AI Marketplace Sales Expectations Lowered
Microsoft shares experienced a 3% decline on Wednesday in New York following new reporting from The Information, which revealed that the company had quietly reduced sales expectations for its cloud-based AI marketplace. This downturn marked the largest single-day drop for Microsoft since November 18.
The adjustments were made within the Azure division, where several teams revised their sales targets for AI products after many salespeople failed to meet their goals in the fiscal year that concluded in June. One team had initially set a goal for customers to increase their spending on the Foundry marketplace by 50%, but less than 20% of the team achieved this objective. Consequently, in July, Microsoft lowered the target to 25% for the current year.
The Foundry marketplace is a platform where businesses procure tools to develop automated AI agents. This is distinct from Microsoft's more consumer-oriented Copilot products.
Microsoft Responds to Sales Target Report
In response to the internal sales target adjustments, a Microsoft spokesperson informed The Information, "The Information’s story inaccurately combines the concepts of growth and sales quotas, which shows their lack of understanding of the way a sales organization works and is compensated."
The spokesperson further stated, "Aggregate sales quotas for AI products have not been lowered, as we informed them prior to publication."
However, the challenges are not isolated to Microsoft. Several companies have reportedly informed The Information that accurately calculating the actual savings derived from using AI for routine tasks remains difficult, and there are concerns regarding the high cost of errors generated by AI models.
The Foundry marketplace, which was the focus of these unmet sales targets, operates independently of Copilot, Microsoft's AI integration into its office tools. Foundry is designed for developers creating agents from the ground up.
A significant portion of the computing demand associated with AI workloads still originates from OpenAI, which operates independently of Foundry. While this relationship is not directly impacted by the quota issue, it does not contribute to improving Foundry's performance.
Data Privacy Complaint Filed in Ireland
Coinciding with the sales report, an activist group filed a complaint with Ireland's Data Protection Commission. The complaint accused Microsoft of contravening EU privacy law by allegedly assisting Israel's military in transferring sensitive surveillance data out of Europe.
This complaint was reportedly based on information obtained from Microsoft employees and internal records.
According to the complaint, after a news article in early August from The Guardian and Israeli outlets exposed that Microsoft's servers held millions of intercepted Palestinian phone calls, there was a notable increase in activity. A day after this article was published, three accounts linked to the Israeli military requested increased data transfer limits on Microsoft's Azure platform. These requests received internal approvals, and the volume of data within those accounts subsequently decreased significantly.
The company's spokesperson allegedly commented, "Our customers own their data, and the actions taken by this customer to transfer their data in August was their choice." The spokesperson added, "These actions in no way impeded our investigation. That investigation led to a decision to cease some services in September, and ultimately to the customer storing their data with another provider."
The investigation reportedly involved employees who worked directly with Israeli officials and was substantiated by business records. The complaint urged the Irish commission to initiate an immediate inquiry and to prevent Microsoft from processing military and government data in instances where it violates EU law.
Microsoft's European headquarters are situated in Ireland, which designates the Irish Commission as the enforcer of the General Data Protection Regulation for the company.
Meanwhile, Israel's actions in Gaza continue to face international scrutiny. The International Criminal Court has issued arrest warrants for Israeli officials, alleging their use of starvation and deliberate attacks on civilians during the conflict. Israel has denied these accusations.
These issues are not new for Microsoft, which has previously encountered protests from its employees and external pressure regarding its ongoing contract with Israel's Ministry of Defense. However, the events of Wednesday brought two significant challenges to the forefront: a business shortfall in AI sales and a global accusation concerning the handling of war-related data.