Satya Nadella on Microsoft's OpenAI Deal, Xbox's Reset and the A.I. Economy

Hello.

Those were the days when we didn't think about a world without guard rails.

Yeah, I mean, look, the fundamental thing that I feel we're about to move from is not talking about AI as one thing, but having a mental picture of an ecosystem that is driven by AI. Today, if you think about it, even since when you first used Sydney to now, it has been about a frontier model. But if we are ever going to transition to an economy that is driven by AI, it can't be about one model. It can't be about three firms. It has to be something that's broadly felt, where the economy is at the frontier, not a firm or a model is at the frontier. So Microsoft as a platform company, that's what we are up to. We had our developer conference last week. It was all about building the platform and the tools where every enterprise in every country can operate at the frontier. To me, that's the question. Saying my model does this but the economy is growing at 2% means this is not going to end well unless we get to a place where the economy is inflecting in terms of its economic growth and it's broad-based because the frontier benefits are. That's what happened in electricity and every other technology which was a general purpose technology.

There were two things we did at Build which were interesting. One was we took the PC itself. In fact, Jensen had done it the previous night at Computex where he talked about the desktops and laptops because he had the RTX chip, which is a new SOC with essentially a petaflop of compute right on the PC. So that was about new functionality coming to the old form factor. Think about what I describe as unmetered intelligence. The fact that you can have a Windows computer that can run a trillion parameter model locally is going to be very needed if you're going to have agents running 24/7. But then the question it sets up is, in a world where we have these models and these agents that are long running, can I have a badge? If I'm a nurse in a hospital and I'm walking from station to station, can I just take out this device which can scan, which can input, which can take my speech output and turn it into a prompt? That is what I think an agent-first device looks like. The centrality of the phone is still going to be there for a lot of apps that we use, but in the agent world, you have that ambient intelligence that is like a sense of field that then works with your models. So our goal is to invent new form factors that are not beholden to the old form factors for this functionality.

Yeah, so look, this is the 25th year of Xbox. We're very thrilled about the progress we have. Gaming in an interesting way at Microsoft is older than even Windows and Office. The first app we built was the flight simulator. So it's got a long heritage. Xbox itself has been there for 25 years. The challenge now for us is to think about how do you innovate both in hardware as well as in the games going forward in an economically viable way. Asha, who has just taken over Xbox, put out that we've invested a lot. No one can accuse Microsoft of not having invested for the last 25 years. And now we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment. Still, the challenge we have is we're not monetizing that entertainment. In fact, if anything, we've been subsidizing it. There's more monetization of Xbox games happening on YouTube than at Microsoft. That doesn't mean we go do things that are unnatural. We want to do what is really our job, which is to build great games, build great hardware, but we've got to do it in an economically sustainable way. Asha is 100 days in and she put out a post saying in the next 100 days, she's going to take a fresh look and make sure we deliver on what our fans expect of us, both on the hardware side and on the publishing side.

I think we have to find ways to deliver the games in which it is economically relevant for the customer and for us. Today, unfortunately, because of what's happening with the cloud and AI, the prices have gone up. It's happening with PCs, it's happening with phones. Xbox is impacted as well. The scarcity of semiconductor supply and memory in particular is having a massive impact on consumer electronics all up. That is a temporal thing that I think we will get through. It is not going to be permanent. But there is a permanent thing, which is what's the Xbox model going forward? PCs and consoles both have their place. Obviously, mobile has people playing elsewhere. So we have to now bring it all together while staying true to what we've always done.

That is awesome.

Oh man, that weekend I remember forever and thank you for this. But all I remember quite frankly of the weekend is India getting thrashed by Australia in cricket. That was the more tragic thing.

Look, we are thrilled that Greg and Sam made it back to OpenAI and they are where they are. They've filed their S1 or what have you. It's fascinating. When we initially took the bet on OpenAI, it was a research lab, a nonprofit entity that had created a for-profit unit. They went and shopped around and said, who can back our crazy idea that intelligence is log of compute? Quite frankly, there were lots of people at Microsoft at that time who thought this is nuts. But we said I think this is a worthwhile thing to back. Quite frankly, we changed and they changed through their work, and OpenAI through their work changed the world. Here we are in 2026 and we're thrilled about it.

We have a lot of interests in OpenAI. We're obviously on their cap table. They are a customer of ours, a large one. They are a source of IP for us all the way to 32. At the same time, we have the ability and the flexibility to reuse the IP, build our own IP. We just last week launched MAI models which have hill climbed from the ground up. We published the paper which I think should help people even get the capability we have. If you take those two thoughts, intelligence is log of compute and here is a pure lineage model from Microsoft that climbed all the way, it means that we now have the ability to keep going. Our infrastructure, I must mention, we wouldn't have been where we are with even Azure but for that close partnership with OpenAI. So we have the compute, we have now the model, and we have still the partnership.

Yeah, so I think the way I would say is our real goal is to get everyone across the ecosystem to the frontier. We are going to take a slightly different take. For example, if you think about how one builds a frontier model, you hill climb, you do RL, and then you need data. At this point, we have saturated the data, so that means you're basically hoovering the data from every place. The question is, what if you turned that around and said no, there is a base model that has reasoning, that has the agent loop, but you can bring it into your RLE every company. If the future of the firm is human capital and token capital, I want every balance sheet, every income statement in every company to have both. That's our goal with our frontier model. Our model should be the best model that they can use as a base and keep even the weights, definitely the harness and the context which is theirs, and they can replace our model with anything else. That to me is more of a vision. I always ask the question, why does Microsoft or why does the world need Microsoft? And if we are successful, can the world around us be successful? I believe this is a more sustainable way to go at it.

Yeah. I think we can start quite frankly by painting a picture and delivering the results on why everyone is a stakeholder. You can't go out there and say I have this unbelievable technology except you're not going to have a job and we're going to take all your water and all your energy and good luck. No wonder there is so much anxiety. You talked about the students or you can talk about a community. So you have to do the hard work. It is what it is. You can't deny that the perception is terrible. At Microsoft, we want to take the data centers. It's fascinating. We've been operating in Quincy, Washington for 20 plus years. We celebrated our 20th year. If I look at what all has happened in Quincy in the 20 years, their tax base has gone up, their taxes locally have gone down, they have more employment locally because of the data center. The data center has become a data center town. We did a cookout and people came and they celebrated the rejuvenation of Quincy, Washington because of our presence for the last 20 years. That's the first longitudinal thing of 20 years that I've seen. Communities where data centers are, they definitely can't increase price on energy, they have to replenish all the water they use and create economic opportunity. But across the economy, if small businesses feel AI is making them more productive, if every large multinational is able to build that token capital and human capital, because the big question is employment. Everybody thinks all jobs are going away. I'm not saying there won't be real displacement, the workflow doesn't change. But take software development. Software development is now all agentic. If you think about the evolution of the GitHub app, when I had a 100 CLI, what did I need? I need a new IDE, it's called an ADE, a piece of software that helps me manage all this complexity. So we have to think about new work that gets done, which will be meta cognition, meta work that is going to have wages. We have to be concrete about that.

Yeah. So I think if in the early 80s someone had come to us and said we're going to have three and a half billion people in the world who are all going to be typists, we would have said why does the world need three and a half billion typists? Except we do. We all get up in the morning and type, but we're doing information work, knowledge work. So that type of change is going to have to happen. Each of them will have a name and it will have a wage support that reinvention. A software developer of the past to the software developer of the future may have similar skills, but the work they do is different because they're managing a group of 100 agents, a thousand agents. There's a beautiful term one of my colleagues has: just like in software development we always had this concept of test coverage, one of the new things we are learning is what I'll call cognitive coverage. What does a software developer do? I have a repo full of code that was written by agents. I am cognitively understanding what happened and I now need tools for cognitive coverage on what was built. That's the job of a software developer. To do that, you have to go to school, learn computer science, and have cognitive coverage. This reinvention of work, the work artifact, the workflow, because software went from input to output, that's a format change, an artifact change, the workflow has changed and the work changes with it.

I think that's the thing. Wages have always been about what we as a society value. We've grown the last 200, 250 years about a particular form of expertise and accrual of knowledge. So when you have abundance of some form of expertise, what is that human ability to now build a new expertise that is not trainable? There was a nice blog I read this morning from Sarah Guo which was interesting where she mentions what is the untrainable parts, and that applies to organizations and us as well. We as humans have agency, ambition, that should not be counted out. Even what is human capital today, in spite of all the digital systems we have at our disposal, we do the glue work. We will discover the new glue work that happens with all this automation, and that is the process of change.

MSFT you can trade.

You know, look, this is all very new. The idea that the United States may have a sovereign fund and the sovereign fund has equity stakes and that somehow is part of the wealth of the citizens of this country, I think it's a novel idea. Other countries have done it. I think Alaska has some form of it because of the oil wealth. So I'm not opposed to innovative ideas like this. But at the end of the day, there's this entire movement of if only we had invested some portion of our social security in the S&P 500, we would have a surplus or what have you. To the degree that some of these ideas can be played out and they succeed, I think we'll all benefit from it.

In fact, it's one of the things that I think a lot about is the difficulty of even a very powerful general purpose technology and its diffusion and the amount of change management that is required. One of the challenges we're going to face in the next year or two is the economics of tokens. The hard truth is that the marginal cost of productivity improvement has to match the marginal cost of the token. That's a management discipline. You can't just say, I love token maxing because it's money in my bank. The business has to benefit from it. The equation for the 10% growth would be when you have a perfect match between the marginal cost of the token to the marginal value and it's priced right. If that happens, 10% is definitely going to happen, but not what's happening right now where everybody goes and wipes codes and token maxes. That's not a way to achieve 10% growth.

Yeah, and I'm out of it. I want people to obviously and myself, I'm like a token maxer too. So it is addictive. It's like, I love this thing. So then you have to step back when the novelty wears off to say what is it that I'm trying to create. The thing that I love now in Copilot is our auto mode. We now have a very good economic model that's feeding it as well. Basically, I say don't use frontier models for non-frontier problems. Let's match these things such that you get the outputs, you get the economics, and it can't be a race to just doing things that don't add value.

Yeah, I mean, one thing that I recently built was, I've always felt that I want a repo that is in sync all the time with discussions that are happening out of band that I am not in. Think about that concept. It's not possible today. You have the ability now to have an agent that literally is looking at all the work discussions that may be related to your repo and creating the plan and executing the plan. All I did was I put Work IQ, which is the database underneath all of Microsoft 365, as an MCP server to my coding agent and I said keep watching that and every time people discuss this repo, please change my repo. It keeps working. This is the best way to keep your model in sync with all requirements that ever come up.

I wouldn't say they're wrong about the political economy of AI, but I do think when I look back, there's a very cool book I read in December. I may have the name wrong, but it's written by Joel Mokyr and a couple of co-authors. I think it's called A Culture of Growth. They describe a little bit of how the last thousand years the West grew and what was happening in China. The fundamental thing I take from that book and in general when I read history is the West in particular got three things into a virtuous cycle. They got technological revolutions, markets, and democracy all acting as a check on the other. That's why there is no such thing as an economy. It's a political economy. A democracy controls ultimately what happens in a market and then technology tries to disrupt the two and then you keep the checks and balances. That's magical. It's one of the most unbelievable social constructs ever to emerge in the world. It became the model and we now need that same model to be redefined for this age, but it'll work because it worked the last time. So I think us reminding ourselves that the balance and checks that each one has on the other is what we have to aspire for, whether it's in San Francisco, whether it's in Washington DC, or anywhere else.

Look, I buy that anything where the loops can be closed, like coding, in fact AI research, is sort of possible to close. I think we have now got sufficient evidence of that. But is that enough? I don't think so. When I think about people talk about how verifiable is this task, and in the messy real world of even knowledge work, just saying I'm going to look at the traces of human activity is enough to close the loop. I don't think so. That is the challenge. When I am in a meeting, I say things, I note things, I may observe things, but what I do with it is not a trace today that I can rally my way in. That to me is where we're selling short what is the unverifiable part of the human capital. So I believe the advances keep happening. I still am in the world of this is platforms, tools, very powerful, very disruptive. I have a lot of humility to say a lot of things will change, but at the end of the day, so was electricity, so were a lot of other things like steam when it first came out. I'm not sitting there thinking this is the last technology we ever will invent. I don't buy that. This is in the pantheon of all technologies a big step up, but there will be more to come.

Thank you so much. Thank you so much. Thank you.