Nearly $20 million monthly fee! TikTok becomes a major AI player for Microsoft

In the competition in the global cloud computing market, Microsoft has successfully transformed its cloud services into a profitable business by integrating OpenAI's artificial intelligence technology. Taking TikTok as an example, according to a person familiar with internal financial documents, as of March this year, TikTok was spending nearly $20 million per month through Microsoft to purchase OpenAI's AI model services, which accounted for almost 25% of Microsoft's total revenue in this business. At that time, Microsoft's annual revenue in this business was expected to reach $1 billion, or $83 million per month.

However, behind this success lies the risk of high customer concentration. TikTok and its parent company ByteDance are also ambitious in the field of AI, planning to develop dialogue and image generation software comparable to OpenAI. This could mean that once TikTok's AI technology matures, its dependence on Microsoft will decrease, leading to a rapid slowdown in Microsoft's cloud business revenue growth.

To mitigate this risk, Microsoft needs to expand the number and types of companies purchasing such AI. Microsoft is seeking other reliable corporate customers, such as Walmart and financial software company Intuit. These customers pay Microsoft millions of dollars per month in the first quarter to access OpenAI models. Intuit's participation is particularly noteworthy as the company previously mainly spent money renting Amazon servers.

At the same time, Microsoft is pursuing a diversification strategy, leveraging AI technology in various ways to make money. Microsoft's cloud services are not limited to Azure OpenAI services; the company also sells AI writing, coding, and summarization features to existing customers of Office 365 and other enterprise software, collectively known as Copilot. CEO Satya Nadella stated that Copilot's subscription volume doubled in the past three months, with financial services companies being one of its main buyers.

TikTok Becomes a Major Customer of Microsoft's AI

Reports indicate that Microsoft has successfully taken customers and market share from its main competitors - Google, Amazon, and Oracle. For example, TikTok originally primarily used cloud services from Microsoft's competitors but has now switched to purchasing Microsoft's cloud services, bringing in significant revenue for Microsoft's cloud business.

Intuit has developed a range of AI features that provide financial advice based on customers' personal data. The company previously mainly rented Amazon servers. Intuit CEO Sasan Goodarzi stated in May that over 24 million customers have used these features since September, and Intuit plans to "accelerate investment in this area" in the coming year.

Walmart, a long-term customer of Microsoft's cloud services, has stated that it is using this technology to personalize shopping recommendations. Another customer spending millions of dollars per month on Azure OpenAI services is G42, headquartered in Abu Dhabi, which previously announced a partnership with OpenAI to develop AI for Middle Eastern customers.

It is currently unclear whether Walmart or TikTok is using Azure OpenAI services to enhance their own competitive AI models. Once their model technologies mature, their spending on Microsoft may decrease According to reports, using OpenAI's technology to develop competitive AI violates OpenAI's rules, but many customers still do so. OpenAI seems to not enforce these rules, possibly because it has been accused of violating intellectual property rules in training its state-of-the-art AI.

Last year, there were reports that ByteDance was using OpenAI's GPT-4 model to train its internal AI models, partly by having OpenAI's chatbots generate text snippets, which ByteDance then inputs into its own models. In response to the report, ByteDance at the time stated that it was adopting OpenAI's models in a "very limited scope" to develop its own models.

Facing the risk of high customer concentration, Microsoft seeks to expand its customer base and multiple profit methods

However, Microsoft is leveraging OpenAI's artificial intelligence for profit growth, with TikTok and other major customers being key, but Microsoft faces the risk of high customer concentration. To meet the market's high expectations for this business, Microsoft needs to continue attracting and retaining more major customers because investors demand that it fulfill its commitments to the prospects of this business. Previously, the company has already spent billions of dollars funding OpenAI's technology and the data center servers that handle this technology. It is widely expected that these investments will eventually translate into profits.

On Tuesday, Microsoft announced its financial report showing that second-quarter cloud revenue overall sales increased by 29%, falling short of market expectations, with the stock price falling more than 7% after hours. Amazon, Datadog, and Snowflake also fell after hours, and on Wednesday, Microsoft's stock fell more than 2.5% in early trading.

Google Cloud's sales also grew by 29% in the June quarter, but the business is much smaller than Azure, indicating that market share is being taken away by Microsoft. Despite the negative market reaction, Microsoft remains optimistic, stating that it expects Azure revenue to accelerate growth next year.

Microsoft is making money through various ways using artificial intelligence technology. In addition to Azure OpenAI services, Microsoft also sells artificial intelligence writing, coding, and summarization features (collectively known as Copilot) to its existing customers of Office 365 applications and other enterprise software. On Tuesday, CEO Satya Nadella stated that the number of customers purchasing 10,000 or more Copilot subscriptions doubled between March and June. Financial services companies have always been one of the largest buyers, but it is currently unclear how large the overall scale of this business is.

Furthermore, Microsoft also generates a certain percentage of revenue directly from enterprises through OpenAI's models, which unexpectedly exceeded the revenue from Azure's OpenAI services this year. Additionally, Microsoft creates billions of dollars in revenue annually by leasing servers to OpenAI (although the profit margin is not high) so that this startup can operate ChatGPT and develop related technologies