Microsoft punts plan for new AI 365 bundles in favor of pilot tests, sources say

• Microsoft was considering a big change to its popular 365 software suite.
• The company's Copilot AI tools were a major part of these considerations this summer.
• Now, the software giant has pushed back any decision, sources tell BI.

Microsoft has pressed pause on a major AI overhaul of its popular 365 software suite, according to people familiar with the matter.

CEO Satya Nadella and his senior leadership team held executive reviews this summer to consider options that included repackaging new AI features into existing licenses or creating a more expensive bundle with AI capabilities.

The plans revolved around Microsoft's Copilot tools. These are powered mostly by OpenAI's GPT AI models, and Wall Street has high expectations for the new offerings.

The aim was to finalize any changes before Microsoft sales teams returned from the summer slowdown in September. It's now late September and the decision has been made. Kind of.

Spearheaded by Chief Commercial Officer Judson Althoff, the company instead decided to start a pilot test in certain geographies to find out what customers are willing to pay for, a person familiar with the plan said, noting that the tests will run throughout the fiscal year.

Other changes Microsoft is considering for its 365 software bundles is a new suite just for security features, the people also said. They asked not to be identified discussing private matters.

A Microsoft spokesperson declined to comment on the bundling plans but said several customers are effectively using Copilot tools, including Vodafone, Amgen, and Teladoc.

Big 365 changes are risky

The company is likely taking a cautious approach because the 365 products have been an important source of revenue and growth, even without fancy new AI capabilities.

The software suite includes popular business applications such as Word, Excel, and PowerPoint. This is part of Microsoft's Productivity and Business Processes division, which generates about $20 billion in quarterly revenue.

Any major changes to work software like this are risky because companies depend on the products working smoothly every day.

Concerns over whether customers will pay

Still, Microsoft's decision to pause on integrating Copilot AI features more deeply could be a sign the company doesn't believe the tools can drive license purchases.

Indeed, the people familiar with the decision said the pilot test was chosen partly due to concern about whether this AI technology is creating enough value to convince customers to pay for it.

The options Microsoft mulled earlier in the summer -- such as repackaging AI features into existing licenses or creating a pricier bundle with Copilot capabilities -- were put on hold amid concern about whether the new approaches would actually be successful, the people explained.

The pressure is rising

Microsoft is spending more than $10 billion on capex each quarter right now, with most of that going toward data centers, GPUs, and other AI projects. The company is trying to figure out how it will recoup this massive investment.

The pressure is rising for the company produce tangible results here. In recent months, some customers and investors have begun to question the value of generative AI technology, including Microsoft's Copilot AI assistant tool.

The current Copilot AI tool costs $30 per user per month. That's in addition to the monthly cost of Microsoft's 365 software bundles. For example, an E5 license is listed on Microsoft's website at $54.75 per user per month.

Customer complaints

Some customers have complained about the additional cost of this extra software. They also dislike the added complexity of managing multiple software licenses.

Microsoft has faced some complaints from customers about the value of Copilot compared to its significant cost.

A CIO of a pharmaceuticals company, for example, recently canceled the Copilot upgrade for 500 employees after six months because it cost too much, some features didn't work well, and the company had to disable the more compelling tool for summarizing meetings because its legal team was wary of saving transcripts.

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