Satya Nadella: evaluation

Transcript context

…Microsoft historically has been perhaps the greatest software company, the largest software-as-a-service company. You’ve gone through a transition in the past where you used to sell Windows licenses and disks of Windows or Microsoft, and now you sell subscriptions to 365. As we go from that transition to where your business is today, there’s also a transition going on after that. Software-as-a-service has incredibly low incremental cost per user. There’s a lot of R&D, there’s a lot of customer acquisition costs. This is sort of why, not Microsoft, but the SaaS companies have underperformed massively in the markets, because the COGS of AI is just so high, and that just completely breaks how these business models work. How do you, as perhaps the greatest software-as-a-service company, transition Microsoft to this new age where COGS matters a lot and the incremental cost per user is different? Because right now you’re charging like, “Hey, it’s 20 bucks for Copilot.” It’s a great question because in some sense with the business models themselves, the levers are going to remain similar. If you look at the menu of models starting from consumer all the way, there will be some ad unit, there will be some transaction, there will be some device gross margin for somebody who builds an AI device. There will be subscriptions, consumer and enterprise, and then there’ll be consumption. So I still think those are all the meters. To your point, what is a subscription? Up to now, people like subscriptions because they can budget for them. They are essentially entitlements to some consumption rights that come encapsulated in a subscription. So I think that in some sense becomes a pricing decision. How much consumption you are entitled to is, if you look at all the coding subscriptions, kind of what they are, right? Then you have the pro tier, the standard tier, and what have you. So I think that’s how the pricing and the margin structures will get tiered. The interesting thing is that at Microsoft, the good news for us is we are in that business across all those meters. At a portfolio level, we pretty much have consumption, subscriptions, to all of the other consumer levers as well. I think time will tell which of these models make sense in what categories. One thing on the SaaS side, since you brought it up, which I think a lot about. Take Office 365 or Microsoft 365. Having a low ARPU is great, because here’s an interesting thing. During the transition from server to cloud, one of the questions we used to ask ourselves is, “Oh my God, if all we did was just basically move the same users who were using our Office licenses and our Office servers at the time to the cloud, and we had COGS, this is going to not only shrink our margins but we’ll be fundamentally a less profitable company. ” Except what happened was the move to the cloud expanded the market like crazy. We sold a few servers in India, we didn’t sell much. Whereas in the cloud suddenly everybody in India also could afford fractionally buying servers, the IT cost. In fact, the biggest thing I had not realized, for example, was the amount of money people were spending buying storage underneath SharePoint. In fact, EMC’s biggest segment may have been storage servers for SharePoint. All that sort of dropped in the cloud because nobody had to go buy. In fact, it was working capital, meaning basically, it was cash flow out. So it expanded the market massively. So this AI thing will be that. If you take coding, what we built with GitHub and VS Code over decades, suddenly the coding assistant is that big in one year. That I think is what’s going to happen as well, which is the market expands massively. There’s a question of, the market will expand, but will the parts of the revenue that touch Microsoft expand? Copilot is an example. If you look earlier this year, according to Dylan’s numbers, GitHub Copilot revenue was like $500 million or something like that and there were no close competitors. Whereas now you have Claude Code, Cursor, and Copilot with around similar revenue, around a billion. Codex is catching up around $700–800 million. So the question is, across all the surfaces that Microsoft has access to, what is the advantage that Microsoft’s equivalents of Copilot have?…

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