Fareed Zakaria opened with the question that everyone has been doing the rounds. Are we in an artificial intelligence bubble and it’s starting to deflate? OpenAI has promised to spend hundreds of billions in organizing a portion of this. The math doesn’t add up.
Nadella did not back down. He reframed the question as a test the AI had to pass.
“This is a new general-purpose technology that will increase productivity,” he said on CNN GPS. “That productivity has to translate into very broad-based economic growth that spans the entire economy in terms of GDP growth.”
Then condition. “If we don’t see that, then we’re going to have a problem. So if we don’t see that broad economic growth, this movie isn’t going to end well.”
It is surprising that a man who has spent 190 billion dollars this year said his earnings two days before he expected them.
Who buys the chips?
Another Nadella appeared on the account of company executives the same weekend. Microsoft can’t build capacity fast enough. The shortage forced him to triage, This was reported by Ashley Stewart from Business Insider. Own AI products eat first. Azure customers receive the balance.
Chief Financial Officer Amy Hood had as much to say on the earnings call in January. Microsoft is developing the solution first for M365 Copilot and GitHub Copilot, then for research and development.
“Then what you realize is what’s left to serve the Azure capabilities that continue to grow in terms of demand,” he said. If those chips had gone to Azure instead, he added, the increase would have been more than 40%, not 39%.
This perception is not new to the readers here. Michigan pension fund He sued Microsoft in June exactly on it. The lawsuit alleges that the company covered up the diversion before wiping out its $357 billion market cap in January.
What’s new is that insiders say it’s getting worse. “Once we solve for Frontier Labs and our internal businesses like M365 and Microsoft AI, all the hardware will be gone,” an executive told Business Insider.
It sells what you can’t deliver
Here’s the weird reading part. Microsoft increases quotas for Azure sales staff despite the crisis. Some quotas are increasing by 30% this year, according to people familiar with the change.
In the meantime, he buys leads from his competitors. Amazon bails out Microsoft after a series of GitHub hiccups. He researched Oracle cloud infrastructure lease and distanced itself over security and compliance issues. It now rates Amazon and Google.
“We’re shopping for capacity everywhere,” said a person familiar with the negotiations.
Inside the company, the logic is understood, but the messaging is not. One executive laid out the trade-off clearly: why would Nadella favor Adobe, an Azure customer, over growing M365?
“I have no idea how to get this message across to customers,” the person said.
Microsoft is actually in a trap
The dilemma is real, and Microsoft is clearly not mishandling it. Serving Azure customers now drives revenue. Serving their own products is a bet they will eventually win.
The former starves and Azure growth disappoints, which immediately hits the stock price. Starve the latter, and Microsoft falls further behind in the race to justify costs first.
What makes the choice urgent is that customers have somewhere else to go. Google Cloud continues to post big numbers. Meta and SpaceX are now selling computers too. Microsoft’s customers can’t wait to find out what it decides.
The ecosystem argument
Zakaria’s second question was about China. Most firms don’t use artificial intelligence to solve Fermat’s theorem, he noted. They rationalize their inventory systems. So will the world just buy cheaper Chinese models like Moonshot’s Kimi?
Nadella responded that provenance is less important than plumbing. “Let’s even take the Chinese models. Guess where these models work? They work on many American hyperscalers all over the world.”
Because the weights are open, it can be tracked, tested and trained by American firms. If a US lab makes and ships a Chinese base model, he asked, whose model is it?
“As long as it is, we will definitely compete and win,” he said. China will also have a role, he added, but it is not a zero-sum game.
He’s been working on his version of this all week. His pinned post now asks how to ensure “marginal benefits spread throughout the ecosystem.” the program has real marginal cost for the first time. Diffusion is a theory. Triage is an experience.
Three businesses within blast radius
Tension is not only physical. Three major businesses are now sitting at the same time in AI’s path.
Microsoft 365 is the first. Knowledge workers would open Word, Excel and PowerPoint to start the day. Instead, they increasingly start within the AI tool. Gartner predicted this year artificial intelligence will threaten to dethrone traditional productivity suites worth $58 billion.
GitHub is second. One executive told staff it was the best month ever. As the use of artificial intelligence increases, this year has also seen dozens of major outages. Cursor and Claude Code have received millions of engineers in the meantime.
Azure is third and is asked to wait her turn.
Billy club
Nadella took the pressure off. He has senior management dismantled the command structure and gave the commercial business to Judson Althoff. He too Appointed 33-year-old former Snap executive to Copilot.
The panic continues. Rajesh Jha has retired, Yusuf Mehdi is set to leave and Charlie Bell has moved into the individual contributor role. Hayete Gallot, who was hired back from Google, is seen internally as Althoff’s long-term successor.
This year, Microsoft also fundamentally revised the performance reviews, reducing the ratings to five categories and sharpening the differences between them. Executives say it feels like a return to the Ballmer-era stack ranking. Managers have been told to cut senior engineering ranks.
“It’s almost like the old days of Microsoft are coming back,” said one former executive. “The old Windows era where you lead with a lot of fear and a billy club in hand.”
exam on wednesday
Microsoft reports fourth-quarter results on Wednesday. Amazon follows on Thursday. Between the two, it will spend about $400 billion on data centers this year. Fortune reported about itAbout $190 billion with Microsoft.
Investors are already nervous. Alphabet shares fell 7% Last Thursday, after raising guidance on capital expenditures and posting negative free cash flow. Microsoft shares are down about 19% this year and about 25% over the past twelve months. This is the worst of the Magnificent 7 by some distance. Meta was next, down almost 17%.
The core business is not weak. Microsoft announced nearly twice as much as a year ago, about $627 billion in executive commitments. It is financing about $35 billion to build a quarter from operating cash flow rather than new debt. Azure and other cloud services are projected to reach $148.9 billion in fiscal 2027.
Nadella has heard doubts before. “I remember when I became CEO, everyone was saying, ‘Oh my God, isn’t it too late?’ He recalled at the Morgan Stanley conference in March. Microsoft built anyway, and the public cloud became a multi-player.
At that conference, he outlined the plan. “We have the OpenAI book, we have the Anthropic book, but we also want to have the long tail of enterprise IT,” he said. The long tail is now the section waiting at the back of the queue.
