MSPs Face Profitability Challenges as 18% Operate at a Loss; OpenAI and CrowdStrike Innovate AI

[00:00:02] It's Thursday, February 13th, 2025 and I'm Dave Solt. Three things to know today. Managed Services hits a growth wall as 18% of MSPs are operating at a loss. OpenAI plans GPT-4.5 and GPT-5 while Apple taps Alibaba for AI and, with breaches happening in minutes, CrowdStrike bets on AI-driven security automation. This is the Business of Tech.

[00:00:27] Service Leadership has released its fourth-quarter data for 2024, showing that while managed service revenue growth has slowed to pre-pandemic levels, profitability for managed service providers remains high. The report indicates that worldwide managed service revenue growth was just 1%, the lowest of the year, with North America experiencing a mere two-tenths of a percent increase.

[00:00:51] In contrast, Australia and New Zealand posted a growth rate of 2.8%. Despite this slowdown, managed service provider profitability showed resilience, with the average adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, across providers decreasing slightly from 12.2% in the previous quarter to 11.1%.

[00:01:16] However, a concerning trend emerged. 18% of managed service providers reported operating at a loss, up from 14% in the third quarter. Value-added resellers experienced strong total revenue growth of 18.5%, driven mainly by non-recurring product sales, although their services revenue declined by 8.5%.

[00:01:40] A new report from NTT Data reveals a growing responsibility gap in artificial intelligence adoption, with over 80% of business leaders acknowledging that leadership and governance are not keeping pace with advancements in AI technology. The report, which surveyed more than 2.300 executives across 34 countries, highlights a significant divide in the C-suite regarding the importance of responsibility versus innovation.

[00:02:07] While one-third of executives prioritize responsibility, an equal number favor innovation, and the remaining third view them as equally important. Furthermore, 89% of leaders expressed concern about security risks associated with AI, yet only 24% believe their organizations are adequately prepared to manage these risks.

[00:02:27] The report emphasizes the urgent need for leadership-driven governance strategies to ensure ethical AI development and prevent potential innovation and public trust setbacks. Why do we care? The slowdown in managed service revenue growth suggests that the post-pandemic surge is behind us, with expansion returning to a more normalized pre-2020 trajectory.

[00:02:52] The fact that 18% of MSPs are now operating at a loss, up from 14% last quarter, is a warning sign, especially in a market that is supposed to thrive on predictability and recurring revenue. This suggests that while profitability remains solid at 11.1% EBITDA, margins are under pressure, and smaller or inefficient providers may be struggling to sustain their operations.

[00:03:19] The strong revenue growth of VARs at 18.5% is another key signal. Much of this was driven by non-recurring product sales, meaning companies are still investing in hardware, software, and infrastructure. But their services revenue declined by 8.5%, reinforcing that customers may be shifting spending away from traditional service contracts. For MSPs, this raises a question.

[00:03:44] Are our clients moving back to transactional IT spending instead of fully managed services? If so, the shift toward co-managed IT models may continue to gain traction. Or, another existential threat. Maybe traditional service contracts are becoming unnecessary. I've cited the example of an MSP leader visiting another MSP recently and encountering issues with their network,

[00:04:11] and using ChatGPT rather than use their own help desk. Now consider if customers do that. How valuable are service contracts? Now I paired this with the AI data as it shows where the value need is. 80% of business leaders admit that governance isn't keeping pace with AI advancements. So AI adoption is outpacing responsible implementation. A clear risk for businesses and their service providers.

[00:04:39] The executive divide on responsibility versus innovation is worth noting. With one-third of leaders prioritizing responsibility, one-third focused on innovation, and one-third balancing both, there's no clear consensus on how AI should be governed. This lack of alignment could slow down AI adoption or create compliance headaches down the road. For IT service providers, this reinforces the importance of helping clients develop structured AI governance policies

[00:05:07] before regulators step in and impose them. The managed services industry is maturing, and easy revenue growth is no longer guaranteed. Providers must focus on operational efficiency, high-value offerings, and emerging AI governance needs to stay competitive. This episode is supported by Flexpoint. Flexpoint offers a purpose-built payment solution from managed service providers, automating billing operations to enhance efficiency and cash flow.

[00:05:37] With features like accounts receivable automation, branded client portals, and secure same-day payments, Flexpoint streamlines financial management. Integrations with accounting software such as QuickBooks and Xero, as well as professional services automation tools like ConnectWise and Autotask, ensure seamless data synchronization. Experience improved cash flow and client satisfaction with Flexpoint's comprehensive platform.

[00:06:02] Learn more at getflexpoint.com slash msp-radio. OpenAI has announced its plans for the upcoming GPT-4.5 and GPT-5 AI models, as detailed by CEO Sam Altman. The roadmap, shared on social media, states that GPT-4.5, internally known as Orion, will be the last model not utilizing a chain-of-thought approach.

[00:06:29] Altman emphasized the company's goal to simplify its product lineup and aims to unify the various series of models to enhance their functionality across a broader range of tasks. When GPT-5 launches, users of the free version of ChatGPT will have unlimited access at a standard intelligence setting, while Plus and Pro subscribers will enjoy higher levels of intelligence. Specific release dates were not disclosed.

[00:06:57] Altman provide a vague estimate of weeks to months. OpenAI announced a significant update to its model specification, expanding it from around 10 pages to 63 pages. This new version outlines how its artificial intelligence models should engage with controversial topics while adhering to customizability, transparency, and intellectual freedom principles. The update also reflects ongoing debates in AI ethics,

[00:07:27] particularly surrounding sensitive questions like misinformation and self-harm. Notably, OpenAI aims to address the issue of AI sycophancy, encouraging models to provide constructive feedback rather than simply agreeing with users. OpenAI is soliciting public input on these guidelines, which will be released under a Creative Commons Zero license, allowing others in the AI community to modify and build upon them freely.

[00:07:56] Apple has announced it will incorporate Alibaba's artificial intelligence technology into its iPhones, highlighting a renewed confidence in the capabilities of the Chinese tech giant. Alibaba's co-founder revealed this decision at the World Government Summit in Dubai, noting that Apple carefully evaluated several companies in China before selecting Alibaba. The information reported that Apple is continuing its collaboration with Baidu

[00:08:25] to enhance artificial intelligence features for iPhone users in China, even as it partners with Alibaba Group. Now, why do we care? OpenAI's plans for GPT 4.5 and GPT 5 reveal a shift toward product unification, but they also raise questions about accessibility and model differentiation. Model differentiation quickly goes away as these models are commoditized, and DeepSeq accelerated that process.

[00:08:55] Note, Apple looks to deliver the same features regardless of the model. Sure, the headline reason Apple is doing this is due to Chinese law. Just use that concept in the U.S. Perhaps Apple switches from OpenAI to DeepSeq or something open source to save money. As long as the customer experience is the same, and now you see the commodity play. This drives the value into the application layer,

[00:09:24] which is great for customers and the service providers serving them. CrowdStrike has launched Charlotte AI Detection Triage, a tool designed to automate alert assessment in security operations centers. The solution achieves over 98% accuracy and reduces manual triage workloads by more than 40 hours each week. According to a recent report by CrowdStrike, adversaries can now break out within just two minutes after initial access,

[00:09:54] highlighting the urgency for faster incident response. The new AI system enhances efficiency and allows security teams to prioritize genuine threats by filtering out false positives. In a survey conducted by CrowdStrike, 80% of cybersecurity professionals expressed a preference for generative AI integrated into cybersecurity platforms rather than standalone tools. With Charlotte AI, CrowdStrike aims to empower defenders to keep pace with evolving threats,

[00:10:22] ensuring they can respond effectively in real time. Why do we care? CrowdStrike's launch of Charlotte AI Detection Triage is another signal that AI-driven automation is becoming a necessity in cybersecurity operations and operations broadly. That said, AI-assisted security isn't a replacement for human expertise, it's an augmentation. Customers prefer AI integrated into existing platforms rather than standalone tools.

[00:10:50] Security vendors offering AI as part of their core platform, like CrowdStrike, may see stronger adoption than those offering AI as a separate product. And that's the insight to focus on. AI is most useful baked into products when it delivers value. Are you ready to get your brand in front of the tech leaders shaping the future of managed services? Here at the Business of Tech, we offer flexible sponsorship opportunities to meet your needs,

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