Satya Nadella Testifies in U.S. v. Google and Admits to AI Search Failure

Microsoft CEO Satya Nadella appeared on the stand today as a witness for the prosecution in the U.S. v. Google antitrust trial. As expected, he tried to hurt Google’s defense that Apple chose Google Search as its default search engine because it was the best choice. But he also unexpectedly revealed that he overestimated the impact that OpenAI’s ChapGPT-based AI capabilities would have on Bing. Capabilities that he has since reorganized his entire company’s strategy around.

Nadella told the court that his company was “trapped in a vicious cycle” in which Google uses its 90 percent share in Internet search to continually improve its service in ways that are impossible with Microsoft’s unsuccessful Bing search service. This reality works to expand the quality divide between Google Search and Bing: Microsoft can’t afford to improve Bing enough to be competitive because doing so will not rely in a commensurate return in investment.

But Google also abuses its search dominance, Nadella said, by engaging in multi-billion deals with Apple and other companies to ensure that its search engine is the default in all smartphones and web browsers. Which, when you think about it, is the entire world. The Internet, he said, was now “the Google web.”

And as bad, Apple was using Microsoft to “bid up the price” it receives from Google to be the default search engine on the iPhone. “Do you think Google would continue to pay Apple if there was no search competition?” he asked rhetorically. “Why would they do that?”

None of this is surprising. But I was most taken with Nadella’s mea culpa on AI.

As you may recall, Mr. Nadella reveled in Microsoft’s AI push with Bing Chat back in February, and noted that every 1 percent of usage share that he stole from Google would be worth “billions” of dollars. He later bragged that he was particularly happy that Microsoft made “Google” dance in the wake of that announcement.

Months later, a Wall Street Journal report uncovered the inconvenient truth of what really happened: Despite a months-long publicity campaign in which it expanded Bing chat’s features dramatically and then announced a company-wide pivot around its AI functionality, Microsoft did not gain even a single percentage point of usage share at Google’s expense. Bing is as lackluster and pointless today as it was last December. Bing chat is, in the in the words of one well-spoken analyst, “cute, but not a game changer.”

Microsoft disputed the WSJ reported vehemently at the time. But under oath, Mr. Nadella finally admitted to the truth: For all its billions of dollars of investment and months or work shoring up Bing, its new AI additions have not moved the needle at all.

“Yeah, I mean, look, that’s called exuberance of someone who has like 3 percent share, that maybe I’ll have 3.5 percent share,” he said of his early comments. And this reality impacts his company’s future: “Despite my enthusiasm that there is a new angle with A.I., I worry a lot that this vicious cycle that I’m trapped in could get even more vicious … My main worry now, other than my early exuberance about an opportunity that we may have here, is: Is this going to be even more of a nightmare to make progress in search?”

That Microsoft is now playing the role of Netscape in this antitrust trial is disturbing on some levels. But Nadella’s braggadocio back in February was always unwarranted. In fact, he comes off as no more sophisticated than the hapless New York Times columnist Kevin Roose, who boldly proclaimed after Microsoft’s February presentation that ” he was immediately switching to Bing (‘yes, Bing’)!” And then admitted a week later that he “changed his mind.” He, like Bing chat, was just a liar.

But I expect more from the leader of the world’s second most powerful company. And while failing in web search doesn’t mean Microsoft can’t continue to be successful in productivity and the cloud, one has to wonder.