DeepSeek disruption and losing OpenAI exclusivity - so much good news for Microsoft's Satya Nadella to take on board

A disappointing forecast for cloud growth in 2025 sent Microsoft’s share price down yesterday, but it was noises off from two directions that CEO Satya Nadella had to deal with on the post quarterly results analyst call - the relationship with OpenAI and the DeepSeek disruption to the AI landscape.

Last week, coinciding with OpenAI’s participation in the $0.5 trillion planned AI infrastructure rollout, called Stargate, the firm changed its existing partnership agreement with Microsoft. While the latter had been the exclusive cloud capacity provider to the former, a statement from Microsoft confirmed a new approach ahead:

OpenAI recently made a new, large Azure commitment that will continue to support all OpenAI products as well as training. This new agreement also includes changes to the exclusivity on new capacity, moving to a model where Microsoft has a right of first refusal (ROFR).

It’s all fine, was the messaging last week from the Microsoft camp and that was repeated by Nadella yesterday when he insisted:

We remain very happy with the partnership with OpenAI…they have committed in a big way to Azure and even in [our] bookings what we recognize is just the first tranche of it. And so you'll see [we’ve been] given the ROFR. We have more benefits of that even into the future. And obviously their success is our success.

Good news all round

As for DeepSeek, this is also good news, he declared, even if its emergence on Monday did sent Wall Street into a panic about loss of US leadership in the AI market. Calling what he’s seen of DeepSpeak as impressive, Nadella, a veteran of the tech sector, sought to remind the more over-excited commentators that disruptive enfants terribles are nothing new:

In some sense, what's happening with AI is no different than what was happening with the regular compute cycle. It's always about bending the curve and then putting more points up the curve. So there's Moore's Law that's working in hyperdrive. Then on top of that, there is the AI scaling laws, both the pre-training and the inference time compute that compound, and that's all software. We have observed for a while 10x on improvements per cycle just because of all the software optimizations on inference.

He added:

I think DeepSeek has had some real innovations…and so, obviously, now that all gets commoditized, and it's going to get broadly used. And the big beneficiaries of any software cycle like that are the customers. Because at the end of the day, if you think about it, what was the big lesson learned from client server to cloud? More people bought servers, except it was called cloud. And so when token prices fall, computing prices fall, that means people can consume more, and there'll be more apps written. It's unimaginable to think that here we are at the beginning of '25 where on the PC, you can run a model that required pretty massive cloud infrastructure. So that type of optimization means AI will be much more ubiquitous. And so therefore, for a hyperscaler like us, a PC platform provider like us, this is all good news as far as I'm concerned.

My take

Keep on keeping on. Or as Nadella put it:

You would rather win the new than just protect the past.

Microsoft’s AI business annual revenue run rate has surpassed $13 billion, above expectations.

Not much reason for Nadella to be losing sleep just yet.