Redmond, Washington, mid-January 2026. The weather, cold and gray. It’s the kind of morning the snooze button was built for. But the team of engineers camped out in Building 92 on Microsoft’s sprawling campus got here early. They are in a race. And they are behind.
The team is working on a new AI product, one that functions as a personal assistant, capable of doing everything from booking flights to responding to emails to finding a good local plumber. They know competing teams at other companies are working on similar products. As if they needed a reminder that a lot is riding on their work, Satya Nadella drops by. He wants to show them something.
But the fact that Nadella is spending so much time with the teams building AI products, even rolling up his sleeves and building prototypes himself, says a lot about Microsoft’s current predicament. After all, this is a $3 trillion company, not some scrappy startup where the CEO routinely logs on for coding sprints with the developers. Nadella is concerned enough about the company’s AI strategy that last October he announced he was stepping back from some commercial duties to focus on AI research, product innovation, and the build-out of AI data centers.
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Nadella, a decade into his tenure, had steered Microsoft through one platform shift — desktop to cloud — and looked poised to repeat the feat. But AI is fast-moving, and two years is a lifetime. This is the story of how Microsoft fumbled its early AI lead, and how it is trying to get it back.
But OpenAI’s explosive growth and soaring ambitions after the launch of ChatGPT in late 2022 soon strained the partnership. The two partners clashed over computing capacity (OpenAI constantly wanted more); over intellectual property (Microsoft thought OpenAI was slow to honor its contractual obligation to share innovations); over customers (OpenAI pitched AI models directly to the same enterprises Microsoft was selling Copilot to); and, when OpenAI sought to restructure, over how much equity Microsoft should receive in the new for-profit corporation.
When Nadella joined a sprint by the company’s AI engineers, “that set the tone for how hard the team was going to push.”
MAI also didn’t turn the Copilot chatbot into a consumer hit. A year into Suleyman’s tenure, Copilot usage had flatlined at about 20 million weekly active users, according to press reports, while ChatGPT’s user base rocketed to ever greater heights on its way to 900 million. A major 2025 upgrade, designed to make Copilot more like a personal assistant that could perform tasks, failed to jump-start growth. And the AI-enhanced version of Microsoft’s Bing search engine barely dented Google’s share of the search market.
Plan A was also running into trouble. In 2023, OpenAI’s GPT models were head and shoulders above the field. By early 2025, Anthropic’s Claude routinely topped AI leaderboards, and many businesses preferred it for complex tasks. Google’s Gemini was increasingly competitive on visual tasks. But Microsoft’s Copilot offerings were powered exclusively by GPT. What had once been the engine of Microsoft’s AI strategy was starting to feel like a millstone.
Judson Althoff, Microsoft’s commercial CEO, acknowledges several missteps. For one thing, calling both its consumer and its enterprise products Copilot was confusing. “The only thing worse than not having a copilot is having more than one,” Althoff, who holds a private pilot’s license, quips. Microsoft also incentivized its sales reps to push both the freemium version of its enterprise M365 Copilot as well as the premium version, when only the premium version delivered the value businesses wanted. “We got that wrong,” he says.
Microsoft was also struggling to keep pace with the speed at which AI technology was evolving. A break point came in 2025, when Anthropic released Claude Code, which could autonomously write entire programs from just a description of what the developer wanted. This was no longer a copilot, it was an autopilot. Within six months it had reshaped software development. Then, this January, Anthropic debuted Claude Cowork, an agent that could use software — including Microsoft’s productivity tools, like Excel and PowerPoint—to autonomously complete tasks.
By the fall of 2025, Nadella realized it was time for a reset. The company’s actions since then have reflected a tricky balancing act, as the company strives to innovate at AI speed like a buzzy startup, while still reliably delivering for investors and enterprise customers like the staid Microsoft of old.
He handed many of his commercial and daily operational duties to Althoff, a longtime Microsoft exec, so that he could focus on AI product development. Althoff says he handles horizon zero and horizon one while Nadella looks after horizons two and three. At the same time, Nadella began breaking down silos to make Microsoft faster, flatter, and more agile than ever before, Althoff says.
Microsoft faces a tricky balancing act: It needs to innovate fast enough to keep up with AI rivals like Anthropic and Google, while remaining a reliable partner for big enterprise customers.
The revamped partnership allowed Microsoft to embrace OpenAI’s archrival, Anthropic. The company committed to investing up to $5 billion in Anthropic in November and began offering its models on Azure. The ability to use Claude to power Copilot has been popular with enterprises and enabled Microsoft to build Copilot Cowork.
To give credit to OpenAI and Anthropic, they’re helping us run faster.
But Microsoft is not simply swapping reliance on one loss-making AI startup for dependence on another. The Anthropic investment is indicative of a different bet: that AI models will increasingly commoditize, and that value will accrue—for enterprises, anyway—not in the AI brain, but in all the body parts and connective tissue around it. That’s where Microsoft thinks it can win. It already owns a lot of those organs and sinew: software tools, security, data warehouses, and cloud computing. It has also built IQ-branded products that allow enterprises to create customized workflows, gather their data, and then build, deploy, and monitor agents running those workflows—using any AI model from any vendor.
“We don’t think enterprises will swap out their information work platform, their [developer] environment, their security environment, every time a new model drops,” Althoff says.
In another cost-conscious move, Microsoft has looked to slim its workforce. In April, it announced its first-ever employee buyout offer, aimed at its most long-tenured employees. The company says about 7% of its U.S. workforce, or about 8,750 employees, qualify for the buyout, at an anticipated cost of $900 million.
There’s evidence the revamped enterprise strategy is working. At the end of March, Azure revenues were growing 40% year over year, and Microsoft’s total AI business was on pace for $37 billion in annual sales, up 123% from the year before. Of the 20 million M365 users now paying for Copilot, a quarter were added in the first four months of 2026, and Althoff says adoption is accelerating.
UBS analyst Karl Keirstead says more Microsoft customers are telling him they see Copilot’s value. But the overall user base is still disappointing. “I don’t think they’ve reached a penetration rate to satisfy Wall Street,” he says.
Microsoft’s model-agnostic strategy has a possible flaw: What if the buzzy AI startups start building the boring-old-Microsoft-style connective tissue, too? That is no longer a hypothetical. In February, OpenAI launched its Frontier enterprise platform, offering many of the capabilities Microsoft is building into its new tools. Anthropic is moving in this direction too, offering a Claude Managed Agents service.
Microsoft’s argument is that decades of enterprise relationships, its reputation for reliability and security, and deep integration with the software customers already run will give it the edge. Althoff says he welcomes the competition. “To give credit to OpenAI and Anthropic, they’re helping us run faster,” he says.
But some question whether a company the size of Microsoft can match the agility of the AI-native startups. “Microsoft, and frankly all the software firms, are facing something they haven’t faced in 10-plus years, which is extraordinarily innovative new rivals,” Keirstead of UBS says. “And expecting any large incumbent like Microsoft to pivot as fast as OpenAI and Anthropic are able to is probably too demanding.”
Bank of America’s Tal Liani makes the case for Team Satya. It’s unlikely, he says, that the AI companies will be able to build the full product suite that Microsoft offers. That means Microsoft doesn’t have to win the AI race. It just has to not lose it. “It may not be the best, but if it’s good enough, and you get great value through bundling, that’s actually the value of Microsoft,” he says.
Even the costs of not losing, however, are not trivial. Microsoft, like other hyperscale cloud providers, is expending vast sums on data centers and specialized chips. The company spent $88.2 billion on capital expenditures in fiscal 2025. That was in line with peers such as Google Cloud and Amazon’s AWS. But it still wound up being too conservative. Demand surged, leaving Microsoft without enough compute capacity and unable to recognize the AI revenue it had booked at the rate it had hoped to. “I thought we were going to catch up,” CFO Amy Hood acknowledged on an October earnings call. “We are not.”
Now the company is more than doubling down: In 2026, Microsoft has forecast it is likely to spend some $190 billion on capex—more than three times what it spent in 2024. Once nervous about such sums, Wall Street seems willing to tolerate the massive spending. But if investor sentiment were to reverse, Microsoft will be more exposed than ever.
But as popular as OpenClaw was, it had a problem. It needed access to systems, data, payment information, and passwords to be useful, which made it enormously risky. It also burned through tokens at an enormous rate. “I can’t launch OpenClaw at Microsoft,” Nadella told a San Francisco tech conference in March. “I don’t have permission to do that, because that would be considered Microsoft launching a virus. But at the same time, it’s a fantastic innovation.”
Nadella has tasked the unified Copilot team with building a Microsoft version of OpenClaw — same consumer-grade fun, but with the security and governance enterprises demand. Andreou frames it as the test of the new organization: “That’s what a win looks like here.” Lamanna thinks it might be the thing that ignites Copilot’s growth. “The hardest thing has been, how do you help people change the way they work?” he says.
A perpetual AI assistant, if it works, would make that change easier. It would also mean the unit of AI shifts from model to always-on agent—precisely the kind of paradigm shift that tests whether Microsoft’s connective-tissue strategy holds when the thing in the middle changes shape. Lamanna says an enterprise-grade Microsoft OpenClaw is now not very far away.
The entire team gathered in a giant ballroom to hear a keynote address and ask me anything session with Suleyman and Nadella. Nadella, according to Suleyman, described the moment as Microsoft “refounding the company” in response to the platform shift to AI. It’s a telling phrase.
After the keynote, the gathering broke up into separate workstreams, each team gathered at one of 40 whiteboards arrayed around the ballroom, as they brainstormed and plotted the next eight-week sprint. Rather than depart, Nadella lingered. For the next three hours, he wandered from table to table, talking to researchers, making suggestions, offering ideas. If this is a refounding, then Nadella is acting the part of the startup CEO. He’s not taking anything for granted. He knows that Microsoft has everything to lose — and everything yet to play for.
This article appears in the June/July 2026 issue of Fortune.
