Microsoft Needs Steady Copilot --- Its AI software could revolutionize Office apps, but stakes are high

"Clippy just got a serious promotion. Now Microsoft has to make sure this one doesn't become unhinged.

Microsoft, helmed by CEO Satya Nadella, announced plans on Tuesday to integrate the artificial intelligence technology powering the popular ChatGPT chatbot into its suite of Office software tools. 

That adoption will take the form of a new interface called Copilot, which can write Word documents, create PowerPoint presentations, analyze Excel spreadsheets and even reply to emails through Outlook -- essentially a far more powerful tool than the Office Assistant dubbed Clippy that Microsoft once deployed through its Office products. 

The new Copilot is also the next step in Microsoft's aggressive campaign to adopt generative AI into its products, following a similar announcement last month related to its internet search business.

But the stakes are much higher now. Microsoft is a bit player in search, with its Bing search engine accounting for less than 3% of the world's search volume compared with 93% for Google, according to data from Statcounter. Almost the reverse is true in office app software; Microsoft controlled more than 85% of that market by the end of 2021 compared with Google's 13.7% share, according to Gartner.

And it is a big business. Office 365 -- the cloud-based version of Microsoft's suite of productivity software -- alone generated nearly $41 billion in revenue in the calendar year 2021 between its commercial and consumer versions, according to consensus estimates from Visible Alpha. That is more than the entire annual revenue of most large-cap software companies, including Salesforce and Adobe. Office products and related cloud services accounted for 23% of Microsoft's total revenue in its latest fiscal year compared with a 6% contribution from search and news advertising.

Hence, Microsoft can't afford to get this wrong. Nor can it afford to have its new AI-powered Office apps unaccountably spit out inaccurate information or crib from copyrighted materials the way the public version of ChatGPT has sometimes been prone to do. And it really can't afford some of the more bizarre turns that its new AI-powered Bing engine took with some early testers -- the chatbot seemed to take on sentient qualities and even a full persona. Microsoft says it put new limits on the technology to prevent those issues, and the company said Thursday it is rolling out the new Copilot tool slowly, with only a small group of customers getting initial access "to get the critical feedback required to improve these models as they scale."

The next question: Will Microsoft's corporate customers pay up? Generative AI technology requires intense computing power and is expensive to enable. But Microsoft commands the highest operating margins of its peers, and its segment that includes the Office business is its most profitable, with operating margins 6 percentage points above the corporate average for calendar 2022.

Microsoft said Thursday that new Copilot pricing and licensing details will be shared soon. They'll have to walk a fine line. While Office tools are integral to corporate life for most businesses, those same businesses are under pressure to cut their own costs in a slowing economy, and thus might hesitate to pay up for unproven technology. UBS analyst Karl Keirstead cited conversations with several large enterprise customers who expressed "a reluctance to pay until the technology is truly enterprise-grade and the ROI is proven" in a note to clients earlier this week. A PowerPoint that makes itself might be worth the money. A sentient Clippy is a different story." [1]

1.  Microsoft Needs Steady Copilot --- Its AI software could revolutionize Office apps, but stakes are high
Gallagher, Dan.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 17 Mar 2023: B.12.