ISG Provider Lens™ Microsoft Cloud Ecosystem - Generative AI Services for the Microsoft Clouds - Germany 2024

Copilot and GenAI fundamentally change the use of Microsoft Clouds

The year 2024 is shaping up to be an important turning point for Microsoft, its customers and partners. This year and beyond will witness a surge in networking within the technology ecosystem, with Microsoft pioneering the integration of AI and cloud technologies, such as Azure, Microsoft 365 and Dynamics 365. This development, driven by the ongoing implementation of generative AI (GenAI), is unlocking new opportunities for innovative solutions and fundamentally reshaping the Microsoft ecosystem. Microsoft’s strategic direction not only strengthens its innovation leadership but also significantly contributes to growth and productivity. Partners will particularly benefit from this development through dedicated GenAI services and security and integration services related to data management.

To realize growth opportunities, Microsoft must invest significantly. These investments are partly financed by job cuts (staff reductions).

By investing €3.2 billion to expand its AI infrastructure and cloud capacity in Germany, particularly in Frankfurt and with new projects in North Rhine-Westphalia, Microsoft is strategically positioning itself to meet the growing demand for specialized computing power and cloud services. This initiative aims to train more than 1.2 million people in digital skills by the end of 2025, underlining Microsoft’s commitment to  technological innovation and training and making a significant contribution to strengthening Germany as a leading location for digital technologies and AI development.

Microsoft’s initiative opens up more opportunities for partner companies to develop solutions based on a sovereign cloud or industry solutions with integrated AI capabilities, significantly expanding the range of innovative applications and services. Industry specific sovereign cloud services can open up new markets for many service providers.

GenAI and various Copilot services are central to Microsoft’s market development strategy. Microsoft is currently pushing the Copilot concept into the market, seeing it as a sales door opener for other AI solutions. AI, Copilot and related offerings are increasing competitive pressure. The introduction of Copilots represents a turning point in Microsoft’s history, comparable in significance to the iPhone moment. It is a strategic move with which Microsoft intends to consolidate and commercialize its pioneering role in the field of GenAI. For example, GitHub’s Q2 FY revenue increased more than 40 percent YoY, driven by overall platform growth and adoption of GitHub Copilot, the world’s most widely used AI development tool. Microsoft has more than 1.3 million paying GitHub Copilot subscribers, up 30 percent quarter-over-quarter; over 50,000 organizations use GitHub Copilot to increase developer productivity.

If you project these figures to include other areas such as Microsoft 365 or the Power Platform, the potential becomes apparent — Microsoft could feasibly generate $10 billion globally in the short term and a three-digit billion amount in the midterm. For Microsoft partners, a revenue multiplier comparable to that of other solutions such as Teams or SharePoint — is applicable. A multiplier ranging from 4 to 5 is plausible, meaning that for every euro of Microsoft revenue, partners could generate 4 to 5 euros in revenue, primarily in areas such as training, consulting and use case design initially. Over time, services for data management, security and integration will be increasingly added. Monitoring services for AI services will be in above-average  demand in the midterm.

Another strong growth area for AI in the context of Copilot and GenAI is the development of zero-trust security architectures. Microsoft’s vision is to use AI to prevent cyberattacks, thereby making a significant contribution to security in cyberspace.

In the age of increasing cyber security risks, GenAI emerges as a key component for zerotrust security architectures. It introduces a novel form of prevention by swiftly analyzing vast data volumes in real time, identifying anomalies and potential threats at an early stage. GenAI supports adaptive authentication mechanisms, factoring in contextual factors such as location and user behavior and enables the customization of security policies precisely tailored to individual needs. GenAI efficiently automates and orchestrates security processes, improves network security through continuous monitoring and strengthens a strong security culture through focused employee training. These developments present service providers with far-reaching opportunities to actively participate in designing advanced security solutions, thereby consolidating their role in the cybersecurity ecosystem. GenAI thus plays a key role in promoting secure and resilient digital environments.

Microsoft partners have the opportunity to tap into new markets with innovative solutions and industry-and customer-specific services made possible by Azure GenAI Services.

Microsoft is fully committed to AI, as evidenced by its high level of investment in infrastructure and partnerships. In addition, Microsoft is rapidly entering into forward-looking partnerships. The cooperation with OpenAI was a decisive moment for Microsoft. The strategic alliance with Mistral AI, which is based on supercomputing infrastructure, market development and AI research, as well as the announcement of major financial investments in the expansion of AI and cloud infrastructures in countries such as Germany, underline Microsoft’s commitment to global innovation and the improvement of digital skills. These measures highlight Microsoft’s ambition to be at the forefront of digital transformation and the ethical application of AI technologies. Partners can benefit from these strategic partnerships and should actively seek collaborations with technology pioneers.

While Microsoft’s focus on AI is generating considerable interest in Germany, not all customers are equally enthusiastic. Nor does it mean that there are no other customer interests. The requirements of German small and midsize enterprises (SMEs), in particular, are remarkably diverse. On the one hand, some companies are pioneering the implementation of new services, working intensively on topics such as automating cloud operations and optimizing expenses (FinOps). The importance of team telephony, especially when integrated with mobile telephony and the Power Platform, is also growing. Some customers are exploring what comes next after E5 and how Windows 365 can be seamlessly integrated into their overall strategy.

On the other hand, many companies are only just starting to use the basic functions and services of Microsoft 365 and Azure to achieve their first significant successes. This presents service providers with the task of optimizing their offerings and focusing on the most profitable and sustainable services without limiting revenue opportunities. In this context, it is important to look to assess the lifecycle of individual managed services, determine the value contribution and cost recovery ratio at both the customer and individual levels, and thus streamline the portfolio for the future. In addition, it is necessary to validate how GenAI can improve enterprises’ service provision.

In summary, Microsoft’s strategic focus on AI and cloud technologies represents both challenges and growth opportunities for service providers. Germany’s heterogeneous customer landscape offers opportunities for niche solutions. In addition, the large number of companies with similar needs and problems in areas such as operations, security, compliance and governance makes it possible to quickly and efficiently serve and support a large number of customers through standardized and largely automated services and solution concepts.

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