remains a hardware company at its core, despite the growing importance of its services segment, which beat the US$20bn revenue mark for the second consecutive quarter. Generative AI, which mostly runs on the cloud, is not yet disruptive for Apple’s hardware-focused business. Nevertheless,  it will need to continue to innovate to retain the hardware advantage it has built in the market.
• Cloud players have been quick to dominate the generative AI market. This can potentially raise competition challenges, if they create barriers to entry or become a critical part, because of the need for computational power, in the development of new AI models. The Federal Trade Commission (FTC) in the US, the Competition and Markets Authority (CMA) in the UK, and the EU through the Digital Markets Act (DMA) are already positioning themselves to intervene if needed.

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Source: EIU – Economist Intelligence Unit
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