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Image source: Visual China

Blue Whale News, August 2 (Reporter Zhu Junxi)TikTok's growth miracle was once inseparable from huge purchases of traffic, which brought huge revenues to Meta and Google, and ByteDance itself became a new global social media giant. Now, TikTok, which is dancing with money, has poured its wealth into AI and cloud providers, such as Microsoft.

On July 31, local time, Silicon Valley technology media The Information reported that TikTok is one of Microsoft's largest AI cloud computing customers. People with access to internal financial documents revealed that as of March, TikTok had to pay $20 million per month to purchase OpenAI's models through Microsoft, accounting for nearly 25% of Microsoft's sales of the service, pushing the business to an annual revenue of $1 billion.

The report also pointed out that excessive concentration of sales on TikTok could pose risks to Microsoft, as TikTok's parent company ByteDance is also engaged in the research and development of large AI models, hoping to launch products comparable to OpenAI in the fields of conversation and image generation. Once its AI technology matures, TikTok may reduce its reliance on Microsoft and stop purchasing the service.

Just like the story of leveraging Facebook's rapid growth a few years ago, TikTok has the opportunity to replicate it with Microsoft - when its self-developed large model is not mature enough, it first uses huge amounts of money to obtain the right to use OpenAI's most advanced AI technology, and then slowly accumulate experience and users to prepare for future explosions - this is a growth methodology that ByteDance has already used and proven successful.

Microsoft has doubts about cooperating and competing with OpenAI

Microsoft is the world's second largest cloud service provider after Amazon. Its core cloud computing platform Azure provides a variety of services such as Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS) to corporate customers, developers and other groups, meeting customers' various needs from infrastructure to advanced application development. Statistics from multiple data platforms show that Azure occupies about a quarter of the global cloud market, second only to Amazon's AWS.

TikTok and Microsoft are trading Azure OpenAI, one of the cloud services provided by the Azure platform. This service allows users to access OpenAI's models through the Azure platform, access its content generation, code assistance and other functions, and enjoy Azure's enterprise-level features such as security.

For many Chinese companies and developers, Microsoft's Azure OpenAI service has left a window for using OpenAI's capabilities, and is also the only compliant channel for calling GPT models in China. When OpenAI announced in June that it would tighten its API interface for China, Microsoft (China) also published an article on its WeChat official account titled "Why replace? Migrate to Azure OpenAI, simple and fast", which has now been deleted.

Microsoft is the largest external investor in OpenAI, with a total investment of $13 billion. According to the cooperation agreement between the two parties, the Azure platform is the exclusive cloud service provider for OpenAI, which consolidates Microsoft's competitive advantage in the cloud market. Microsoft has the right to resell OpenAI's models, while also earning a share of the revenue from OpenAI's direct sales to customers and charging server rental fees.

But the competition between these two seemingly closely tied partners in sales has begun to intensify. According to The Information, OpenAI's own sales of AI models have surpassed Microsoft. As of March this year, OpenAI has generated about $1 billion in annualized revenue by selling access to models such as GPT-4, while Microsoft Azure OpenAI services did not reach $1 billion in annualized revenue until June.

OpenAI has also formed a dedicated sales team, promising to give customers priority access to the latest version of conversational AI, attracting some former Azure customers. In response, Microsoft has also adjusted the charging strategy for Azure OpenAI services, reducing the minimum fee for customers to use servers during peak demand periods. Reselling OpenAI models directly to customers will bring higher profits to Microsoft. The report quoted people familiar with the matter as saying that the server rental fees OpenAI initially paid to Microsoft only covered the cost of using Azure computing resources.

On August 1, in Microsoft's latest annual report submitted to the SEC, Microsoft stated that it had established a long-term partnership with OpenAI and was OpenAI's exclusive cloud provider; at the same time, Microsoft also clearly listed OpenAI as an emerging competitor. Similarly, at Apple's WWDC in June, OpenAI also became Apple's primary partner for Apple Intelligence. These complex cooperative and competitive relationships have resulted in different interests among various technology companies, and instead each has its own agenda, giving TikTok an opportunity.

For Microsoft, maintaining growth in its cloud business is crucial because it needs to prove to investors that investments in startups like OpenAI and huge spending on AI infrastructure such as data centers are reasonable and can pay off.

Microsoft's quarterly earnings report released this week showed that revenue from Azure cloud computing platform and other cloud services grew 29%, lower than the expected 30.6%, and the growth rate slowed down compared with the previous two quarters. However, capital expenditures soared 77.6% to $19 billion, almost all of which were cloud computing and AI-related expenditures. Microsoft management also said that it plans to continue to expand investment in AI infrastructure, which may take 15 years or even longer to pay off.

Microsoft's stock price fell 7% after the announcement, but the decline narrowed to 4% after Microsoft said Azure's growth will accelerate in the second half of fiscal 2025.

In the AI ​​era, ByteDance, waving money, fights overseas again

As a content distribution platform, AI technology is one of the core elements of TikTok's operations. TikTok uses AI algorithms to analyze users' viewing history, content preferences, etc. to recommend personalized video content. According to a report by technology media The Verge in May, TikTok is testing incorporating generative AI into search results pages to provide "search highlights", which are marked as generated using ChatGPT. Therefore, TikTok's demand for more powerful AI technology is increasing.

At the end of 2023, ByteDance was exposed to have purchased the right to use OpenAI through Microsoft, and then used OpenAI's API to train and evaluate ByteDance's own models in its large language model development project code-named "Project Seed". The plan mainly involved the development of two products, including the already launched AI assistant Doubao and a chatbot platform that was still under development at the time.

OpenAI later said that all API customers must comply with its usage policy and that ByteDance’s account has been suspended. OpenAI’s terms of service stipulate that its model output cannot be used to “develop any AI model that competes with our products and services.”

A ByteDance spokesperson responded at the time that its engineering team used OpenAI's GPT and other third-party models in a very limited way during evaluation and testing. The data generated by GPT was used to annotate the model in the early development of the "Seed Project" and was later deleted from ByteDance's training data. ByteDance emphasized that it has obtained Microsoft's authorization to use the GPT API and uses GPT to support its products in non-Chinese markets, but supports Doubao through self-developed models in the Chinese market.

Compared with other major domestic companies, ByteDance started slowly in the field of AI big models. It was not until August 2023 that it launched its Skylark big model (now renamed "Doubao") to the public. CEO Liang Rubo even expressed dissatisfaction with the company's late discussion of GPT in 2023 at a full-staff meeting.

When ByteDance began to pay attention to big models, it once considered investing in external star startups like Alibaba and Tencent, but ultimately did not do so. Instead, it chose to invest all its resources in itself and focus on developing big models and related products. Judging from the interim results, ByteDance's main strategy is to focus on both the domestic and overseas markets. As of May this year, it has launched 7 AI application products overseas, covering multiple tracks such as social networking and education.

Among them, many of ByteDance's AI applications were first tested in overseas markets and then launched in China. For example, its AI chatbot development platform "Coze" was launched in overseas markets in December 2023, and the domestic version "Button" was officially launched in February this year; the overseas version of the AI ​​dialogue application "Doubao" is "Cici". As ByteDance responded before, "Coze" and "Cici" are connected to OpenAI's GPT model, while "Button" and "Doubao" are domestic products built based on its self-developed large model.

It is obvious that with the strong support of cash cow advertising and e-commerce businesses, ByteDance, the "App Factory" of the mobile Internet era, is not willing to lag behind in the AI ​​era, and even shows its ambition to create the next TikTok-style global AI application.

However, TikTok still faces the dilemma of "either sell or ban" in the United States, and ByteDance has also made it clear that it is not possible to sell TikTok's US business both commercially and legally. Oracle, TikTok's US cloud service provider, warned in its financial report released in June that if TikTok is banned, they will not be able to provide cloud services to TikTok and cannot redeploy these production capacities in a timely manner, and revenue and profits will be adversely affected. TikTok is an important customer of Oracle and uses its cloud infrastructure to store and process US user data.

In addition to Oracle, TikTok also uses cloud services from Amazon and Google. Now, as TikTok's demand for OpenAI-based cloud services grows, Microsoft's importance in this list of partners is rapidly increasing. And Microsoft is increasingly eager to prove to its investors that it has the ability to recoup its tens of billions of dollars in investment in AI.

A few years ago, after quietly buying traffic and accumulating hundreds of millions of users, TikTok's rise was unstoppable, and Meta personally put this tough opponent on the altar, just to exchange for billions of dollars in advertising revenue. Now, Microsoft and OpenAI seem to be repeating Meta's mistakes.