![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2026\/05\/Microsoft-AI-CoPilot-social-thumbnail.jpg?w=2048\")
<\/p>\n<\/p>\n
Redmond, Washington, mid-January 2026. The weather, cold and gray. It\u2019s the kind of morning the snooze button was built for. But the team of engineers camped out in Building 92 on Microsoft\u2019s sprawling campus got here early. They are in a race. And they are behind.<\/p>\n
The team is working on a new AI product, one that functions as a personal assistant, capable of doing everything from booking flights to responding to emails to finding a good local plumber. They know competing teams at other companies are working on similar products. As if they needed a reminder that a lot is riding on their work, Satya Nadella drops by. He wants to show them something.<\/p>\n
The Microsoft CEO opens a laptop and fires up an application. It\u2019s a kind of system for instructing and controlling multiple AI agents. He calls it \u201cChain of Debate.\u201d As Nadella walks them through the demo, the engineers trade knowing looks, the sort regulars at the local basketball court exchange when they realize a newbie\u2019s got game. Because Nadella didn\u2019t get someone to build this app for him. He created it himself, vibe coding with an AI tool. \u201cThat set the tone for how hard the team was going to push,\u201d recalls Jacob Andreou, the executive vice president responsible for the design of Copilot, Microsoft\u2019s AI assistant. He was in the room with folks, like over their shoulder, there with his machine out. <\/p>\n
Watching the boss get such excitement out of building new things inspired the team. It wrapped up its big push in late February when it rolled out Copilot Tasks, the computer-using personal assistant AI tool. (Nadella\u2019s own prototype served as the model for a feature called the model council as well as other components of Copilot.)<\/p>\n
But the fact that Nadella is spending so much time with the teams building AI products, even rolling up his sleeves and building prototypes himself, says a lot about Microsoft\u2019s current predicament. After all, this is a $3 trillion company, not some scrappy startup where the CEO routinely logs on for coding sprints with the developers. Nadella is concerned enough about the company\u2019s AI strategy that last October he announced he was stepping back from some commercial duties to focus on AI research, product innovation, and the build-out of AI data centers.<\/p>\n
There\u2019s certainly reason for concern. Microsoft\u2019s stock has endured a tough run. After hitting an all-time high in October, over the next five months Microsoft\u2019s share price fell some 34%, despite its cloud-computing platform Azure\u2019s AI-related revenues having more than doubled in the past year. Microsoft has been a prominent victim of the SaaSpocalypse, the selloff of software stocks precipitated by the advent of AI coding agents. Many investors are convinced these products mean businesses won\u2019t buy AI offerings from software-as-a-service (SaaS) vendors such as Microsoft \u2014 that, perhaps, they won\u2019t buy off-the-shelf software at all.<\/p>\n
-34%<\/p>\n
Microsoft share price decline from 10\/28\/25 through 3\/27\/26<\/p>\n
Sales of Microsoft\u2019s enterprise Copilot products have been slower than the company would like. Less than 4.5% of the 450 million customers of its Microsoft 365 office suite currently pay for Copilot features. Usage of its consumer-facing Copilot chatbot, meanwhile, lags far behind ChatGPT, Gemini, and Claude. GitHub Copilot, once the leading AI coding assistant, has been supplanted\u2014first by AI startup Cursor, then by Claude Code.<\/p>\n
Two years ago, Microsoft appeared to be one of the early winners of the AI era. Thanks to Nadella\u2019s prescient bet on OpenAI, Microsoft had exclusive access to the high-flying AI startup\u2019s models, and could use them to create AI features across its products. If companies wanted to access OpenAI\u2019s technology, the only cloud provider they could use was Microsoft Azure. The company even thought OpenAI gave it the best chance in years to compete with Google Search. Nadella, a decade into his tenure, had steered Microsoft through one platform shift \u2014 desktop to cloud \u2014 and looked poised to repeat the feat. But AI is fast-moving, and two years is a lifetime. This is the story of how Microsoft fumbled its early AI lead, and how it is trying to get it back.<\/p>\n
What went wrong<\/p>\n
Microsoft was tripped up in part by the very deal that put it at the front of the AI pack to begin with: its partnership with OpenAI. Microsoft spotted the young San Francisco company early, investing its first $1 billion in 2019, and eventually committing $13 billion to the startup. Microsoft used OpenAI\u2019s tech to launch its Copilot-branded AI products across both its consumer and enterprise software portfolio.<\/p>\n
But OpenAI\u2019s explosive growth and soaring ambitions after the launch of ChatGPT in late 2022 soon strained the partnership. The two partners clashed over computing capacity (OpenAI constantly wanted more); over intellectual property (Microsoft thought OpenAI was slow to honor its contractual obligation to share innovations); over customers (OpenAI pitched AI models directly to the same enterprises Microsoft was selling Copilot to); and, when OpenAI sought to restructure, over how much equity Microsoft should receive in the new for-profit corporation.<\/p>\n
Nadella knew that staking his company\u2019s AI strategy on an unproven startup was risky. Those risks were underlined in bold in November 2023 when the nonprofit board that controlled OpenAI\u2019s for-profit arm fired CEO Sam Altman for not being consistently candid\u2014informing Nadella minutes before announcing its decision. Nadella scrambled to reassure investors that Microsoft retained access to OpenAI\u2019s technology, while working with Altman to pressure the board to reverse its decision. Nadella announced a plan to hire Altman and any OpenAI staff who wanted to come with him. The prospect of mass defections forced the board to cave and reinstate Altman. At OpenAI, the five-day crisis became known as the blip. But it left Nadella shaken, according to those familiar with his thinking. He needed to hedge his bets.<\/p>\n
When Nadella joined a sprint by the company\u2019s AI engineers, \u201cthat set the tone for how hard the team was going to push.\u201d<\/p>\n
Jacob Andreou, EVP, Copilot, Microsoft<\/p>\n
Plan B came in the form of Mustafa Suleyman, a Google DeepMind cofounder who had left to create his own AI startup, Inflection. In March 2024, Microsoft hired Suleyman and Inflection\u2019s technical staff and licensed their technology in a $650 million deal. Suleyman was installed as CEO of a new Microsoft AI division\u2014MAI for short\u2014responsible both for building in-house frontier models as insurance against OpenAI, and for growing the user base of Microsoft\u2019s Copilot chatbot.<\/p>\n
It did not go well. Microsoft\u2019s partnership with OpenAI prohibited Microsoft from training models beyond a certain size. \u201cWe were very much only able to train native models, Microsoft models, in the SLM, or small language model, size,\u201d Suleyman tells Fortune. The first general purpose language model MAI tested publicly, in August 2025, called MAI-1 preview, ranked well down the performance leaderboards. It was never widely released. <\/p>\n
MAI also didn\u2019t turn the Copilot chatbot into a consumer hit. A year into Suleyman\u2019s tenure, Copilot usage had flatlined at about 20 million weekly active users, according to press reports, while ChatGPT\u2019s user base rocketed to ever greater heights on its way to 900 million. A major 2025 upgrade, designed to make Copilot more like a personal assistant that could perform tasks, failed to jump-start growth. And the AI-enhanced version of Microsoft\u2019s Bing search engine barely dented Google\u2019s share of the search market.<\/p>\n
Plan A was also running into trouble. In 2023, OpenAI\u2019s GPT models were head and shoulders above the field. By early 2025, Anthropic\u2019s Claude routinely topped AI leaderboards, and many businesses preferred it for complex tasks. Google\u2019s Gemini was increasingly competitive on visual tasks. But Microsoft\u2019s Copilot offerings were powered exclusively by GPT. What had once been the engine of Microsoft\u2019s AI strategy was starting to feel like a millstone.<\/p>\n
Judson Althoff, Microsoft\u2019s commercial CEO, acknowledges several missteps. For one thing, calling both its consumer and its enterprise products Copilot was confusing. \u201cThe only thing worse than not having a copilot is having more than one,\u201d Althoff, who holds a private pilot\u2019s license, quips. Microsoft also incentivized its sales reps to push both the freemium version of its enterprise M365 Copilot as well as the premium version, when only the premium version delivered the value businesses wanted. \u201cWe got that wrong,\u201d he says.<\/p>\n
Microsoft was also struggling to keep pace with the speed at which AI technology was evolving. A break point came in 2025, when Anthropic released Claude Code, which could autonomously write entire programs from just a description of what the developer wanted. This was no longer a copilot, it was an autopilot. Within six months it had reshaped software development. Then, this January, Anthropic debuted Claude Cowork, an agent that could use software \u2014 including Microsoft\u2019s productivity tools, like Excel and PowerPoint\u2014to autonomously complete tasks.<\/p>\n
Claude Cowork posed a serious challenge to M365 Copilot and the AI agents Microsoft had been pushing customers to adopt. In fact, it posed a threat to most business software. That realization sparked the SaaSpocalypse stock market rout, which would eventually wipe more than $2 trillion off the value of tech shares\u2014including a one-day plunge that erased $357 billion of Microsoft\u2019s market cap in a single trading session.<\/p>\n
The fixes<\/p>\n
By the fall of 2025, Nadella realized it was time for a reset. The company\u2019s actions since then have reflected a tricky balancing act, as the company strives to innovate at AI speed like a buzzy startup, while still reliably delivering for investors and enterprise customers like the staid Microsoft of old.<\/p>\n
He handed many of his commercial and daily operational duties to Althoff, a longtime Microsoft exec, so that he could focus on AI product development. Althoff says he handles horizon zero and horizon one while Nadella looks after horizons two and three. At the same time, Nadella began breaking down silos to make Microsoft faster, flatter, and more agile than ever before, Althoff says.<\/p>\n
In March, Nadella merged the consumer and enterprise Copilot teams. Suleyman was stripped of his responsibility for consumer AI products and put in charge of a rebranded model development effort: the Superintelligence team. (Suleyman says the name reflects its ambitions and will help it recruit top researchers.) Andreou, who joined Microsoft in 2025 after stints at Snap and venture capital firm Greylock, was put in charge of Copilot Experience across both consumer and enterprise, reporting directly to Nadella. Rounding out the Copilot Leadership Team alongside Suleyman and Andreou are three veteran Microsoft executive vice presidents: Charles Lamanna, who oversees Copilot, AI agents, and platform; Ryan Roslansky, responsible for Microsoft Office and Microsoft-owned LinkedIn; and Perry Clarke, chief technology officer for application systems. \u201cWe want it to be one backend, one brain, that powers both consumer and work,\u201d Lamanna says. Nadella himself joins the Copilot Leadership Team\u2019s weekly stand-up meetings and participates in an ongoing Teams channel on Copilot development.<\/p>\n
Microsoft faces a tricky balancing act: It needs to innovate fast enough to keep up with AI rivals like Anthropic and Google, while remaining a reliable partner for big enterprise customers.<\/p>\n
Andreou points to two new products, Copilot Tasks for consumers\u2014the product Nadella had played around with prototyping in January\u2014and Copilot Cowork for enterprise customers, as evidence the unified Copilot team is working as Nadella intended. \u201cBoth of those things were basically frontier-grade experiences, both for consumers and enterprise users,\u201d he says. \u201cAnd both are things our teams were able to pull together and build in a matter of weeks.\u201d<\/p>\n
Microsoft has also agreed to OpenAI\u2019s long-pending restructuring on substantially less restrictive terms. The software giant secured a 27% equity stake \u2014 potential upside if OpenAI goes public, as is widely expected. But the old deal\u2019s exclusivity has been abandoned: OpenAI can now cut deals with other cloud providers, and Microsoft can work with other AI companies\u2019 models. Suleyman says the agreement allows Microsoft to finally build larger, more capable frontier AI models that will eventually allow it to be self-sufficient \u2014 but adds that it will take two to three years for Microsoft to catch up with the top labs.<\/p>\n
The revamped partnership allowed Microsoft to embrace OpenAI\u2019s archrival, Anthropic. The company committed to investing up to $5 billion in Anthropic in November and began offering its models on Azure. The ability to use Claude to power Copilot has been popular with enterprises and enabled Microsoft to build Copilot Cowork.<\/p>\n
To give credit to OpenAI and Anthropic, they\u2019re helping us run faster.<\/p>\n
Judson Althoff, Commercial CEO, Microsoft<\/p>\n
But Microsoft is not simply swapping reliance on one loss-making AI startup for dependence on another. The Anthropic investment is indicative of a different bet: that AI models will increasingly commoditize, and that value will accrue\u2014for enterprises, anyway\u2014not in the AI brain, but in all the body parts and connective tissue around it. That\u2019s where Microsoft thinks it can win. It already owns a lot of those organs and sinew: software tools, security, data warehouses, and cloud computing. It has also built IQ-branded products that allow enterprises to create customized workflows, gather their data, and then build, deploy, and monitor agents running those workflows\u2014using any AI model from any vendor.<\/p>\n
\u201cWe don\u2019t think enterprises will swap out their information work platform, their [developer] environment, their security environment, every time a new model drops,\u201d Althoff says.<\/p>\n
The strategic shift comes with a new business model. Microsoft has traditionally priced its products with per-user licenses\u2014$30 per user per month for Copilot, for example. Customers like it because it makes budgeting easy. But if the AI agents inside those products use models Microsoft doesn\u2019t own, Microsoft has to pay the AI vendor for the tokens consumed. So Microsoft has started moving toward hybrid pricing: a per-user license with a limited token allowance, plus per-token charges beyond it \u2014 to keep the model-agnostic strategy from torching its margins.<\/p>\n
In another cost-conscious move, Microsoft has looked to slim its workforce. In April, it announced its first-ever employee buyout offer, aimed at its most long-tenured employees. The company says about 7% of its U.S. workforce, or about 8,750 employees, qualify for the buyout, at an anticipated cost of $900 million.<\/p>\n
There\u2019s evidence the revamped enterprise strategy is working. At the end of March, Azure revenues were growing 40% year over year, and Microsoft\u2019s total AI business was on pace for $37 billion in annual sales, up 123% from the year before. Of the 20 million M365 users now paying for Copilot, a quarter were added in the first four months of 2026, and Althoff says adoption is accelerating. <\/p>\n
UBS analyst Karl Keirstead says more Microsoft customers are telling him they see Copilot\u2019s value. But the overall user base is still disappointing. \u201cI don\u2019t think they\u2019ve reached a penetration rate to satisfy Wall Street,\u201d he says.<\/p>\n
Microsoft\u2019s model-agnostic strategy has a possible flaw: What if the buzzy AI startups start building the boring-old-Microsoft-style connective tissue, too? That is no longer a hypothetical. In February, OpenAI launched its Frontier enterprise platform, offering many of the capabilities Microsoft is building into its new tools. Anthropic is moving in this direction too, offering a Claude Managed Agents service.<\/p>\n
Microsoft\u2019s argument is that decades of enterprise relationships, its reputation for reliability and security, and deep integration with the software customers already run will give it the edge. Althoff says he welcomes the competition. \u201cTo give credit to OpenAI and Anthropic, they\u2019re helping us run faster,\u201d he says.<\/p>\n
But some question whether a company the size of Microsoft can match the agility of the AI-native startups. \u201cMicrosoft, and frankly all the software firms, are facing something they haven\u2019t faced in 10-plus years, which is extraordinarily innovative new rivals,\u201d Keirstead of UBS says. \u201cAnd expecting any large incumbent like Microsoft to pivot as fast as OpenAI and Anthropic are able to is probably too demanding.\u201d<\/p>\n
Bank of America\u2019s Tal Liani makes the case for Team Satya. It\u2019s unlikely, he says, that the AI companies will be able to build the full product suite that Microsoft offers. That means Microsoft doesn\u2019t have to win the AI race. It just has to not lose it. \u201cIt may not be the best, but if it\u2019s good enough, and you get great value through bundling, that\u2019s actually the value of Microsoft,\u201d he says.<\/p>\n
Even the costs of not losing, however, are not trivial. Microsoft, like other hyperscale cloud providers, is expending vast sums on data centers and specialized chips. The company spent $88.2 billion on capital expenditures in fiscal 2025. That was in line with peers such as Google Cloud and Amazon\u2019s AWS. But it still wound up being too conservative. Demand surged, leaving Microsoft without enough compute capacity and unable to recognize the AI revenue it had booked at the rate it had hoped to. \u201cI thought we were going to catch up,\u201d CFO Amy Hood acknowledged on an October earnings call. \u201cWe are not.\u201d <\/p>\n
Now the company is more than doubling down: In 2026, Microsoft has forecast it is likely to spend some $190 billion on capex\u2014more than three times what it spent in 2024. Once nervous about such sums, Wall Street seems willing to tolerate the massive spending. But if investor sentiment were to reverse, Microsoft will be more exposed than ever.<\/p>\n
In November 2025, an independent developer named Peter Steinberger released OpenClaw, a free, open-source system for turning any AI model into an always-on agent that works autonomously over long periods\u2014building software, acting as a virtual executive assistant, even running inventory for an online business. OpenClaw was a hit with developers and AI-forward tinkerers. Nadella, reportedly, was among them.<\/p>\n
But as popular as OpenClaw was, it had a problem. It needed access to systems, data, payment information, and passwords to be useful, which made it enormously risky. It also burned through tokens at an enormous rate. \u201cI can\u2019t launch OpenClaw at Microsoft,\u201d Nadella told a San Francisco tech conference in March. \u201cI don\u2019t have permission to do that, because that would be considered Microsoft launching a virus. But at the same time, it\u2019s a fantastic innovation.\u201d<\/p>\n
Nadella has tasked the unified Copilot team with building a Microsoft version of OpenClaw \u2014 same consumer-grade fun, but with the security and governance enterprises demand. Andreou frames it as the test of the new organization: \u201cThat\u2019s what a win looks like here.\u201d Lamanna thinks it might be the thing that ignites Copilot\u2019s growth. \u201cThe hardest thing has been, how do you help people change the way they work?\u201d he says.<\/p>\n
A perpetual AI assistant, if it works, would make that change easier. It would also mean the unit of AI shifts from model to always-on agent\u2014precisely the kind of paradigm shift that tests whether Microsoft\u2019s connective-tissue strategy holds when the thing in the middle changes shape. Lamanna says an enterprise-grade Microsoft OpenClaw is now not very far away.<\/p>\n
\u2018Gigawatt scale\u2019<\/p>\n
The week of March 30, Suleyman gathered his new Superintelligence team\u2014some 500 people from around the globe\u2014for a three-day offsite in Miami. The purpose was to lay out a road map for achieving gigawatt scale AI training runs\u2014the sort that should let Microsoft compete directly with OpenAI, Anthropic, Google DeepMind, Meta, and xAI. Suleyman says it is essential to Microsoft achieving self-sufficiency before 2030; the company loses access to OpenAI\u2019s tech in 2032.<\/p>\n
The entire team gathered in a giant ballroom to hear a keynote address and ask me anything session with Suleyman and Nadella. Nadella, according to Suleyman, described the moment as Microsoft \u201crefounding the company\u201d in response to the platform shift to AI. It\u2019s a telling phrase.<\/p>\n
After the keynote, the gathering broke up into separate workstreams, each team gathered at one of 40 whiteboards arrayed around the ballroom, as they brainstormed and plotted the next eight-week sprint. Rather than depart, Nadella lingered. For the next three hours, he wandered from table to table, talking to researchers, making suggestions, offering ideas. If this is a refounding, then Nadella is acting the part of the startup CEO. He\u2019s not taking anything for granted. He knows that Microsoft has everything to lose \u2014 and everything yet to play for.<\/p>\n
#Microsoft #lost #race #Copilot<\/p>\n","protected":false},"excerpt":{"rendered":"
Redmond, Washington, mid-January 2026. The weather, cold and gray. It\u2019s the kind of morning the…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[245],"tags":[353,12626,2175,878,538,879,406,1403],"_links":{"self":[{"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/posts\/6827"}],"collection":[{"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6827"}],"version-history":[{"count":0,"href":"https:\/\/stock999.top\/index.php?rest_route=\/wp\/v2\/posts\/6827\/revisions"}],"wp:attachment":[{"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6827"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6827"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stock999.top\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6827"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}