Microsoft is outsourcing its best AI, tech CEO says — and that’s good news for Google
This photograph shows a screen displaying the logo of Bard AI, a conversational artificial intelligence software application developed by Google, and ChatGPT.
Lionel Bonaventure | Afp | Getty Images
LONDON — Microsoft is handing over the development of all of its best artificial intelligence tools and software to OpenAI, according to one tech CEO — which could be a boon for arch-rival Google.
Todd McKinnon, CEO of identity security firm Okta, told CNBC on Friday that as Google looks to defend its position in search, it is “probably doing the best job of actually not having to outsource their R&D.”
He noted that the so-called transformers that power today’s generative AI technologies “all came from Google.”
Transformers are deep-learning models that learn context and thus meaning by tracking relationships in sequential data, such as words.
“This all came from Google, with DeepMind and the research,” McKinnon said. “I mean, the breakthrough was the research from Google, the transformers which are the algorithm that all these LLMs [large language models] are using to make these big advancements.”
Microsoft as an AI ‘consultancy’
McKinnon added that there’s a risk Microsoft’s position in AI becomes reduced to that of a “consultancy.” Microsoft was not immediately available for comment when contacted by CNBC.
It comes as a number of the firm’s top products — such as Copilot, the firm’s generative AI chatbot, and PCs that are equipped with generative AI software — incorporate tech made by OpenAI, the lab behind artificial intelligence chatbot ChatGPT.
Microsoft has plowed billions of dollars into OpenAI, with its total investment to date reportedly swelling to $13 billion. In Jan. 2023, the tech giant said its investment would “accelerate AI breakthroughs to ensure these benefits are broadly shared with the world.”
“It’s so bizarre,” McKinnon told CNBC. “Imagine working at Microsoft. OpenAI is over there making all the exciting stuff. It’s almost like Microsoft is going to turn into a consulting company.”
Still, Google has a mountain to climb if it’s going to achieve commercial success with its own AI investments.
Microsoft has effectively become the leader in the push toward foundation AI models given its investment in and partnership with OpenAI. This has raised concerns that Google’s position in search could be undermined, as internet users increasingly turn to ChatGPT and other AI chatbots for their search needs.
Google’s own AI efforts, meanwhile, have been beset by a number of public blunders.
Last year, when Google unveiled its Gemini AI chatbot (called Bard at the time), an ad on social media site X showed it giving the wrong answer to a user question. More recently, Google Gemini, as the product is now known, started creating ahistorical images from prompts about history.
Google subsequently pulled its Gemini image generator tool for pictures of people and is yet to reinstate the product while it investigates a fix.
Huge investments needed to succeed
McKinnon noted that AI is a rare segment of technology that has stemmed from substantial backing from major tech giants, rather than organic investments into new product cycles, as was the case with the PC and cloud computing.
“It’s different than other generations of technology like with personal computers, where it was not necessarily the biggest companies in the world that had the advantage, because the whole thing about personal computers is they were truly disruptive in the sense that they were almost toys,” McKinnon said.
“There’s no new AI model that’s like a toy. The only reason OpenAI can get it working is because the great R&D that they needed — $10 billion from Microsoft, to run the model — that wasn’t like a disruptive thing, that was a $10 billion investment.”
He added that Big Tech’s mammoth investments into AI create some competition concerns.
The “biggest risk” McKinnon sees for the cybersecurity industry going forward is that AI issues stemming from the digital giants — such as disinformation — will “stunt the progress in technology.”
“The potential [for] artificial intelligence is really high,” he said, but added: “I actually expect the swing of regulation to go so far that we leave only the biggest, most powerful companies in control of AI.”
Sundar Pichai, CEO of Alphabet Inc., during Stanford’s 2024 Business, Government, and Society forum in Stanford, California, April 3, 2024.
Justin Sullivan | Getty Images
Google is going to spend $10 billion more this year than it previously expected due to the growing demand for cloud services, which has created a backlog, executives said Wednesday.
As part of its second quarter earnings, the company increased its forecast for capital expenditures in 2025 to $85 billion due to “strong and growing demand for our Cloud products and services” as it continues to expand infrastructure to power more AI services that use its cloud technology. That’s up from the $75 billion projection that Google provided in February, which was already above the $58.84 billion that Wall Street expected at the time.
The increased forecast comes as demand for cloud services surges across the tech industry as AI services increase in popularity. As a result, companies are doubling down on infrastructure to keep pace with demand and are planning multi‑year buildouts of data centers.
In its second quarter earnings, Google reported that cloud revenues increased by 32% to $13.6 billion in the period. The demand is so high for Google’s cloud services that it now amounts to a $106 billion backlog, Alphabet finance chief Anat Ashkenazi said during the company’s post-earnings conference call.
“It’s a tight supply environment,” she said.
The vast majority of Alphabet’s capital spend was invested in technical infrastructure during the second quarter, with approximately two-thirds of investments going to servers and one-third in data center and networking equipment, Ashkenazi said.
She added that the updated outlook reflects additional investment in servers, the timing of delivery of servers and “an acceleration in the pace of data center construction, primarily to meet Cloud customer demand.”
Ashkenazi said that despite the company’s “improved” pace of getting servers up and running, investors should expect further increase in capital spend in 2026 “due to the demand as well as growth opportunities across the company.” She didn’t specify what those opportunities are but said the company will provide more details on a future earnings call.
“We’re increasing capacity with every quarter that goes by,” Ashkenazi said.
Due to the increased spend, Google will have to record more expenses over time, which will make profits look smaller, she said.
“Obviously, we’re working hard to bring more capacity online,” Ashkenazi said.
WATCH: Alphabet shares Q2 shares sink despite revenue and earnings beat
Technology
Nvidia supplier SK Hynix second-quarter profit and revenue hit record highs, topping estimates
IBM CEO Arvind Krishna appears at the World Economic Forum in Davos, Switzerland, on Jan. 16, 2024.
Stefan Wermuth | Bloomberg | Getty Images
IBM shares fell as much as 5% in extended trading on Wednesday after the tech conglomerate issued second-quarter results that topped Wall Street projections.
Here’s how the company did in comparison with LSEG consensus:
- Earnings per share: $2.80 adjusted vs. $2.64 expected
- Revenue: $16.98 billion vs. $16.59 billion
IBM’s revenue increased nearly 8% year over year in the quarter, according to a statement. Growth in the first quarter was below 1%. Net income, which includes costs related to acquisitions, rose to $2.19 billion, or $2.31 per share, from $1.83 billion, or $1.96 per share, a year ago.
Software revenue climbed about 10% to $7.39 billion, exceeding the $7.43 billion consensus among analysts surveyed by StreetAccount. Hybrid cloud revenue, including Red Hat, showed 16% growth. The software unit’s gross margin of 83.9% was barely narrower than StreetAccount’s 84.0% consensus.
Revenue from consulting rose almost 3% to $5.31 billion, higher than StreetAccount’s $5.16 billion consensus. Infrastructure revenue went up 14% to $4.14 billion, above the $3.75 billion StreetAccount average estimate.
During the quarter, IBM announced the next-generation z17 mainframe computer and the acquisition of data and artificial intelligence consulting firm Hakkoda.
IBM called for over $13.5 billion in 2025 free cash flow, similar to a projection from April. The company still sees at least 5% revenue growth at constant currency for the year.
As of Wednesday’s close, IBM shares were up 28% so far in 2025, while the S&P 500 index has gained around 8% in the same period.
Executives will discuss the results with analysts on a conference call starting at 5 p.m. ET.
This is breaking news. Please check back for updates.
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