Microsoft’s initial momentum in AI came from its data centre capacity and its partnership with OpenAI. Now, with competition intensifying and external pressure mounting, Microsoft is diversifying beyond OpenAI, recalibrating its infrastructure, and reshaping its core products.
Partnership strain
Microsoft’s partnership with OpenAI, established in 2019, was key to its AI strategy. It invested over $13 billion in the AI startup, securing exclusive cloud hosting rights through Azure and integrating OpenAI’s technology into products such as Copilot and GitHub. The partnership helped Microsoft surge ahead when ChatGPT launched in 2022, boosting Azure, which generated $75 billion in revenue by July 2025. However, the relationship has become strained.
OpenAI, which has now become the world’s top private company by valuation, has been looking beyond Microsoft with a $300 billion Oracle deal, and partnering with SoftBank and Nvidia on the Stargate data centre project. A contentious ‘AGI clause’ could limit Microsoft’s access to future models if OpenAI achieves artificial general intelligence.
In response, Microsoft is diversifying its AI portfolio, incorporating models from Anthropic, xAI, Meta and others. The company is also developing its own AI model, MAI-1-preview. Both companies signed a non-binding agreement in September 2025 for a continued partnership. However, this partnership, once pivotal to Microsoft, has become just one element in a broader, more cautious approach.
Infrastructure pivot
Microsoft’s shift away from OpenAI is perhaps most visible in its approach to infrastructure. Microsoft declined to be a part of OpenAI’s $500 billion Stargate project, preferring more diversified, globally distributed facilities.
It is betting big on its own AI infrastructure. Its capital expenditure is projected to hit $120 billion in FY26, up from $88.2 billion in FY25 (Microsoft’s financial year runs from July 1 to June 30 of the following year). This capex will fund projects such as Wisconsin’s Fairwater data centre with Nvidia GB200 GPUs and a $15 billion push into UK infrastructure.
Microsoft is also betting on neoclouds (specialised cloud providers offering high-performance, AI-optimised infrastructure) to address capacity shortages. It has committed more than $33 billion to neocloud providers such as Nebius ($19.4 billion) and CoreWeave. This gives the company faster access to advanced AI computing power. Crucially, shifting internal workloads to neoclouds frees up Microsoft’s own data centres to serve lucrative cloud customers.
Data centres have been facing criticism over their environmental impact. Microsoft aims to become carbon-negative by 2030. It is moving in this direction by signing renewable energy deals, including a 100-megawatt agreement with Japan’s Shizen Energy, restarting Pennsylvania’s Three Mile Island nuclear reactor to generate 835 megawatts of electricity, and developing more efficient systems.
Embedded intelligence
Following the reorganisation, Nadella expects to increase his focus on product innovation. Microsoft is betting that AI-powered applications will drive future growth. While AI models may have become commoditised, integrating its Copilot assistant across Microsoft 365 could give Microsoft a competitive advantage.
It has already integrated Copilot into Excel, Teams, Word and other applications, and this approach has seen success with the company’s traditional customers—large enterprises. Nearly 70% of Fortune 500 companies use the service, with daily usage increasing substantially, Microsoft said. For example, Vodafone deployed Copilot to 68,000 employees following tests that indicated time savings, while Barclays is implementing it for 100,000 workers globally, Microsoft said in a recent earnings calls.
The company is also using this strategy to compete in consumer markets. This month it launched a $19.99 premium subscription that bundles AI with traditional Office applications, directly challenging ChatGPT. Both commercial and consumer segments are growing. Though smaller than the commercial business, the consumer segment of Microsoft 365 grew to $7.4 billion in FY25 from $6.6 billion in the previous year.
Gaming struggles
Microsoft’s gaming division is seeing changes, too, as it steps up on subscription services amid mounting financial pressure. The company acquired Activision Blizzard for $69 billion in 2023 to bolster its Game Pass library, though the merger drew criticism that it could harm both developers and gamers.
Game Pass reached 34 million subscribers and nearly $5 billion in revenue in FY25, but subscriber growth slowed dramatically from 80% over 2020-2021 to 36% over 2022-2024. Its day-one release strategy for major titles proved costly. Microsoft forfeited over $300 million in Call of Duty sales by offering the game through Game Pass instead of selling it traditionally, Bloomberg reported, citing a former employee. Microsoft recently raised Game Pass Ultimate prices by 50% to $30 a month, or $359.88 a year.
Meanwhile, Xbox consoles face steep competition from Sony PlayStation and Nintendo, with hardware revenue dropping 25% in FY25. Microsoft has raised console prices twice this year. Overall gaming revenue has dropped in the past two quarters.
Political crosshairs
Microsoft concluded FY25 with over $101 billion of profit and $94.6 billion in cash reserves. However, the company faces mounting external pressure, including some from the Trump administration, which imposed a $100,000 fee on new H-1B visa applications, potentially constraining Microsoft’s access to talent. Microsoft is a heavy user of H-1B visas, and Nadella himself was a H-1B visa holder early in his career. Also, last month President Trump demanded Microsoft fire its global affairs president Lisa Monaco, citing national security concerns.
There are geopolitical factors in play as well. Microsoft was pushed to disable Israeli military use of its software after finding evidence of mass surveillance data from millions of Palestinian mobile phone calls stored on its cloud servers. On the regulatory front, the company narrowly avoided EU fines over Teams bundling by offering separate versions and improving interoperability. Meanwhile, the UK’s Competition and Markets Authority found Microsoft’s cloud licensing practices harm competition.
Althoff’s promotion to lead commercial operations was meant to give Nadella space to focus on AI innovation. But as Microsoft navigates partner tensions, regulatory scrutiny and political pressure, he faces challenges that extend far beyond technical work, requiring strategic agility and diplomatic finesse in equal measure.
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