• On Wednesday, Microsoft started selling the Microsoft 365 Copilot artificial intelligence add-on for its Office app subscriptions targeting businesses.
• Piper Sandler analysts estimate the tool could generate more than $10 billion in annualized revenue by 2026.
• That doesn't include uptake of additional tools such as Microsoft's Purview for managing data.

Microsoft is primed to enjoy its next cycle of growth. On Wednesday, the company started selling the Microsoft 365 Copilot artificial intelligence add-on for its Office app subscriptions targeting businesses.

The feature that appears in Word, Excel and other Office programs will cost $30 per person per month. That can add up to more than $10 billion in annualized revenue by 2026, Piper Sandler analysts Brent Bracelin and Hannah Rudoff wrote in a note to clients earlier this week.

Microsoft aims to make the most of its commanding lead in the productivity software market, where Google has been working to gain share. Google, meanwhile, is selling the Duet AI enhancement for subscriptions to its Workspace tools.

Piper Sandler's model assumes that 18% of eligible users will use Copilot. That might be aggressive, but "there's going to be a FOMO element to this," Bracelin told CNBC in an interview Tuesday, using the acronym for fear of missing out. "If you're in an industry competing against someone that has Copilot and you don't, you're at a disadvantage."

Piper Sandler has the equivalent of a buy rating on Microsoft shares, which are up 41% this year, compared with a gain of 9% for the wider S&P 500 index.

"Customers tell us that once they use Copilot, they can't imagine work without it," Microsoft CEO Satya Nadella told analysts on a conference call last week.

After revealing plans for Copilot in March, Microsoft announced in September that it would first target the largest companies. On last week's call, Nadella said 40% of the companies in the Fortune 100, a ranking of U.S. companies by revenue, were using Copilot in an invitation-only paid early-access program announced in May, calling out five clients by name: Bayer, KPMG, Mayo Clinic, Suncorp and Visa.

The preview was announced in May, less than six months ago. As a result, there isn't a wealth of data on how Copilot affects performance.

"A lot of the conversations we've had even with the early-access customers is too short a timeframe to really look at the qualitative aspects of how they're using the tools," said Jason Wong, an analyst at technology industry researcher Gartner.

Companies need at least 300 licenses for employees to get access to Copilot. The challenge for Microsoft is to go beyond a small core of end users and land a wide deployment. That could take time.

Wong said Gartner encourages organizations to experiment with generative AI, which can create synthetic images and text with just a few words of human input.

"I think getting to 20% will be reasonable within two to three years for technologies like Copilot, because there's going to be early adopters, and there's going to be fast followers," he said.

It might be easiest for companies to distribute Copilot to the mostly highly paid executives, whose time is precious, said Piper Sandler's Bracelin. The tool could help them prioritize email messages and quickly understand documents.

But the top brass might wind up causing headaches for tech support, Wong said. It might be wiser to first give Copilot to technically savvy employees who have drawn on generative AI for personal use and are familiar with shortcomings such as the potential to spout inaccurate information, Wong said. Microsoft acknowledges on its website that "the responses that generative AI produces aren't guaranteed to be 100% factual."

That hasn't discouraged people from using ChatGPT, the chatbot from Microsoft-backed OpenAI whose language models are at the core of Copilot. After ChatGPT launched in November 2022, Microsoft and other large software companies moved quickly to incorporate similar generative features. Microsoft says prompts and responses in Copilot aren't used to train language models and adhere to the company's privacy standards.

Microsoft won't only benefit from the new monthly Copilot fees. While setting up the tool, companies might end up using additional Azure cloud services, such as Purview for managing data, Wong said.

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