Microsoft’s aggressive, multi-billion-dollar push into synthetic intelligence was purported to be a flawless victory. The combination of Copilot into Home windows 11, Microsoft 365, and GitHub was designed to usher in a new era of agentic computing. But, beneath the polished keynote displays and large infrastructure investments, a dramatically completely different actuality is what we noticed.
As first reported by Home windows Newest, based on a extremely revered former Microsoft govt, the corporate’s AI technique is basically failing to attach with actual customers, spurring requires an enormous inside “manufacturing unit reset.”
The chief in query is Mat Velloso, who was most lately the Vice President of Product for the Developer Platform at Meta’s Superintelligence Labs. He additionally led AI developer merchandise at Google DeepMind (together with the Gemini API and Google AI Studio). However earlier than his stints at Google and Meta, Velloso spent over 12 years at Microsoft, the place he served as a Accomplice Director managing AI innovation in Home windows and, apparently, spent 4 years because the Technical Advisor to Microsoft CEO Satya Nadella.
When somebody with Velloso’s resume, having noticed the AI arms race from the best ranges of Microsoft, Google, and Meta, says Microsoft has “missed the AI wave,” it will probably rip the lid off the deep tensions inside Redmond.
Ex-Microsoft exec says Microsoft missed the AI wave
Microsoft’s conduct over the previous few months is nothing in need of stunning. Each the Home windows and Xbox divisions out of the blue began prioritizing consumer suggestions and implementing requested options after years of ignoring them.
It’s additionally not a small process to assemble and arrange OEMs, ODMs, and chipset distributors in an occasion like WinHEC that had its final incidence nearly a decade in the past (2018).
Explaining this sudden pivot to listening to clients, Velloso remarked that regardless of making Bing the corporate’s greatest AI guess, it did not seize a single share level of search market share from Google. Extra damning is the state of Copilot.
Based on Velloso, lower than 3% of paying customers actively use Copilot, although Microsoft has pre-deployed it directly into the Windows 11 taskbar and throughout the Workplace suite.
Out of Microsoft’s 450 million Microsoft 365 consumer base, the corporate has solely managed to transform roughly 15 million paid Copilot seats. This implies a staggering 96.7% of customers are rejecting the premium AI options, yielding only a 3.3% paid adoption fee. When considered in opposition to Microsoft’s estimated $37.5 billion quarterly AI spending, that is an alarmingly low adoption fee.
But it surely’s not simply software program; Velloso additionally known as out the present state of AI {hardware}. Over the previous yr, Microsoft has closely pushed OEMs to incorporate Neural Processing Models (NPUs) of their newest laptops to energy superior Home windows 11 capabilities. We have now tracked Microsoft’s push for NPU-powered AI options in Home windows 11, however as Velloso noted, OEMs invested closely in NPUs solely to search out out that “no person cares as a result of not a single worthwhile usecase was constructed for these in Home windows/Workplace.”
Moreover, he highlighted that GitHub, a platform that ought to be thriving because the centerpiece of the AI coding revolution, has seen its Service Degree Settlement (SLA) reliability drop below 90%. Mix this with rising Price of Items Bought (COGS) and shareholders starting to ask tough questions, Microsoft was compelled to begin listening to clients as a result of the AI guess isn’t paying off as easily as anticipated.
Microsoft’s govt exodus
All this friction seems to be taking a toll on Microsoft’s management. Just lately, information broke that Julia Liuson, the extremely revered head of Microsoft’s Developer Division (DevDiv), was retiring after 34 years with the software giant.
Whereas official channels framed this as an ordinary retirement, Mat Velloso critiqued the information, saying, “Appears to be like like Microsoft simply went from hit refresh to hit manufacturing unit reset.” He additionally listed an enormous string of high-profile departures and reassignments throughout the corporate, together with leaders from Xbox, GitHub, AI Infrastructure, Groups, and OneNote.
This public commentary drew the ire of Frank X. Shaw, Microsoft’s Lead Communications govt. Shaw replied to Velloso, defending the departing executives and accusing Velloso of jamming a “adverse body” onto regular company retirements.
All Velloso needed to do was level out the cruel monetary realities that the market is at present digesting. He moved from Microsoft to Google in early 2024, and whereas Google’s shares surged by roughly 230%, Microsoft’s inventory progress remained primarily flat at 0%.
“I suppose the entire market can be fallacious about this,” Velloso fired again. “However what do I do know? I solely noticed each corporations, how they function, their strengths and their flaws. Microsoft missed the web wave, the cellular wave and now it missed the AI wave. It’s what occurs once you preserve doing the identical issues anticipating completely different outcomes.”
He urged Microsoft’s leadership to stop “gaslighting,” deflecting blame, and burying skeletons, arguing that hitting a whole inside “manufacturing unit reset” is the one pragmatic method to repair the arduous issues plaguing the working system and enterprise software program stack.
OpenAI is reducing out the intermediary (Microsoft)
Aside from the inner challenges, Microsoft is more and more being affected by its closest allies. The corporate has staked its whole generative AI future on its multi-billion-dollar partnership with OpenAI. Nonetheless, OpenAI is quickly constructing out its personal enterprise infrastructure, threatening Microsoft’s historic dominance within the company sector.
Simply days in the past, OpenAI formally launched the “OpenAI Deployment Company” (DeployCo), a brand new enterprise unit backed by over $4 billion in preliminary funding from international companies. This new enterprise options 150 “Ahead Deployed Engineers” (FDEs) tasked with embedding immediately into Fortune 500 corporations to assist them construct and deploy customized AI options.
Traditionally, this hands-on, enterprise-level consulting was Microsoft’s bread and butter. As Velloso reminisced about his early profession as a guide, he famous that Microsoft’s unbelievable penetration into massive enterprises was constructed on “armies of individuals spending time, listening, understanding enterprise targets and fixing them with expertise in each trade vertical.”
Now, prime AI labs like OpenAI are replicating this similar playbook. They now not wish to delegate enterprise deployment to hyperscalers like Microsoft Azure. By reducing out the intermediary and proudly owning the direct relationship with companies, OpenAI is stepping immediately into the extremely profitable providers layer the place the actual enterprise AI {dollars} are headed. This presents an enormous structural menace to Microsoft’s long-term enterprise income, particularly as customers proceed to push again in opposition to compelled Copilot internet app integrations.
Why Microsoft is way from useless: “The moat is unbreakable”
Regardless of these extreme criticisms, Velloso defended his former employer in opposition to apocalyptic tech media narratives. When a distinguished tech publication lately claimed that “AI is killing Microsoft” and in contrast their present trajectory to the disastrous 2008 period, Velloso stepped in to close the narrative down.
“Nope, they don’t seem to be dying,” Velloso acknowledged. “I do know I criticize them so much and that’s as a result of I care, however boy in case you suppose Microsoft is dying you haven’t watched what number of occasions they recovered from issues.”
He pointed out that whereas AI startups and labs is likely to be constructing flashy deployment corporations, utterly changing legacy enterprise software program is extremely tough. When requested about corporations claiming they will absolutely automate software program companies, Velloso really helpful speaking to Fortune 500 CIOs to see how sensible that actually is.
“There’s a cause why all the highest AI labs are hiring massive consulting groups,” he defined. “The final mile is the toughest and Microsoft has the most effective distribution for that. Their moat is unbreakable.”
That is the final paradox of Microsoft in 2026. They’re concurrently struggling to persuade customers to undertake their new AI options, but their foundational grip on the enterprise ecosystem remains to be strong. Hundreds of thousands of companies depend upon Lively Listing, Azure, Workplace, and Home windows. Whereas it’s straightforward to spin up an AI agent in Python, integrating it securely right into a legacy company setting requires the sort of huge distribution community that Microsoft has spent 4 a long time constructing.
A needed wake-up name
All of the “new” options in Home windows 11, together with the much-awaited movable taskbar and resizable Start menu, are a results of every little thing that went fallacious within the firm and management lastly doing one thing about it.
When an organization realizes that pushing a 3.3% adoption-rate AI chatbot down customers’ throats isn’t translating to inventory progress or consumer satisfaction, they’re compelled to rethink their technique.
We’re lastly seeing the outcomes of this “manufacturing unit reset” in actual time. Microsoft is dismantling sluggish internet wrappers, committing to native UI performance for Home windows 11 apps, overhauling driver quality standards, and explicitly prioritizing long-ignored consumer suggestions.
Microsoft’s pivot again to platform fundamentals proves that whereas AI is likely to be the longer term, you can not construct that future on a crumbling basis. The market compelled Microsoft to listen, and for pissed off Home windows customers, that’s arguably the most effective factor that might have probably occurred.