Google and Microsoft weave tangled AI webs

Microsoft

Wed 21:32

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Jennifer  Saba and Robert Cyran
NEW YORK, Oct 28 (Reuters Breakingviews) - The next frontier in artificial intelligence is figuring out how to handle corporate frenemies. Alphabet GOOGL.O and Microsoft MSFT.O have woven a tangled set of relationships with other AI labs. The search giant is part-owner, supplier and rival to Claude maker Anthropic. The Redmond company’s alliance with OpenAI is similarly complex. Earnings unveiled by both on Wednesday show them reaping rich rewards. Yet they also hint at a growing tension between collaboration and competition.
The Google parent and the business software titan reported major growth in their servers-for-hire businesses, boosted by the ravenous appetites of Anthropic, OpenAI and their ilk. Alphabet boss Sundar Pichai can tout third-quarter cloud revenue of $31 billion, roughly doubling year-over-year. At Microsoft’s Azure unit, sales rose 48% for the three-month period ending September 30, to $33 billion.
These figures come just after Anthropic released the prospectus for its anticipated initial public offering on Monday. In it, Google is mentioned 109 times. The AI lab buys Google’s custom-made chips and crunches data on Google’s cloud services. At the same time, the Silicon Valley giant is listed in the filing as a threat, competing for “customers, talent, compute, and strategic partnerships.”
Such friction shows up in Alphabet’s results. Sure, selling server capacity to third parties is going gangbusters. But the company spent a surprisingly large sum on its own machine-learning ambitions. Losses related largely to shared AI research and development across the company increased to nearly $8 billion, from $4.4 billion in the same quarter last year. It also burned $9 billion in free cash flow, far more than Wall Street expected, according to LSEG data. Microsoft, meanwhile, generated $18 billion in free cash flow.
Of course, boss Satya Nadella is not immune, either. His company’s relationship with OpenAI has been plenty fraught. As the ChatGPT maker’s revenue and valuation ballooned, it chafed against Microsoft’s pace of data-center investment. After an awkward phase, the two revised their partnership agreement last year and then loosened it further in April. The startup can now more easily work with other partners, a vaguely-defined prenuptial agreement was scrapped, Microsoft is developing its own models, and revenue-sharing payments from OpenAI are now subject to a total cap.
When giant companies are enmeshed with red-hot, fast-growing new darlings, things are bound to be knotty. As financial pressures ramp, their interests will only diverge further.
Follow Jennifer Saba on Bluesky and LinkedIn.
         
CONTEXT NEWS
Alphabet reported on October 28 that revenue for the third quarter rose 25% year-over-year to $127.6 billion. Sales at its cloud unit doubled in the quarter to $30.7 billion. The company generated negative free cash flow of $9 billion.
On the same day, Microsoft said revenue for the quarter ending September 30 was $92.3 billion, an increase of 19% from the same period a year ago. Sales at its Azure cloud computing unit rose 48% to $33.2 billion.

(Editing by Jonathan Guilford; Production by Pranav Kiran)
((For previous columns by the authors, Reuters customers can click on SABA/ jennifer.saba@thomsonreuters.com, CYRAN/ robert.cyran@thomsonreuters.com ))