Vibe shifts: Microsoft and Google on AI

The dawning AI-first era is creating clear winners and losers. We’re seeing giants of the past lose ground, while companies that few initially believed in defy their sceptics. At the same time, the terms of big macro debates in the field seemingly change overnight. In this “vibe shifts” series, we’ll be diving into some of these stories and drawing a few lessons for entrepreneurs and investors.

Introduction

For those of us tracking the pulse of the AI vibes, a summary would probably look like this:

Progress slows or ‘hits a wall’, only to accelerate. Companies are down and out, only to be ‘cooking’ a few months later. We’ve seen this dynamic play out with a handful of big tech companies. Satya Nadella has turned Microsoft from a stagnating behemoth that didn’t know how to innovate to a 10x turnaround story. Much of his success stemmed from his decision to go all-in on OpenAI, even if the relationship today isn’t as happy as it might once have been. Following OpenAI’s board drama, Microsoft were left looking like the biggest winners. “Satya is playing 4D chess” was what the people chanted.

Meanwhile, Google went from being ‘unable to ship’ to building the viral AI product hit of late 2024 and stunning observers with a new quantum computing chip. Gemini 2.0 impressed users with its AI assistant and an agent that can control the user’s browser. Its Deep Research functionality, which generates a multi-step research plan based on user prompts, before executing on it, has also won fans.

So what’s going on? Are these reflections of real change or the vagaries of narrative wars?

Tech is hard

Building consumer-facing AI is hard. Anything involving relatively open-ended user prompting runs into a range of hot-button social and political issues. Not to mention the heightened chance of random events… Microsoft and Google both fell afoul of these at different stages.

Microsoft was first out the door with Tay. Launched in 2016, the company’s AI-powered Twitter bot lasted a whole 16 hours, before trolls managed to push it into releasing a series of increasingly inflammatory replies. This quickly led it to be enshrined as an example of reckless product design and release strategies, even years later.

Google had this in three waves, with its first adventures into generative AI. Bard shared inaccurate information in a promotional video, while the saga of Gemini’s “woke” image generation made the company a cross between a laughing stock and a punching bag. As a chaser, its AI-generated search previews came under scrutiny. Remember AI Overviews suggesting to use “non-toxic glue” to make cheese stick to pizza better?

These very visible, public errors that ordinary people could replicate for themselves understandably overshadowed the highly impressive benchmark scores we saw in Gemini releases. It didn’t help that Google was caught gaming one of its Gemini demos either… The company also hasn’t done itself any favors by pursuing a generally uninspiring approach to communicating new product news, often with well-concealed, dry updates that have attracted satirical comment. Not to mention if products were even available for use when they were announced.

You only need to win once

It’s important to understand that to execute a vibe shift, you don’t have to win at everything. One or two big wins will more than patch over a good number of disappointments.

For example, Microsoft has won credit for its OpenAI investment, its nuclear investment, and data centre buildout. This in turn gives it cover for its misses. It doesn’t take a lot of scouring on social media or Microsoft’s Community forums to see that reception for Copilot has been far from overwhelmingly positive.

At the same time, if Menlo Ventures’ survey is to be believed, Google’s Gemini has failed to increase its share of enterprise spending over the past year, significantly lagging OpenAI, Anthropic, and Meta.

And yet, NotebookLM has won the company creds, even though there’s no data available on its actual adoption. While undoubtedly well-crafted, it’s not necessarily an economic gamechanger. Likewise, DeepResearch is clearly better at some domains than others. Meanwhile, Willow is sufficiently complicated that it has likely received even less expert scrutiny than the median AI product release.

In short, momentum and pace are so often the building blocks on which good vibes are built. Once the narrative is up and running, anything that doesn’t fit can be conveniently discarded.

In search of a narrative

Maybe opinion is simply shifting rapidly, because … the space is just inherently uncertain.

Consistent commentary relies on having a model of the world. In this context, we mean a coherent theory of how innovation works, what makes for a killer product, markers of success for a company, and a view of the direction in which the field is moving.

Of course, you should update this model as new evidence emerges, but without one, you will be endlessly buffeted by the tide of new announcements. It quickly becomes impossible to properly weigh new information which, depending on your personal biases, means either a bias towards dismissing or overinterpreting every new development.

The other dimension at work is pretty human. The perpetual race dynamic is kinda fun. In the most recent installment of the State of AI Report, we noted that you could just “close your eyes for a year and OpenAI is still #1”.

But we don’t want to do that.

The race is motivating for the participants, while a whole industry of commentators is dependent on keeping us in suspense. For a good story, we need someone to be ‘ahead’, someone to be ‘catching up’, and someone we’d counted out to be going through a surprise ‘comeback’. To spice things up, we need occasional new entrants (and controversies), even if we quickly forget them after they flame out.

Closing thoughts

Narrative, real progress, or demand-driven speculation? We’re probably seeing a combination of the three at play today. It is probably true that our vibes on Google, Microsoft or other big tech companies are over-determined by individual, high-profile decisions. But at the same time, these big moments conceal feedback, lessons learned, as well as fundamental research. Vibes may in fact, not be all you need in the longer term.