The tech equivalent of the Godzilla Vs. Kong showdown is Microsoft and Google’s AI arms race. While different contenders emerge victorious at different stages, these two have become household names in the technology domain that prioritises artificial intelligence. It is true that Google has had quite an ambiguous journey with regard to AI, starting from the mixed reactions with which Bard was viewed. However, recent reports show a very clear-cut downturn. One that spells trouble for Google. Following two consecutive quarters of exceeding expectations, Google Cloud’s earnings experienced a decline in the third quarter ending on 30 September. Falling behind the targets that were set, raises the question as to whether Google got ahead of itself by placing an unquestionable trust in generative AI, seeing as to how business customers are pulling the plug on spending.
Is Google falling behind?
In comparison to the third quarter of 2022, Google’s cloud revenue has risen by 22.5% to $8.41 billion. However, the numbers missed the amount of $8.6 billion that Wall Street had estimated. Adding to the woes is the fact that these numbers also represented the lowest growth rate for the division since the initial quarter of 2021. Although Cloud sustains its growth across geographical locations, industries and product lines, Alphabet’s CFO, Ruth Porat, noted in an earnings call that a lower-than-expected growth rate is due to customers scaling back their spending as part of their optimization efforts. A statement as such is poles apart from the cheerful tone that was set by Alphabet CEO Sundar Pichai during the previous quarter where he tooted his own horns by claiming that over 70% of generative AI unicorns are clients of Google Cloud and that the company’s AI-focused infrastructure stands as a prominent platform for training and deploying generative AI models. Despite self-proclaiming themselves as the leader of AI, they are still in search of that one AI app which will seal all deals for them.
Apart from trying to find their saviour, Google also has its hands full because they are trying to keep up with their rival; Microsoft, who is continuously putting more distance between themselves and Google in the realm of generative AI. Ever since Microsoft’s unexpected investment in OpenAI, positioning it as the leader in the AI competition, the company has had sunny days and seen a substantial 29% growth in its cloud revenue for the most recent quarter. An achievement that adds to the growing list of concerns for Google.
How are things looking like for Microsoft?
As if enough salt had not been rubbed on Google’s wounds, Microsoft, on 24 October surpassed the estimates that were set by Wall Street for fiscal first-quarter results in all avenues. Its cloud computing and PC businesses that have integrated AI, experienced a steady growth because they were delivering as per the wishes of customers. Even though Microsoft is yet to launch many of the products that have collaborated with OpenAI, the eagerness among corporate tech buyers to invest in features such as the capability of extrapolating the salient features from a large number of emails and presenting them in bullet points aided the company’s revenue to increase by 13% to $56.5 billion in the quarter that ended on 30 September.
Additionally, the company experienced a 24% increase in its Microsoft Cloud revenue, reaching $31.8 billion, which consists of a variety of divisions such as the Azure cloud platform, Office 365 Commercial, the commercial segment of LinkedIn, and Dynamics 365. Revenue that was generated by Azure and cloud services escalated by 29% during the quarter, surpassing the company’s earlier forecasts. As mentioned in Geek Wire, according to CFO Amy Hood, currently, the main source of AI-related revenue within Azure is Azure AI services, with about 2% points of Azure growth attributed to AI for this quarter. Numbers indicate that investing in AI is helping Microsoft reap the benefits that it sowed, which was unfortunately not the case for Google.
Wall Street subjects Google to a rapid-fire round
Wall Street is dissatisfied. Especially because Google is not walking the talk. Because Google created such hype around AI and integrating it into its services, Wall Street wants to know how it will profit from it. The arrival of the reports on Google’s third-quarter earnings flagged a few major problems. One of them is how Google is splurging more on AI infrastructure and muted cloud growth than it can earn. A clear indication that there is a discrepancy between income and expenditure within Google’s AI space. Ensuing such statistics, Wall Street is asking questions from the C-suites as to how Google is going to convert all the efforts invested in AI, into actual money. And AI is a late bloomer in Google’s endeavours and being in its ‘early stages’ was not expected as the answer. Especially not against the backdrop that Microsoft has provided.
The questions that Wall Street are asking have come into being nearly a year after the public introduction of ChatGPT in November, which generated all the brouhaha around generative AI technology. In its attempt at responding to the inquiries, Google has pointed out that the process of rolling out their own chatbots such as Bard, various other AI experiments and the process of training large language models (particularly for those with extensive data sets) can be quite demanding, financially. As mentioned in CNBC, one of the questions that was posed by Lloyd Walmsley of Deutsche Bank was about the progress of deploying SGE (Search Generative Experience; an early experiment that was launched in August by Google. This permits users to see what a generative AI experience would appear to be when on the lookout for products) to a user base. The inquiry delves into how advanced this deployment is and how Google manages the balance between rolling out the product to consumers and ensuring it is monetized effectively during this transition. While Pichai did answer the question, it is certainly a probe that Google can sleep on. Pichai is optimistic about all the new products that are in their nascent stages, ones that are yet to be launched and the ones that have already been launched. However, some of the answers that he provided to what Wall Street asked were ambiguous and were beside the point. Nevertheless, Google surely has enough time and confidence to address its loopholes and give tough competition to its rivals.
(Sandunlekha Ekanayake)