Three years in the past, Satya Nadella catapulted Microsoft to the entrance of the AI race and have become “like a superhero,” one current former Microsoft government stated.
In February 2023, after betting early on OpenAI, the CEO unveiled Microsoft’s AI-powered Bing search engine earlier than a packed viewers exterior Seattle, and declared a struggle on Google’s search dominance. “A race starts today,” he stated. Waves of adulation adopted. When Nadella helped navigate OpenAI’s board disaster later that yr, Bill Gurley referred to as it an “amazing shift in corporate reputation.” CNN Business selected Nadella because the CEO of the Year.
Inside Microsoft and throughout the tech business, Nadella was hailed for seizing the longer term. Now, his legacy is at stake.
Microsoft’s inventory is down greater than 24% from 12 months in the past, considerably worse than the remainder of the Magnificent 7. Investors have grown more and more skeptical that the corporate’s multibillion-greenback AI wager will ship. Copilot, Microsoft’s flagship AI product, lags behind different AI instruments like ChatGPT and Claude. LinkedIn has drawn criticism for becoming flooded with AI-generated hustleporn. Xbox’s enterprise is “not healthy,” its CEO recently said, and present process layoffs and restructuring because it tries to justify the corporate’s document-breaking $69 billion Activision Blizzard acquisition.
And inside the corporate, workers are questioning Microsoft’s plans to spend a record $190 billion this year to construct AI infrastructure. As generative AI adjustments how folks work, write software program, and eat info, three of the corporate’s core companies grasp within the stability: Microsoft 365, GitHub, and Azure. Investors will get a report card on these challenges on Wednesday, when the corporate releases its fourth-quarter earnings outcomes.
As AI adoption spreads by way of company America, each software program firm is preventing to fend off the so-referred to as SaaSpocalypse. But the battle is especially fraught for Nadella’s Microsoft, which made an early and loud wager on AI to propel the corporate’s future. Now the corporate’s north star has additionally change into a possible noose.
For many years, Microsoft’s productiveness software program has been the default homeroom the place data staff begin their day. They opened Word to put in writing, Excel to research information, and PowerPoint to build presentations. Now, thousands and thousands of these staff are starting to do all this stuff immediately inside AI instruments. Gartner analysts earlier this year predicted AI would threaten to dethrone conventional productiveness suites like Microsoft 365 and Google Workspace in a $58 billion market shakeup.
Microsoft executives level to continued progress in Microsoft 365 and growing Copilot adoption as proof clients nonetheless need Microsoft’s merchandise on the middle of their workdays. “The M365 business is seeing tons of new adoption and M365 Copilot usage,” one government stated, who stated the corporate is particularly chasing computing capability to fulfill the demand.
GitHub faces an analogous problem. Since buying the software program growth platform in 2018, the corporate has held a dominant place with builders and had an early benefit in AI coding by way of GitHub Copilot. And it continues to develop: The platform lately had its “best month ever,” an government advised workers in inside assembly feedback seen by Business Insider, although he did not say by what measure.
But upstarts have swarmed in, as thousands and thousands of engineers have adopted Cursor — which SpaceX recently announced plans to acquire for $60 billion — and Anthropic’s Claude Code. As Business Insider beforehand reported, executives have mentioned internally the necessity to overhaul GitHub to raised compete with these AI-native coding instruments. AI demand has additionally strained Github. As AI utilization surged GitHub has skilled dozens of main outages this yr.
The firm can also be struggling broadly to maintain up with the demand for compute capability. Despite this crunch, Microsoft is elevating salespeople quotas for promoting its cloud computing platform, Azure, some by 30% this yr, in keeping with folks conversant in the change.
Azure stays Microsoft’s quickest-rising strategic enterprise, however internally executives say it has change into a continuing balancing act. Demand for computing infrastructure has outpaced the corporate’s potential to construct new capability, forcing Microsoft to make tough selections about the place its assets go. Even with this yr’s $190 billion capital expenditures — largely to develop information-middle capability for AI workloads — executives say the corporate continues to be constrained.
Earlier this yr, Chief Financial Officer Amy Hood instructed Microsoft was prioritizing scarce computing assets for its personal AI merchandise earlier than allocating the remaining capability to Azure clients.
“The first thing we’re doing is solving for the increased usage in sales and the accelerating pace of M365 Copilot, as well as GitHub Copilot, our first-party apps,” Hood stated throughout Microsoft’s January earnings name. “Then we make sure we’re investing in the long-term nature of R&D and product innovation… Then what you end up with is the remainder going towards serving the Azure capacity that continues to grow in terms of demand.”
Why would Satya prioritize rising Adobe over rising M365?Microsoft government
If Microsoft had allotted the GPUs that got here on-line in the course of the first half of its fiscal yr to Azure as a substitute of its personal AI merchandise, Azure progress would have exceeded 40% as a substitute of 39%, Hood stated. Microsoft beforehand reported $75 billion in Azure income for its 2025 fiscal yr.
That earnings report triggered considered one of Microsoft’s greatest submit-earnings inventory declined by greater than 10% as traders questioned the corporate’s slower Azure outlook regardless of document AI spending and rising issues that Microsoft was diverting capability away from cloud clients.
Executives who spoke to Business Insider say these tradeoffs have intensified.
Microsoft is so determined for capability that it is turning to rivals to assist relieve a few of these constraints. Following a sequence of GitHub outages, Amazon bailed Microsoft out. The firm additionally explored leasing Oracle cloud infrastructure however Microsoft walked away because of safety and compliance issues.
Microsoft is now looking for further cloud capability from different suppliers, together with evaluating Amazon and Google, in keeping with folks conversant in the discussions. “We are shopping for capacity everywhere,” a kind of folks stated.
While prioritizing inside companies has a blended reception on Wall Street, the technique is evident inside Microsoft.
“All of the supply is gone once you solve for frontier labs and our internal businesses like M365 and Microsoft AI,” one government stated.
Those selections have created tough conversations internally.
“Why would Satya prioritize growing Adobe over growing M365?” the particular person stated. “I have no idea how we’re going to land that message with customers.”
As the stress on Microsoft’s core companies mounts, Nadella has been bearing that stress down on his workforce, and reshaping the construction of the corporate and its leaders.
As Business Insider beforehand reported, Nadella promoted Judson Althoff to CEO of Microsoft’s commercial business to free himself and the corporate’s engineering leaders to focus extra immediately on AI. Althoff was beforehand Microsoft’s longtime gross sales boss however the function gave him a much bigger profile. In an inside memo seen by Business Insider at the time, Nadella described the second as “a tectonic AI platform shift.”
The mounting stress on Nadella has trickled down by way of Microsoft’s ranks from the manager suite to the rank-and-file worker.
At the identical time, Nadella has remade his inner circle. Business Insider beforehand reported that Microsoft successfully retired its conventional senior management group construction in favor of smaller, flatter management teams. AI CEO Mustafa Suleyman has narrowed his focus to Microsoft’s superintelligence efforts, prime Nadella lieutenant Rajesh Jha retired, longtime product and advertising chief Yusuf Mehdi is making ready to depart the corporate, and extra government adjustments are anticipated.
According to folks conversant in the succession planning, Hayete Gallot, who lately returned to Microsoft from Google to steer the corporate’s safety enterprise, is seen internally because the lengthy-time period successor to Althoff as gross sales chief. Gallot beforehand labored for Althoff and left in what one government advised Business Insider was “not an amicable departure.” Nadella recruited Gallot again to switch Charlie Bell, who moved into a person contributor function centered on engineering high quality. Rodrigo Kede Lima, who Microsoft simply put in command of a $2.5 billion AI gross sales unit, can also be a rising star, one of many folks stated.
The adjustments prolong past the manager suite. Business Insider has realized that Microsoft overhauled its efficiency evaluation system this yr, simplifying scores into 5 classes whereas making efficiency distinctions considerably sharper.
Executives say the brand new course of appears like a return to “stack ranking,” the controversial system that evaluated workers relative to 1 one other in the course of the Steve Ballmer period. At the identical time, managers have been instructed to scale back the variety of workers in larger-degree engineering roles as Microsoft continues flattening elements of the group, emblematic of a broader hardcore work tradition that is unfold throughout Big Tech in the previous couple of years.
“It’s almost like the old era of Microsoft is back,” one former government stated. “The old Windows era where you lead with a lot of fear and a billy club in your hand.”
For years, Microsoft’s best energy was that it owned the place folks labored and the place builders constructed software program. AI is starting to problem each assumptions directly. Now Nadella’s legacy will not be outlined by whether or not Microsoft can construct the perfect AI, however by whether or not it may possibly hold AI from eroding the companies that made it one of many world’s most respected corporations.
Ashley Stewart is a chief expertise correspondent at Business Insider.
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