Microsoft’s aggressive, multi-billion-dollar push into artificial intelligence was supposed to be a flawless victory. The integration of Copilot into Windows 11, Microsoft 365, and GitHub was designed to usher in a new era of agentic computing. Yet, beneath the polished keynote presentations and massive infrastructure investments, a dramatically different reality is what we saw. As first reported by Windows Latest, according to a highly respected former Microsoft executive, the company’s AI strategy is fundamentally failing to connect with real users, spurring calls for a massive internal “factory reset.” The executive in question is Mat Velloso, who was most recently the Vice President of Product for the Developer Platform at Meta’s Superintelligence Labs. He also led AI developer products at Google DeepMind (including the Gemini API and Google AI Studio). But before his stints at Google and Meta, Velloso spent over 12 years at Microsoft, where he served as a Partner Director managing AI innovation in Windows and, interestingly, spent four years as the Technical Advisor to Microsoft CEO Satya Nadella. When someone with Velloso’s resume, having observed the AI arms race from the highest levels of Microsoft, Google, and Meta, says Microsoft has “missed the AI wave,” it can rip the lid off the deep tensions within Redmond. Microsoft’s behavior over the last few months is nothing short of shocking. Both the Windows and Xbox divisions suddenly started prioritizing user feedback and implementing requested features after years of ignoring them. It’s also not a small task to assemble and organize OEMs, ODMs, and chipset vendors in an event like WinHEC that had its last occurrence almost a decade ago (2018). Explaining this sudden pivot to listening to customers, Velloso remarked that despite making Bing the company’s biggest AI bet, it failed to capture a single percentage point of search market share from Google. More damning is the state of Copilot. According to Velloso, less than 3% of paying users actively use Copilot, even though Microsoft has pre-deployed it directly into the Windows 11 taskbar and across the Office suite. Out of Microsoft’s 450 million Microsoft 365 user base, the company has only managed to convert roughly 15 million paid Copilot seats. This means a staggering 96.7% of users are rejecting the premium AI features, yielding just a 3.3% paid adoption rate. When viewed against Microsoft’s estimated $37.5 billion quarterly AI spending, this is an alarmingly low adoption rate. But it’s not just software; Velloso also called out the current state of AI hardware. Over the past year, Microsoft has heavily pushed OEMs to include Neural Processing Units (NPUs) in their latest laptops to power advanced Windows 11 capabilities. We have tracked Microsoft’s push for NPU-powered AI features in Windows 11, but as Velloso noted, OEMs invested heavily in NPUs only to find out that “nobody cares because not a single valuable usecase was built for those in Windows/Office.” All this friction appears to be taking a toll on Microsoft’s leadership. Recently, news broke that Julia Liuson, the highly respected head of Microsoft’s Developer Division (DevDiv), was retiring after 34 years with the software giant. While official channels framed this as a standard retirement, Mat Velloso critiqued the news, saying, “Looks like Microsoft just went from hit refresh to hit factory reset.” He also listed a massive string of high-profile departures and reassignments across the company, including leaders from Xbox, GitHub, AI Infrastructure, Teams, and OneNote. This public commentary drew the ire of Frank X. Shaw, Microsoft’s Lead Communications executive. Shaw replied to Velloso, defending the departing executives and accusing Velloso of jamming a “negative frame” onto normal corporate retirements. All Velloso had to do was point out the harsh financial realities that the market is currently digesting. He moved from Microsoft to Google in early 2024, and while Google’s shares surged by roughly 230%, Microsoft’s stock growth remained essentially flat at 0%. Apart from the internal challenges, Microsoft is increasingly being affected by its closest allies. The company has staked its entire generative AI future on its multi-billion-dollar partnership with OpenAI. However, OpenAI is rapidly building out its own enterprise infrastructure, threatening Microsoft’s historic dominance in the corporate sector. Just days ago, OpenAI officially launched the “OpenAI Deployment Company” (DeployCo), a new business unit backed by over $4 billion in initial investment from global firms. This new venture features 150 “Forward Deployed Engineers” (FDEs) tasked with embedding directly into Fortune 500 companies to help them build and deploy custom AI solutions. Historically, this hands-on, enterprise-level consulting was Microsoft’s bread and butter. As Velloso reminisced about his early career as a consultant, he noted that Microsoft’s incredible penetration into large enterprises was built on “armies of people spending time, listening, understanding business goals and solving them with technology in every industry vertical.” Despite these severe criticisms, Velloso defended his former employer against apocalyptic tech media narratives. When a prominent tech publication recently claimed that “AI is killing Microsoft” and compared their current trajectory to the disastrous 2008 era, Velloso stepped in to shut the narrative down. “Nope, they are not dying,” Velloso stated. “I know I criticize them a lot and that’s because I care, but boy if you think Microsoft is dying you haven’t watched how many times they recovered from problems.” He pointed out that while AI startups and labs might be building flashy deployment companies, completely replacing legacy enterprise software is incredibly difficult. When asked about companies claiming they can fully automate software businesses, Velloso recommended talking to Fortune 500 CIOs to see how realistic that really is. “There’s a reason why all the top AI labs are hiring large consulting teams,” he explained. “The last mile is the hardest and Microsoft has the best distribution for that. Their moat is unbreakable.” For more visit OUR FORUM.