On Wednesday, Microsoft showcased its dominant position in the AI era worldwide.The latest earnings report revealed that Microsoft's &#34;Intelligent Cloud&#34; business (including Azure, GitHub, server products, enterprise, and cloud services) saw a 19% YoY revenue growth in the third quarter. The flagship product of its cloud business, Azure, regained its high growth rate of 29%, ending a seven-quarter slowdown trend.For a company with a market value of $2.5 trillion, expanding its business at such a speed is remarkable. But what's even more impressive is that Microsoft seems to have achieved this effortlessly.In the third quarter, all three types of operating expenses for Microsoft saw a MoM decrease, with the marketing expense ratio at only 9.2%, dropping below 10% for the first time in two years. The research and development expense ratio and the administrative expense ratio also slightly decreased.With revenue and costs moving in opposite directions, Microsoft's gross margin for the third quarter increased to 71.2%, a 1-2 percentage point increase MoM.So, the question is, in this AI era where everyone is burning money, how did Microsoft not only secure a ticket to enter but also dominate the field without incurring significant financial costs?The answer is not difficult to guess. Microsoft's success in the AI field is all thanks to an investment made five years ago - OpenAI.$13 billion! The veteran tech giant shines again.OpenAI was co-founded by Musk, Sam Altman, and others in 2015. After Musk stepped down from the company's board of directors, it faced a difficult period and was forced to transition from a non-profit to a limited-profit company.At OpenAI's most challenging moment, Microsoft appeared as a &#34;savior.&#34;In 2019, Microsoft invested $1 billion in OpenAI, providing the powerful server infrastructure needed for large-scale model development.In 2021, Microsoft made an additional $2 billion investment in OpenAI.Until December of last year, OpenAI gained popularity with its chatbot ChatGPT, and Microsoft followed suit by increasing its investment by $10 billion in January this year.A total investment of $13 billion over five years.In return, Microsoft acquired a 49% stake in OpenAI, a share of future profits, and the right to use its technology.Through its cloud service platform Azure, Microsoft became the exclusive supplier of OpenAI's large language models (LLMs). Users can directly access ChatGPT, Codex, and DALL.E on this platform without going through OpenAI.Furthermore, Microsoft has integrated OpenAI's technology into its search engine Bing, marketing software, GitHub coding tools, and Microsoft 365 office software, creating a comprehensive and powerful AI service system for individuals, enterprises, and developers.Collaboration with OpenAI has helped Microsoft seize the initiative in the generative AI field, allowing this traditional tech giant to regain &#34;high growth, high gross profit, and high market value,&#34; and ushering in a shining moment for this old-tech giant that has always lagged behind Google in the field of AI.According to Michael Turrin, an analyst at Rich Bank, this series of integrations will increase Microsoft's revenue by $30 billion annually, with about half of it coming from Azure.Riding on the wave of AI, Microsoft's stock price has risen by 42.2% year-to-date, with a current market value of $2.5 trillion.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e57993a1-f048-4433-b1ca-043f44f9bd96.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e57993a1-f048-4433-b1ca-043f44f9bd96.png"/>On the other hand, OpenAI has not only overcome its survival crisis but has also grown rapidly.CEO Sam Altman recently revealed to employees that OpenAI's revenue this year will reach $1.3 billion, an increase of more than 45 times compared to last year.Since the end of last year, the number of OpenAI employees has more than doubled, reaching at least 700 people.<h2>OpenAI &#34;Held Hostage&#34;</h2>However, it is worth noting that this is not just a story of mutual redemption between an old-tech giant and a new AI player.Due to being &#34;deeply held hostage&#34; by Microsoft in terms of equity and technology, OpenAI's revenue-generating ability is severely constrained, and this most valuable startup is being gradually eroded by Microsoft.As mentioned earlier, Microsoft has obtained the right to use OpenAI's technology and is bundling it with its other products to sell downstream, directly squeezing OpenAI's revenue.Moreover, Microsoft's scale is unmatched by startups like OpenAI. If you can get the same technology services from both places, why wouldn't users choose Microsoft, which appears to be more reliable?According to Microsoft salespeople and customers, especially in the legal and financial fields, companies are more willing to entrust their data to Microsoft, which has higher requirements for data security in these areas.In fact, it has been reported that Microsoft has poached some major customers from OpenAI.For example, Morgan Stanley, one of the &#34;flagship customers&#34; of OpenAI on Wall Street. Reports suggest that Morgan Stanley has recently started purchasing some of OpenAI's model services through Azure.Eli Brosh, Head of AI Research at web software design company Wix, said that initially, they only purchased services from OpenAI, but now they are using Microsoft's services to support some of their functions. To save costs, they are also testing open-source models and Google's Vertex AI models.According to Microsoft's third-quarter earnings report, there are currently 18,000 customers purchasing OpenAI software through Azure, up from 11,000 in August.Note that only a small portion of the revenue generated through Azure goes back to OpenAI, with the majority being intercepted by Microsoft.According to reports from informed sources, OpenAI has signed a revenue-sharing agreement with Microsoft.The agreement stipulates that OpenAI has the right to retain a significant portion of the revenue from direct sales of its models to customers. However, when customers purchase OpenAI models through Azure, Microsoft will receive a larger share of the revenue.In addition, Microsoft and OpenAI have also signed a profit-sharing agreement.According to the agreement, Microsoft will receive 75% of OpenAI's profits until its initial investment is repaid, and then 49% of the profits until it reaches a theoretical limit of 100 times the initial investment.Furthermore, OpenAI is not the exclusive supplier of large models for Microsoft. Microsoft Azure also offers large models from Meta and Hugging Face, benefiting from both ends.In July of this year, Microsoft and Meta jointly released the open-source AI model Llama 2 (commercial version), which is deployed on Microsoft's cloud service Azure and runs on the Windows operating system.This could be a huge threat to ChatGPT, which currently dominates the world of large models.It is reported that Llama 1 is already capable of competing with ChatGPT and Google's Bard chatbots. Compared to Llama 1, Llama 2 has 40% more training data, doubled context length, and over 1 million manually labeled examples to fine-tune its output quality.At the same time, the soaring valuation of OpenAI makes Microsoft's investment appear more profitable.Venture capital firm Thrive Capital is in the process of buying shares from OpenAI employees, which will increase OpenAI's valuation to at least $80 billion, at least double what it was six months ago, making it the third-largest startup in the world.Based on the current valuation, Scott Raney, Managing Director of venture capital firm Redpoint Ventures, said that OpenAI is more likely to go public.Raney said:<blockquote>When a company raises funds with a valuation of $30 billion, there is no turning back. It will say, &#34;Our plan is to become an independent large company.&#34;</blockquote><h2>In conclusion</h2>According to global data processing company Dealogic, under the leadership of Satya Nadella, Microsoft has completed a total of 326 acquisition deals with a total value of over $170 billion.The three largest deals include Microsoft's acquisition of Activision Blizzard for a staggering $75 billion, the acquisition of LinkedIn for $26 billion, and the acquisition of AI speech recognition company Nuance Communications for $16 billion, all of which involved significant investments.The classic aspect of investing in OpenAI is that Microsoft, as a traditional tech giant, has deeply integrated its technology and ownership with the most promising and powerful AI startup through a mere $13 billion investment. In just five years, it effortlessly took the lead in the era by incorporating state-of-the-art AI technology into almost all of its products, achieving a dominant position. This achievement is significant enough to be recorded in the textbook of corporate transformation.

OpenAI

MSFT

As a traditional tech giant, Microsoft has effortlessly taken the lead in the industry and achieved dominance by investing only $13 billion in the most promising and powerful AI startups, integrating cutting-edge AI technology into almost all of its products within five years. This remarkable feat has solidified its position at the forefront of the era and is worthy of being recorded in the textbook of corporate transformation.

OpenAI's "dilemma," Microsoft's "shrewdness," and a classic move worthy of being "written into textbooks."