The Numbers Don't Match the Narrative
Microsoft converted just 3.3% of Microsoft 365 users with Copilot Chat access into paying customers, according to analysis by Directions on Microsoft. That's 15 million paid seats against 450 million commercial M365 users who now have some form of free Copilot Chat access.
The figure landed during Microsoft's Q2 FY26 earnings call, where CEO Satya Nadella emphasized "record AI momentum" and claimed daily active users are up tenfold year-over-year. CFO Amy Hood spent much of the analyst Q&A explaining why the company's $37.5 billion quarterly AI spend shouldn't be judged solely on Azure revenue or immediate Copilot uptake.
The Allocation Defense
Hood's argument: Microsoft is allocating significant AI capacity to its own products - M365 Copilot, GitHub Copilot, Security Copilot - before making infrastructure available to external Azure customers. "Many investors are doing a very direct correlation between the capex spend and seeing an Azure revenue number," she said. That's the wrong yardstick, according to Microsoft.
Nadella reinforced this, telling investors to focus on lifetime value across the entire Copilot portfolio rather than single-product conversion rates. "We don't want to maximize just one business of ours," he said.
What This Means in Practice
The 3.3% conversion rate mirrors broader enterprise AI adoption challenges. Previous reporting pegged M365 Copilot adoption at 1.81% of the subscriber base as of August 2025. Microsoft launched the product in late 2023 at $30 per user per month - a significant line item for IT budgets still working through pandemic-era tech investments.
The company has since pivoted messaging from "chatbot" to "AI agent," emphasizing automation over prompt-based interaction. Whether that distinction drives enterprise budget allocation remains to be seen.
Microsoft reported 900 million monthly active users across AI features in Q1 FY2026, with 16 billion Copilot interactions - up 72% quarter-over-quarter. Usage is growing. The question is whether usage converts to the kind of revenue that justifies the infrastructure spend. Three years into the generative AI cycle, enterprises are starting to ask harder ROI questions.
History suggests the gap between "everyone's trying it" and "companies are paying for it" matters more than Microsoft's earnings script acknowledges.