Microsoft bet everything on AI. Is its North Star now a noose?

ASSOCIATED PRESS; Tyler Le/BIThree years ago, Satya Nadella catapulted Microsoft to the front of the AI race and became "like a superhero," one recent former Microsoft executive said.In February 2023, after betting early on OpenAI, the CEO unveiled Microsoft's AI-powered Bing search engine before a packed audience outside Seattle, and declared a war on Google's search dominance. "A race starts today," he said.

Waves of adulation followed. When Nadella helped navigate OpenAI's board crisis later that year, Bill Gurley called it an "amazing shift in corporate reputation." CNN Business chose Nadella as the CEO of the Year.

Inside Microsoft and across the tech industry, Nadella was hailed for seizing the future. Now, his legacy is at stake.Microsoft's stock is down more than 24% from 12 months ago, significantly worse than the rest of the Magnificent 7.

Investors have grown increasingly skeptical that the company's multibillion-dollar AI bet will deliver. Copilot, Microsoft's flagship AI product, lags behind other AI tools like ChatGPT and Claude. LinkedIn has drawn criticism for becoming flooded with AI-generated hustleporn.

Xbox's business is "not healthy," its CEO recently said, and undergoing layoffs and restructuring as it tries to justify the company's record-breaking $69 billion Activision Blizzard acquisition.And inside the company, employees are questioning Microsoft's plans to spend a record $190 billion this year to build AI infrastructure. As generative AI changes how people work, write software, and consume information, three of the company's core businesses hang in the balance: Microsoft 365, GitHub, and Azure.

Investors will get a report card on these challenges on Wednesday, when the company releases its fourth-quarter earnings results.As AI adoption spreads through corporate America, every software company is fighting to fend off the so-called SaaSpocalypse. But the battle is particularly fraught for Nadella's Microsoft, which made an early and loud bet