SEATTLE – Microsoft chief executive Satya Nadella had some kind words for DeepSeek, the Chinese artificial intelligence start-up that roiled his company’s shares earlier this week.

The upstart stunned the US tech industry with an open-source AI model called R1 that it claims rivals or outperforms the abilities of western technology but at a fraction of the cost.

“DeepSeek has had some real innovations,” Mr Nadella said during an investor call after Microsoft reported quarterly results on Jan 29. “Obviously now that all gets commoditised and it’s going to get broadly used.”

DeepSeek’s feat prompted investors to wonder if Mr Nadella’s company needs to spend so much money on AI infrastructure. Could Microsoft and partner OpenAI train its AI models and handle user queries – a process known as inferencing – more cheaply?

Mr Nadella said they already have been doing exactly that.

“We ourselves have been seeing significant efficiency gains both in training and inference for years now,” he added. Microsoft has used its software to wring better performance and cost savings from each new generation of AI models and AI hardware, Mr Nadella said.

He said Microsoft did a lot of the work in partnership with OpenAI. It is not enough to release the best new model, he added. You have to make it cost-effective to use. “If it’s too expensive to serve, it’s no good, right?” he said.

Microsoft still plans to spend US$80 billion (S$108 billion) on data centres this fiscal year to help it meet demand from customers for its AI products, though the company expects the growth in expenses to taper off in fiscal 2026, which starts July 1. 

On Jan 28, Bloomberg News reported that Microsoft and OpenAI are investigating whether a group linked to DeepSeek had obtained data output from OpenAI’s technology without authorisation.

That has not stopped Microsoft from offering DeepSeek’s model to customers. On Jan 29, the company said it had added R1 to its Azure AI Foundry, a repository of more than 1,800 models that companies can use to design and manage AI programs. BLOOMBERG

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