Why Are Microsoft, Amazon, and Google Betting Big on AI Startups?
Microsoft, Amazon, and Google are making big bucks by offering costly cloud services to the startups they support financially. Over the past year, they have poured billions into young companies specializing in artificial intelligence. At the same time, they've billed these newcomers a similar amount for using their cloud platforms.
Table of Contents
The Win-Win Investment Model
These deals are a win-win for big tech firms, making them some of the best AI stocks to consider. They get to play the role of the main investors and reap the benefits directly from these startups. If the startups soar, the value of tech giants’ stakes could skyrocket. And if not, they still make money by converting cash into revenue through their cloud services.
For the startups, it’s a good deal too. They get the necessary cash to develop advanced AI models and gain access to the much-needed computing power for creating and launching products like ChatGPT.
This growing bond between AI startups and tech giants is making traditional venture capitalists, who usually back young companies, take a backseat. Unlike tech giants, these investors don't usually spend billions and are wary of the high valuations that come with big deals.
Take Amazon, for example. It announced a plan to invest up to $4 billion in Anthropic, a rival to ChatGPT creator OpenAI. What wasn’t reported was another part of the deal: Anthropic committed to spending $4 billion on Amazon’s cloud platform, Amazon Web Services, over the next five years.
Following an earlier investment, Google recently pledged an additional $2 billion to Anthropic after the startup agreed to spend more than $3 billion on Google Cloud. Microsoft, on the other hand, invested a whopping $13 billion in OpenAI, which is now spending billions on Microsoft’s cloud.
Such interlocking financial deals have made tech giants the biggest backers of these ambitious AI startups. Just in Anthropic and OpenAI, Microsoft, Google, and Amazon have invested nearly $20 billion, with a large portion of this money coming back to them in the form of cloud revenue.
Microsoft Leads with Significant Investments
Since ChatGPT became a hit a year ago, many startups have been vying to create the next big thing in generative AI, which lets software chat like humans. But building this technology needs supercomputers with top-notch chips and a lot of cash, something only big tech firms have.
Microsoft started this trend four years ago by investing $1 billion in OpenAI. In return, OpenAI agreed to use Microsoft's Azure servers exclusively for training its software and releasing its products. The deal scaled up this year with Microsoft announcing a $10 billion investment plan.
The rising popularity of ChatGPT and tools built on its technology has brought good fortune for Microsoft. In the recent quarter, its cloud service, Azure's revenue, jumped by a solid 29% compared to the same quarter last year. A good chunk of this growth comes from AI spending, especially from OpenAI and products built on its software.
In the past, similar investments have happened, but not on the scale of recent deals. Executives at tech companies say these investments and cloud commitments are handled by different teams with a goal to not just fund a high-spending customer but to profit from their investments.
For instance, besides Anthropic, Google has made similar investments and cloud contracts with several smaller startups. Unlike others, the deal between OpenAI and Microsoft is unique as it comes with exclusivity—all of OpenAI's cloud spending is on Azure.
While Microsoft enjoyed a boost in cloud revenue driven by AI, Google hasn’t seen the same trend. Shares of Google's parent company, Alphabet, fell over 10% after reporting slower growth in its cloud business. Yet, Google Cloud executives are betting on their close ties with promising AI startups, hoping they will become bigger customers over time.
The strategic financial ties between big tech and AI startups are not only reshaping the investment landscape but also accelerating the pace of innovation in AI. The evolving model presents both opportunities and challenges for all stakeholders, hinting at a dynamic, intertwined future of tech investments and innovations.