Microsoft lost its way in the AI race. Can Copilot get it back on course?

An early alliance with OpenAI hasn’t been enough to keep the software giant in first place. Here’s how Satya Nadella and his team are refueling for the long run.

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.

The Microsoft CEO opens a laptop and fires up an application. It’s a kind of system for instructing and controlling multiple AI agents. He calls it “Chain of Debate.” As Nadella walks them through the demo, the engineers trade knowing looks, the sort regulars at the local basketball court exchange when they realize a newbie’s got game. Because Nadella didn’t get someone to build this app for him. He created it himself, vibe coding with an AI tool. “That set the tone for how hard the team was going to push,” recalls Jacob Andreou, the executive vice president responsible for the design of Copilot, Microsoft’s AI assistant. He was in the room with folks, like over their shoulder, there with his machine out.

Watching the boss get such excitement out of building new things inspired the team. It wrapped up its big push in late February when it rolled out Copilot Tasks, the computer-using personal assistant AI tool. (Nadella’s own prototype served as the model for a feature called the model council as well as other components of Copilot.)

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.

There’s certainly reason for concern. Microsoft’s stock has endured a tough run. After hitting an all-time high in October, over the next five months Microsoft’s share price fell some 34%, despite its cloud-computing platform Azure’s AI-related revenues having more than doubled in the past year. Microsoft has been a prominent victim of the SaaSpocalypse, the selloff of software stocks precipitated by the advent of AI coding agents. Many investors are convinced these products mean businesses won’t buy AI offerings from software-as-a-service (SaaS) vendors such as Microsoft — that, perhaps, they won’t buy off-the-shelf software at all.

-34%Microsoft share price decline from 10/28/25 through 3/27/26

Sales of Microsoft’s enterprise Copilot products have been slower than the company would like. Less than 4.5% of the 450 million customers of its Microsoft 365 office suite currently pay for Copilot features. Usage of its consumer-facing Copilot chatbot, meanwhile, lags far behind ChatGPT, Gemini, and Claude. GitHub Copilot, once the leading AI coding assistant, has been supplanted—first by AI startup Cursor, then by Claude Code.

Two years ago, Microsoft appeared to be one of the early winners of the AI era. Thanks to Nadella’s prescient bet on OpenAI, Microsoft had exclusive access to the high-flying AI startup’s models, and could use them to create AI features across its products. If companies wanted to access OpenAI’s technology, the only cloud provider they could use was Microsoft Azure. The company even thought OpenAI gave it the best chance in years to compete with Google Search. 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.

Microsoft was tripped up in part by the very deal that put it at the front of the AI pack to begin with: its partnership with OpenAI. Microsoft spotted the young San Francisco company early, investing its first $1 billion in 2019, and eventually committing $13 billion to the startup. Microsoft used OpenAI’s tech to launch its Copilot-branded AI products across both its consumer and enterprise software portfolio.

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.

Nadella knew that staking his company’s AI strategy on an unproven startup was risky. Those risks were underlined in bold in November 2023 when the nonprofit board that controlled OpenAI’s........

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