OpenAI AI model sales surpass Microsoft! Annual revenue reaches $1 billion USD

Author: Fang Jiayao

Source: Hard AI

After establishing a partnership with Microsoft in 2019, the AI startup OpenAI has demonstrated remarkable sales capabilities. According to the latest internal data from both companies, as of March, OpenAI has generated approximately $1 billion in annualized revenue by selling access to its AI models. In comparison, Microsoft's similar product Azure OpenAI Service only recently reached $1 billion in annualized revenue (ARR). (Here, "annualized revenue" refers to taking the revenue figure from the previous month and multiplying it by 12 to estimate the total annual revenue.)

This achievement is particularly noteworthy because until the middle of last year, OpenAI had almost no dedicated sales team, while Microsoft is the world's largest enterprise and cloud software vendor.

In terms of revenue sources, OpenAI is known for its ChatGPT chatbot, and generates revenue by selling access to advanced AI models like GPT-4, assisting its largest customers in customizing software based on specific needs, among other methods.

In terms of specific business operations, OpenAI provides a service called an API (Application Programming Interface), allowing developers and companies to directly use its AI models, such as GPT-4. More and more customers are bypassing Microsoft and purchasing OpenAI's models directly. In collaboration with OpenAI, Microsoft also offers a similar service called Azure OpenAI Service, allowing customers to purchase access to OpenAI models through this service.

Facing the success of OpenAI's direct sales, Microsoft has felt competitive pressure and adjusted the pricing strategy of Azure OpenAI Service. They have reduced the minimum cost for customers to use servers during peak demand periods to increase the attractiveness of their service and reduce the likelihood of customers switching to OpenAI.

For example, Microsoft has reduced the minimum cost of using the OpenAI GPT-4 model during peak periods by 25%, from the previous price to approximately $185,000 per month. This means that customers now only need to pay a lower fee to ensure access to Microsoft's OpenAI service during peak demand periods.

According to insiders, Microsoft executives expect Azure OpenAI Service to achieve $2 billion in annualized revenue one year later, with an average monthly revenue of $166 million. It is currently unclear how fast OpenAI expects its API business to grow, but based on history, OpenAI's API business has grown by more than three times in the past year.

Companies are more inclined to directly cooperate with original developers like OpenAI rather than third-party service providers like Microsoft

As the market evolves, customers are increasingly inclined to establish direct contact with OpenAI and purchase its advanced AI products Microsoft has failed to win in some sales competitions with OpenAI, for example, some large customers such as Klarna and Salesforce have chosen to cooperate directly with OpenAI. Igor Jablokov, the founder and CEO of Pryon, conducted an in-depth analysis of this trend, stating:

"Enterprises are undergoing a fundamental transformation, they are now more willing to choose companies with AI as their core business, such as OpenAI, rather than relying solely on traditional cloud service providers to obtain the required AI technology models."

This indicates that obtaining technical services through third-party service providers may not fully meet the needs of all enterprises compared to directly obtaining services from technology developers. Although Microsoft's Azure products have a certain market competitiveness, companies are more inclined to collaborate directly with the original developers of the technology.

Holiday Extras, a European travel booking website and a competitor of Expedia, decided to pay OpenAI directly to access AI models and ChatGPT. This decision was made after multiple meetings between OpenAI's sales representatives and engineers in London and Holiday Extras' employees, where they helped customize an internal chatbot.

According to David Lee, the Director of Innovation at Holiday Extras, this chatbot helps customer service representatives determine which travel resources or insurance policies to provide based on customers' travel destinations, saving the company $800,000 in employee time costs annually.

When choosing partners, Lee clearly stated:

"Although Microsoft's Azure products are good... we really want to get the products directly from the developers."

In the enterprise service market, Microsoft's Copilot is in fierce competition with OpenAI's ChatGPT, both aiming to help employees summarize documents and write drafts more efficiently. However, as both companies have not disclosed specific sales data, it is currently difficult to assess their market performance.

Microsoft has a significant advantage in this field, thanks to the widespread use of its Office 365 applications, with reportedly 60% of Fortune 500 companies choosing to use and pay for Copilot services. However, despite the large user base, Microsoft's financial reports do not show a corresponding market advantage. From the fourth quarter of 2023 to the first quarter of 2024, there was a 2 percentage point slowdown in Office applications' enterprise sales growth.

This phenomenon indicates that enterprise users may be considering various options when choosing enterprise AI tools, including emerging technologies such as OpenAI's ChatGPT. Despite Microsoft's strong brand influence and customer base in the enterprise service market, continuously optimizing product features and enhancing user experience are still necessary to translate these advantages into actual financial gains

Despite sometimes losing to OpenAI, Microsoft can still gain long-term benefits through cooperation

From the beginning, there has been competition in the relationship between Microsoft and OpenAI. A person familiar with the contract said that when the two companies signed an agreement at the end of 2022, it was stipulated that they would operate as independent entities and compete for customers. A Microsoft executive told the individual that the reason for competing for customers was to reduce antitrust scrutiny.

The latest revenue data shows that the competition between OpenAI and Microsoft, this unusual pair of partners, is intensifying, but the current competitive relationship seems relatively friendly. The two companies are planning to collaborate on the development of a giant supercomputer expected to be completed in several years.

Microsoft's stock price has doubled in the past few years, mainly due to the growth prospects of Azure OpenAI services and products like Copilot. Copilot is a suite of AI features designed for software coders and Office 365 customers, leveraging OpenAI's technology. However, OpenAI has demonstrated competitiveness comparable to Microsoft in these product areas.

Looking at the long term, Microsoft is expected to benefit more from OpenAI's success. On one hand, Microsoft can permanently use OpenAI's technology in its own products. This means Microsoft can integrate advanced artificial intelligence technology developed by OpenAI into its various services and applications, whether existing or future products such as Azure cloud services, Office software suites, etc.

On the other hand, financially, Microsoft's cooperation with OpenAI also includes a profit-sharing agreement. According to this agreement, once OpenAI repays its initial investors' investments, Microsoft will receive 75% of OpenAI's profits until Microsoft's main investment (i.e., $13 billion) is fully repaid. Furthermore, after the $13 billion investment is recovered, Microsoft will continue to receive 49% of OpenAI's profits until reaching a theoretical upper limit (ceiling). This ceiling is a predetermined maximum profit distribution amount, and this ceiling could potentially increase.

In this way, Microsoft ensures that even if it does not have an advantage in direct product sales competition, it can still benefit from OpenAI's market success, achieving a win-win situation for both parties.

Microsoft and OpenAI achieve "revenue sharing", with the gross margin expected to further increase

Although businesses tend to cooperate directly with OpenAI, Microsoft, as a leader in the software industry, can still benefit from it.

According to insiders, Microsoft's Azure OpenAI service currently has a gross margin of about 40%. And with the continuous improvement in AI model efficiency, the gross margin is expected to further increase.

At the same time, due to enjoying more favorable server usage prices, OpenAI's API business is also expected to achieve a gross margin level similar to Microsoft's In the cooperation agreement between Microsoft and OpenAI, both parties receive a share of revenue from each other's sales. Microsoft pays OpenAI 20 cents from every $1 of revenue from Azure OpenAI services, while OpenAI pays Microsoft 20 cents from every $1 of revenue from its API sales. This revenue-sharing mechanism allows the two companies to offset each other's payments in a fair and mutually beneficial cooperation.

Microsoft's Azure platform, as the core business of its cloud computing, has generated over $55 billion in annual revenue, covering server rentals and a variety of cloud service products including Azure OpenAI services. According to industry analysts' estimates, Microsoft achieved approximately $1.6 billion in revenue growth from AI-driven cloud services in the previous fiscal year, and surpassed $1 billion in revenue in the first quarter of 2024.

A significant portion of this revenue comes from Azure OpenAI services and the rent paid by OpenAI for using Microsoft's servers. OpenAI is able to afford these costs thanks to Microsoft's initial $1 billion equity investment in the early stages of their collaboration.

However, individuals familiar with the Microsoft and OpenAI cooperation agreement have pointed out that for Microsoft, the profits from selling OpenAI's technology to enterprises are more lucrative than just collecting cloud server rental fees from OpenAI. Insiders revealed that the fees initially paid by OpenAI to Microsoft were only meant to cover the costs of using Azure computing resources, and as the collaboration deepens, OpenAI will also pay additional commissions to Microsoft