Canalys Forums EMEA When Microsoft needs to make a market, it turns to the channel - a nebulous term used for resellers, distributors and an assortment of other independent third party suppliers that sell wares and services. And by goodness Microsoft needs more feet on the street than ever if it's going to appease investors desperate to see returns on the billions of dollars it's betting on Generative Artificial Intelligence.

According to some estimates, Microsoft has sunk $13 billion into OpenAI, basing its own LLM Prometheus on the ChatGPT-4 foundation, tweaked for certain functionalities. Then there's the eye-watering capital expenditure Microsoft is forking out on datacenters to manage this tech in expectation of customers signing up.

Astonishingly, the Big Four hyperscalers have spent $200 billion in capex, and nearly half of that money goes directly to Nvidia... meanwhile... only about $20 billion of revenue is actually coming to consumers and businesses in terms of AI services...

Microsoft has run proof of concepts for much of the year but perhaps not as many of these pilots have gone as expected. Investors, impatient to see a payoff, were warned by Microsoft that big bucks will come, just not for a while.

So for the first time in as long as we can remember, Microsoft last month dispatched senior executives to the Canalys Channels Forum in Berlin, an event the megacorp has mostly shunned in the 13 years El Reg has attended it.

Why? To convince the 1,000 plus audience to get behind Copilot - a tech shoehorned into every corner of its software portfolio - and Copilot + PCs. The problem is, business buyers need convincing and so Microsoft must muster salespeople internally and externally to evangelize the technology.

Dimitra Darda, Microsoft EMEA general manager for Device Partner Sales, was invited on stage to pitch, talking of companies experimenting with "AI capabilities" because they "enjoy" having these "thinking partners and these digital advisors" to be "more effective [when] drafting emails or preparing for your next sales calls or even having analytics and have the advice of what decision to take."

In the PC industry, she characterized "massive innovation", including Copilot + PCs which "are the fastest, most intelligent and most secure PCs ever built… in a period where the companies are busy with modernization and digitization of their estate with the Windows 11 devices, because they would like to be more secure and more productive and more efficient.

"This is a big opportunity for [the] whole partner ecosystem, because we need to help the customers to be secure, but also to plan for the future."

Enter Paul Bray, Computacenter CTO, who said his company has run internal pilots of Copilot for Microsoft 365 with its 20,000 employees and was also "supporting the adoption process of that from a go-to-market customer perspective."

He added that customers that accelerated device purchases during Covid are "now starting to consider… replacement of that equipment, [and] AI PC has come to the fore." Customers, Bray added are a "lot more enlightened" and "starting to think specifically about use cases and personas."

So Microsoft is starting at the top with Computacenter, one of Europe’s largest resellers. Copilot + PCs are gaining sales, Darda assured the audience. According to Canalys, 20 percent of shipments into the channel were AI PCs – not just Copilot+ – in Q3, but whether customers buy them in huge volumes is another matter.

Gartner said last week AI PCs are just confusing customers that are dealing with constrained budgets and struggling to identify use cases that justify the higher priced devices: AI PCs are between 5 and 15 percent more expensive that traditional PCs.

Ranjit Atal, research director, told The Register: "Something has to give in 2025, and I think it's pricing."

Darda at Microsoft said at the Channels Forum in Berlin that Microsoft is working with a "broader network of ISVs who are coming and building applications now on this NPU processor in order to provide this AI enhanced capabilities.

"And this is growing, okay. I mean… they are driving, developing these applications in all the categories. And then we are working with partners like Computacenter, solution partners who are engaging [with] this technology. And they would like to be the subject matter experts.

"They would like to be very close to their customers and advise them and support them of how they adopt the technology. And we would like to support them with pilots, with assets, with training, in order to bring this expertise as soon as possible to the customer side."

She claimed it took longer than expected for customers to move to the cloud than is happening with AI. So what is Microsoft doing to drive Copilot adoption?

Darda added:

"We have about 13,000 partners worldwide that are working with Copilot, and they are offering solutions on the Copilot in more than 50,000 customers as we speak, so Copilot is already in action in different types of lines of businesses and applications."

Bray at Computercenter said: "I think we fully indulge and embrace the hype, the early wave of AI… and moving that into much more of a tangible use case driven support to customers is kind of where I see it going next. So customers all want to learn from each other. They all want insight. But when it comes to these investments, it's really talking about how they can drive value from it."

Research from Gartner in August found that "many" of 152 organizations it polled are not yet running M365 Copilot at scale, instead testing out smaller deployments, with 60 percent surveyed testing the ground. Just 6 percent of them "reported finishing their pilot and actively moving to a large-scale deployment."

Despite this, it said staff at those companies had been "excited" to try out the software and nine in ten employees wanted to retain access. However, 72 percent had struggled to integrate it into their daily routines and 57 percent "report engagement declines quickly".

Corporate governance worries have seen some CIOs halt Copilot projects, as reported by The Register earlier this year, and Gartner noted that 40 percent of respondents said "oversharing and security concerns significantly impact Copilot deployments."</>

Payback from office AI isn't expected for two years, according to some estimates.

Also at the Canalys Channel Forum, Alistair Edwards, chief analyst, said AI promises productivity benefits but he cautioned:

"Almost every customer is struggling to really define how they can deploy AI effectively internally, how they can drive change within their business organizations and processes, and how they can build the models cost effectively to deliver the returns they need."

Melius Research analyst Ben Reitzes said late last month that the majority of investors "seem skeptical of 365 Copilot adoption since they aren't using it personally very much," but things were becoming "modestly better," he added, and the customer list is "improving." Kyndryl, Disney, and EY will deploy it, as we reported previously.

Customers can buy between one and 299 seats for Copilot for $30 extra per person per month under M365 Business Premium and Business Standard licenses. It is also included in all Office apps, as well as Copilot in Teams and Business Chat.

Futurum estimated Copilot contributed "between $2.39 billion (or 1 percent of total revenue) and $9.2 billion (or 4 percent of total revenue) to Microsoft's total revenue" in the corporation's fiscal 2024 ended 30 June.

That's quite a broad estimate and Microsoft wasn't specific when it reported the financials in July. Microsoft's share price was $430 apiece in May and at the time of writing was $417, so it seems investors are yet to be convinced.

At the same Channels Forum in Berlin, Canalys CEO Steve Brazier pointed out AWS, Google and Microsoft has invested $200 billion dollars in capital expenditure into AI infrastructure - datacenters - in 18 months since the start of 2023, and yet less than a tenth of that, he estimated, had translated into licenses bought by customers.

"Now we're a tech industry that sells to itself, hyperscalers buying from major semiconductors companies. Since beginning of 2023, the last 18 months, some $95 billion has been invested in AI startups, companies like OpenAI, Anthropic, Mistral, Cohere. And astonishingly, the Big Four hyperscalers have spent $200 billion in capex, and nearly half of that money goes directly to Nvidia," said Brazier.

Gartner noted this month that AI is driving datacenter construction but customer spending is not on AI software.

• How deliciously binary: AI has yet to pay off – or is transforming business
• Linus Torvalds: 90% of AI marketing is hype
• Microsoft starts boiling the Copilot frog: It's not a soup you want to drink at any price
• If Dell's Qualcomm-powered Copilot+ PC is typical of the genre, other PCs are toast

Brazier continued: "So the hyperscalers invest in the startups who are then tied to buying the cloud services from the hyperscalers. In most businesses in the world, if you use your balance sheet to drive a startup who then gives you revenue, accountants don't like that but somehow [with] big tech, different rules apply."

He added: "Meanwhile, with around $200 billion in capex, only about $20 billion of revenue is actually coming to consumers and businesses in terms of AI services, things like Copilot licenses and ChatGPT licenses, so a very poor return in true results in terms of end users."

"But the real point of this conference… is all of this is going on and driving incredible success for those involved, and virtually nothing of it benefits the channel. The channel has been excluded."

So perhaps Microsoft's bet on those 13,000 channel partners won't pay off. Part of that depends on the incentives it offers because financial rewards always drive salespeople in the channel. Just look at Windows, Azure, etc. Part of it depends on how AI develops over time and if customers can find a better use for the budget. ®