Microsoft's AI Challenge: From Prototype Lead to Market Lag
Microsoft has a recurring pattern: the company often identifies major technological shifts early, developing impressive prototypes and generating significant initial hype. However, it frequently struggles to translate this early lead into sustained market dominance, often ceding ground to competitors who release more polished and successful products. This historical trend appears to be replaying with Microsoft’s generative AI ambitions.
After an aggressive launch of Bing Chat, Microsoft initially positioned itself as a leading consumer AI company. Yet, momentum appears to have slowed considerably, with Copilot usage now reportedly lagging far behind ChatGPT and other rivals. While Microsoft’s diversified portfolio and strong Azure cloud business ensure profitability through enterprise solutions, a key question remains: can the company transcend its business-focused identity and achieve broad consumer success in emerging tech?
Examples of this pattern are not hard to find. The pattern is evident in augmented and mixed reality. In 2015, Microsoft championed this technology with HoloLens, showcasing captivating consumer demos, including Minecraft integration. It even built “Windows Mixed Reality” software into Windows 10, enabling partners like Samsung to develop compatible headsets. Despite building significant consumer anticipation, HoloLens was never released as a consumer product. Microsoft instead shifted focus to the enterprise, notably securing a multi-billion-dollar agreement to develop a HoloLens-based headset for the U.S. military. However, this project reportedly incurred billions in losses, leading to its transfer to Anduril this year. Meanwhile, competitors like Apple, Meta, Google, and Samsung are heavily investing in this space, with Microsoft largely absent. This serves as a cautionary tale: an early lead, substantial investment, and then a retreat, leaving the market open for others.
Decades ago, Microsoft displayed an early grasp of the future of mobile computing. In the early 2000s, years before the iPhone revolutionized the industry, devices running Windows CE offered a glimpse of pocket-sized computers capable of running apps and accessing the web. However, the interface was cumbersome, based on a tiny Windows Start menu. Then-CEO Steve Ballmer famously dismissed the iPhone upon its 2007 launch, questioning its business appeal without a keyboard. Microsoft’s subsequent efforts to compete, notably with the Windows Phone operating system, ultimately failed to gain traction, by which time Apple’s iOS and Google’s Android had established insurmountable leads.
Long before Chrome and Firefox, Microsoft recognized the transformative potential of the internet. With Internet Explorer 4 (IE4) in 1997, the company integrated the web deeply into Windows, allowing HTML content on the desktop and empowering web applications with proprietary ActiveX technology. This vision, however, was heavily tied to Windows and ActiveX, which also presented security vulnerabilities. The landmark antitrust case, partly concerning IE’s bundling with Windows, further complicated matters. Following IE6’s release in 2001, Microsoft’s browser development appeared to stagnate, with IE7 not arriving until five years later, by which point Mozilla Firefox had already captured significant market share. Microsoft’s initial, correct vision for an expansive web stalled, as if IE6 and ActiveX would suffice indefinitely. This left the company playing catch-up for years until it rebuilt Edge on the open-source Chromium project, effectively adopting the same foundation as Google Chrome.
The trajectory of Bing Chat, now integrated into Copilot, strikingly echoes this historical pattern. Microsoft’s early investment in OpenAI led to a rapid consumer AI product launch, initially positioning Bing Chat as a major contender alongside ChatGPT. Despite viral success, the company reacted to unexpected, unpredictable user interactions by implementing usage limits, which ultimately made the chatbot less engaging and useful. As Yusuf Mehdi, a corporate vice president at Microsoft, told NPR, the company “did not expect people to have hours-long conversations with it that would veer into personal territory,” highlighting a potential misjudgment of user engagement.
Under current CEO Satya Nadella, Microsoft has undeniably evolved. The past does not dictate the future. Yet, the question remains: will Copilot break this cycle and become a genuine breakout success, or will it, like previous endeavors, serve as an insightful but ultimately unfulfilled prototype, merely demonstrating what the rest of the tech industry should build? The company’s track record is not entirely encouraging.