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Testing Copilot cowork at my firm confirmed to me that this thing has a huge upside for Microsoft. Currently, only around 5 people are testing it. I work in a small firm of around 100 people, and the estimated cost for the rollout (all staff) is from $80k - $200k (depending on the model). For context, we pay only around $40k annually for the Copilot subscription. That’s almost a 2-5x upside from the Copilot subscription alone.
If we estimate 30% of the 450 million Microsoft 365 customers have a Copilot premium subscription at peak (base case over 3 yrs), that’s $48 billion in subscription revenue annually. If Copilot cowork utilization is around 65% from the premium base, that’s another $62 bil to $156 bil. That would be around $100 bil of new revenue - a total of circa $150 bil in new revenue (I forgot to remove the existing 5% Copilot premium subscriber base from here, but they didn’t contribute any money in the cowork part in the past quarters).
Now move to GitHub Copilot, which switched to a consumption-based model in June on top of the monthly subscription. That’s another 4.7 million existing premium users who will be charged based on consumption once they hit the weekly limit. This is the enterprise developer base, which could give a huge upside on top of the subscription. The CTO announced GitHub had its best month ever in June (fk yeah, no freebies anymore). Assume another $15-20 bil here.
Model improvement has started seeing diminishing returns, and open models and Chinese models are catching up. This could be disastrous for the capex build-out unless you have both the enterprise and developer base locked in plus cloud infrastructure. If models become commoditized and we reach a limit for lower marginal improvement, this could drive the utilization and monetization of their other products even higher. Cowork adoption could go to 100% of the premium Copilot base, and you need a Copilot premium seat to access the agents. Anyhow, they represent a good balance to me.
With its productivity suite being almost a monopoly in enterprises and its cloud infrastructure demand growing so much, I think AI will be the catalyst to drive future growth.
The share price fell due to software fears from agentic AI (and capex), but I believe that will be a key driver, making Microsoft even more integrated and entrenched at all enterprises (it basically owns windows, browser, productivity suite, entra id, cloud, security, how can it not).
New revenue opportunity of almost $125.6-224 bil coming over the next 3yrs just from software and addon consumptions. Add in the cloud revenue growth (currently 39% growth yoy). Caveat the potential seat loss of Microsoft 365 but don’t think this would be material in the next few years, maybe stagnant.
**edit**:
To those saying it’s priced in, I would agree last December but now it’s not imo. Stock has fallen around 25%. Capex fears, SAAS is dead and copilot product improvement delay all led to the price decline. But as an office employee, I am seeing increasingly better products and uses from Microsoft. Copilot itself has made leaps from a year ago. Integration across security, governance, productivity, and cloud will be the winning formula. If they release a solid model that’s effective for 80-90% use cases for both enterprise and coding, it’s game ova. Sentiment is shit. I’m buying in