Microsoft’s CEO on How AI Will Remake Every Company, Including His

Satya Nadella arrived at the World Economic Forum in January ready to talk up his triumphs in artificial intelligence, when a dangerous threat emerged. A little-known Chinese startup named DeepSeek had just released an AI model that quickly became the talk of Davos, Switzerland. Nadella, the chief executive officer of Microsoft Corp., gathered his lieutenants to assess the out-of-nowhere competition. They set up a virtual war room on—where else?—Microsoft Teams to coordinate a response.

The new model, DeepSeek-R1, could deliver results roughly on par with those of OpenAI at a fraction of the price. Computer processing that would cost $1,000 through OpenAI ran for just $36 through R1. Even crazier, DeepSeek made R1 open-source, meaning anyone could install versions of it for free if they had a powerful enough computer. “OpenAI has been so far ahead that no one’s really come close,” Nadella tells Bloomberg Businessweek. “DeepSeek, and R1 in particular, was the first model I’ve seen post some points.”

To the schmoozers in Davos, this seemed like a huge problem for Microsoft. The company had invested $13.75 billion in OpenAI by that point and had already committed to spend $80 billion on AI data centers in this fiscal year alone, all under an assumption that better AI required more computing resources. Nadella immediately ordered his team to conduct a security review of DeepSeek-R1. They scrutinized a research paper DeepSeek published detailing its work and contacted the startup’s engineers, peppering them with questions about the model.

Soon roughly 100 Microsoft employees were coming in and out of the Teams videoconference rooms testing the security of DeepSeek’s codebase and exchanging notes. “People didn’t sleep,” says Asha Sharma, the company’s AI platform head, who spearheaded the effort. “It was 48 hours of going through every single thing.” R1 appeared to be legit. But instead of trying to stomp out this new rival, Nadella chose to embrace it. He instructed his team to install R1 on Microsoft’s cloud and sell access to it to customers alongside products from OpenAI and Microsoft itself.

Nadella’s primary allegiance now isn’t to OpenAI’s very expensive skunkworks. His ultimate objective is to sell whatever AI his customers might want through Microsoft’s platforms. Nadella had spent three years running various parts of the company’s cloud business, called Azure, before he became CEO in 2014, and that’s now central to his AI strategy. Customers can choose from over 1,900 different models on Azure, including ones made by Meta and OpenAI, and upstarts such as Cohere, Mistral, Stability AI and now DeepSeek. (Some, though, such as Google’s Gemini, aren’t available to Microsoft for competitive reasons.) Whether a model’s usage costs a customer $10 through OpenAI or 90¢ via DeepSeek, Microsoft gets paid for the cloud computing, cybersecurity protections, data storage and other upsold services.

The DeepSeek episode highlights another, arguably more revealing part of Nadella’s thinking: AI is rapidly commoditizing, and this is a good thing for Microsoft. While everyone in Davos was focused on AI consumption, Nadella was contemplating the history of coal production. One of his favorite economic theories is the Jevons paradox, which posits that as a resource becomes more accessible and its usage more efficient, consumption increases.  

This econ mindset has been driving the company toward creating its own AI architectures, including some tiny models with capabilities similar to those of DeepSeek-R1. Over the past year, it’s also been training a series of large language models called MAI-2, the latest iteration of Microsoft’s in-house alternatives to OpenAI’s models, which it had been developing in secret. The goal is to build AI that requires less computing power than ChatGPT and bring down the cost to operate Microsoft’s equivalent service, Copilot. The company will still regularly tap OpenAI’s bleeding-edge technology, but Nadella is convinced Microsoft can deliver near-ChatGPT quality for a lot less.  What this all means for Microsoft’s arrangement with OpenAI is complicated. Six years on, what began as a nurturing kinship has turned into an intense sibling rivalry.

Nadella is facing a concentrated version of the trial practically every CEO is undergoing now. Even with Microsoft’s considerable resources, Nadella must decide how AI will reshape his business by making a set of extremely difficult trade-offs—between embracing new-fangled technology and shielding his employees and business partners from disruptive systems, and between marching in line with what’s worked in the past and blindly leaping into the future. Up to this point, shareholders have lauded Nadella’s performance, making Microsoft the most valuable company on Earth. If he falls flat, though, his may be one of the first jobs threatened by AI.

With AI promising (or threatening) such existential change, there remain weighty questions about who will win and who will lose from this next technological transformation. In public, Nadella often sounds like a macroeconomist. He draws parallels between this moment in AI and the industrial revolution, and the convergence of the Global North and South, and cites economic and labor theorists from David Autor to Friedrich Hayek to Herbert Simon.

In particular, the Jevons paradox—first described in an 1865 book on British coal production by William Stanley Jevons—has greatly informed Nadella’s understanding of Microsoft’s place in the AI revolution. Jevons found that the invention of a more fuel-efficient steam engine made coal a more desirable fuel source, igniting a surge in coal consumption. That’s why Nadella appears unfazed by the perception of DeepSeek undermining the value of his investment in OpenAI or the buildout of Microsoft data centers. More efficient AI will eventually mean a greater need for AI services and infrastructure to power them, in his view.

Meanwhile, Microsoft said on May 13 that it’s cutting 6,000 employees, about 3% of its workforce.) But Nadella contends that AI could end up delivering more societal benefits than the industrial revolution did. “When you create abundance,” he says, “then the question is what one does with that abundance to create more surplus.”

He argues, again, that it comes down to economics. If Microsoft spends hundreds of billions of dollars on AI projects, he estimates that will likely generate trillions of dollars in economic activity—more data centers mean more construction, energy use, manufacturing equipment and so forth. More AI use means more opportunities to create new kinds of businesses, especially as AI bridges the skills gap between an entry-level employee, expert engineer and executive. “There may be a new startup with a hundred founders,” Nadella says. Or, if the AI ever gets good enough, perhaps 100 startups with just one founder.

It will take time for the jobs of the AI era to arrive, he says. And then the huge economic and productivity boosts will follow. Just as they did after the advent of the steam engine, electricity, the computer and the internet. “When that happens, then everything computes at a societal level,” Nadella says. “Otherwise, all you have is a bunch of GPUs.”

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