Microsoft's AI advantage is so critical it can't be quantified, analyst says

By Emily Bary

Microsoft may have an 'open-ended' total addressable market if its Copilot assistant becomes the preferred AI interface

Practically every software company is racing to integrate artificial intelligence, but Microsoft Corp. might have an advantage so notable that it's hard to put a numerical value on it, according to one analyst.

As companies race to create AI software features for customers, there's a risk that people will become overwhelmed by all the options. That's why Microsoft's (MSFT) Copilot product is poised to thrive, Melius Research's Ben Reitzes wrote in a Monday report.

"Customers are not going to want to open 20 Copilots from 20 different enterprise apps," he said. "Users likely will want to be 'logged in' to only a very select few AI interfaces and Microsoft is vying for #1."

Microsoft has been rolling out its Copilot AI assistant for platforms like Office and Github, and the company might "own the most valuable AI real estate" in that sense, according to Reitzes. Cementing Copilot's position as an AI hub is more important for investors to consider than the financial potential of Copilot at the outset, he said.

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"The value Microsoft can provide currently isn't quantifiable," Reitzes wrote. "If it provides the means to integrate a vast array of Copilot-like products from just about everyone (and everyone calls them Copilots to boot) - they become the de facto interface for Generative AI. That's an open-ended [total addressable market]."

For example, he highlighted that traditional web browsers like Apple Inc.'s Safari and Alphabet Inc.'s Chrome could become less relevant if users start running queries through AI Copilot tools. And makers of traditional software applications "will increasingly need to integrate with Copilot or risk being left out of the workflow entirely," he said.

See also: Apple's stock has faltered, but a Steve Jobs moment in AI may be on the horizon

From Reitzes' perspective, initial adoption of Copilot is just "OK," and more critically, "a work in progress," especially for products like Excel and PowerPoint. But he's not so concerned about Microsoft's ability to make serious money off the tools now, and he noted that the company's Azure cloud-computing business promises to be the big AI-linked driver for Microsoft shares this calendar year.

"Frankly, we don't think that [average revenue per user] for Copilot even matters that much since one could argue giving it away given the long-term value of owning the interface," he wrote.

-Emily Bary

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04-01-24 1012ET

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