The Financial Burden of Artificial Intelligence Shared by Microsoft and Google

Google has had competition close by for a long time, with Microsoft MSFT 0.47% being a major contender.

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In a world driven by artificial intelligence, the cost of responding to clicks could be quite expensive, even for tech giants that are highly successful. This means that these companies must be mindful of their financial situation.

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Microsoft announced on Tuesday that it is taking steps to integrate OpenAI's AI tools into its offerings. This includes ChatGPT, a chatbot that was released a month ago and has become increasingly popular. It can provide conversational responses to questions, and to the dismay of teachers, it can even write essays and poems.
At the World Economic Forum in Davos, Switzerland, Microsoft's Chief Executive Satya Nadella declared that the company's products will be infused with Artificial Intelligence (AI) capabilities, which will revolutionize them.

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Microsoft has already put $1 billion into OpenAI and is reportedly looking to invest even more, so it is not surprising that they are interested in utilizing the technology. However, this news was not welcomed by Google, as their core search business could be challenged by the question-answering capabilities of technologies such as ChatGPT.

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Last month, The New York Times reported that the launch of ChatGPT on November 30th caused Google to declare a "code red" internally. Microsoft, Google's biggest competitor in web search, has a Bing search engine that only holds a small portion of the global market.
The stock of Alphabet, the parent company of Google, has decreased by 0.69%.

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Microsoft's stock dropped almost 1% on Tuesday and has declined almost 10% since the ChatGPT launch, which is the worst performance of the major tech companies and three times the percentage decrease of the Nasdaq during that period. Microsoft's shares increased slightly on Tuesday, while Nvidia, which specializes in AI chips used in data centers by both companies, rose by almost 5%.

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UBS analysts recently noted in a report that ChatGPT's success and popularity with consumers could be a potential danger to Alphabet's multiple and a benefit to Microsoft and Nvidia in the near future.
ChatGPT appears to be more than a passing trend. According to Similarweb, the tool's homepage has recently been receiving more than 20 million daily visits, which is almost double the amount of visits it was getting two weeks after its launch.

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Investors may be overestimating the effect on Google. Not all web searches are the same, particularly those that produce income through advertising links. ChatGPT specializes in natural-language queries that provide answers that are similar to those of a human.
It can be hard to determine the accuracy of the answers given, and it can be difficult to trace the source of the information. Mark Shmulik, a Bernstein analyst, recently commented that there is a huge difference between a general search query and one that can be monetized. He also noted that ChatGPT's shortcomings in the latter were "very apparent".

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Google has been the go-to search engine for the majority of internet users since 2009, according to StatCounter. Even with the introduction of Microsoft's Bing in the same year, Google has maintained a dominant share of the search engine market.

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In the end, using AI tools like ChatGPT could be expensive for businesses due to the computing power needed. According to Brian Nowak of Morgan Stanley, the cost per query for ChatGPT is around seven times more than what Google charges for a regular search query.

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OpenAI's access to the most affordable tiers of Microsoft's Azure cloud service could potentially reduce the multiple to four times, according to Mr. Nowak's estimation. However, this is still a considerable difference, and it reflects the expenses Microsoft may incur as it integrates ChatGPT and other OpenAI tools into its products.
It would be premature to put too much pressure on either company. Investors are paying more attention to their profits as revenue growth is predicted to decrease significantly in 2021. Alphabet's operating margins are projected to be 27% this year, which is lower than 2022 but still 5 percentage points higher than the average from the three years prior to the pandemic. Microsoft is expected to maintain its margins above 40% for the third year in a row, something that hasn't been accomplished since 1999.

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So far, neither Microsoft nor Google's parent company have made any major job cuts, but that could be changing soon. According to the Wall Street Journal, Microsoft may announce layoffs as early as Wednesday morning, and many anticipate that Google's parent company will follow suit shortly.
It is a difficult task to figure out how to increase spending when investors are expecting to see less money being used. Even the most advanced artificial intelligence, such as ChatGPT, would not be able to provide an answer.