Multinational electronics developer Microsoft published its first quarterly revenue results for the new fiscal year on Tuesday, posting $50.1 billion in revenue, an 11% increase over the same period last year, which represents the companys slowest growth since 2017.

Microsoft cited weakening personal computer sales and a strong dollar as reasons behind the revenue drop, but another problem is also starting to eat into the companys profits, according to the companys chief financial officer, Amy Hood: Europes crunched natural gas supply and mounting energy crisis.

The company expects to incur $800 million of greater than expected energy costs during this fiscal year, the first quarter of which ended in September, Hood revealed during an earnings conference call on Tuesday.

She added that the losses will be largely localized in Europe, in statements reported by Bloomberg, as the continent muddles through one of its worst energy crises in decades.

Cloud computing takes a hit

Microsofts losses are primarily focused in the companys energy-intensive cloud computing services, as Europes data centers and cloud computing industries start to buckle under the weight of the continents energy crisis. 

Microsofts cloud computing services are headlined by Azure, the companys flagship cloud product. Cloud computing requires many data processing centers spread out regionally to support its servers, and Azure is no different, operating with more than 200 data centers around the world.

But data centers also need huge amounts of energy to power and cool the servers they house, energy requirements that are starting to eat into Microsofts finances.

Hood said that only some of the $800 million in energy costs were incurred during the first quarter, while the majority of it will be spread out more or less evenly throughout the last three quarters of the fiscal year. Hood estimated losses to run at around $250 million for each of the last three quarters of the 2023 fiscal year, which would shrink Microsofts operating margins for the year by roughly a point. High energy bills have already affected Azures operating margins, according to Hood.

Data centers have become a target for European policymakers in recent months as governments require businesses to reduce their energy usage and help conserve electricity. European officials have prioritized reducing power demand and filling energy storages ahead of the winter months, when energy demand tends to peak.

Crunched energy supply in Europe, largely caused by Russian energy companies limiting natural gas flows to the continent in response to Western sanctions, has sparked a crisis on the continent and ignited fears of energy rationing. While European countries have been able to fill their gas stores in time for winter, global supply remains constrained, and governments have been careful to cut back on energy usage wherever possible.

In Germany, for instance, a recent law requires large data centers to develop and implement new energy management and efficiency plans, while new centers will have to find a way to reutilize at least 40% of the waste heat produced by servers.

Data centers accounted for 2.7% of the European Unions electricity demand in 2018, according to a recent report by the European Commission, which also forecasted their energy consumption to rise 200% between 2020 and 2030.

Some technology companies have scrapped plans for new data centers in Europe amid a more hostile political environment. In July, Facebook parent Meta announced it would not move forward with a large project in the Netherlands following ongoing resistance from local authorities. And in August, Microsoft and Amazon paused plans to build data centers in Ireland after the government announced a moratorium on new data center projects, citing energy constraints.

During the earnings call, Microsoft executives insisted that cloud-based services remain the future even in energy-starved Europe, as these products could help businesses improve their energy efficiency in the long term.

The best way to hedge against energy costs and be, in fact, more energy-efficient is to move to the cloud, Microsoft CEO Satya Nadella said during the call.

But the climate in Europe is likely to remain hostile for some time, as crunched global energy supply for the immediate future means the continents energy crisis and concerns over energy security could last much longer than just this winter.

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In May of this year, Goldman Sachs CEO David Solomon told Bloomberg there was a chance of a recession, but that he wasnt too concernedat that time. He was instead focused on getting inflation under control, he said.

Fast forward almost six months, and he seems to have made up his mind. Earlier this month, he warned of an increasing likelihood that the U.S. would enter into a recession, saying we could expect more volatility on the horizon, and at Saudi Arabias Future Investment Initiative conference on Tuesday, the so-called Davos in the Desert, he took it a step further.

The U.S. will likely have a recession at this point and its because inflation is embedded, Solomon said. JP Morgans Jamie Dimon, who was also at the event, responded to Solomon by simply saying: I agree. 

Generally, when you find yourself in an economic scenario like this, where inflation is embedded, its very hard to get out of it without a real economic slowdown, Solomon said. 

Solomon was referring, of course, to inflation consistently hitting levels unseen for 40 years throughout 2021, an earth-shaking economic event that team transitory said was unlikely. It peaked at 9.1% year-over-year in June and only slowed slightly to 8.5% in July, 8.3% in August, and 8.2% in September. All of this has prompted the Federal Reserve to hike interest rates aggressively to lower inflation to its 2% target, but Solomon said its embedded into the economy and wont come down on its own.

The Fed has raised interest rates five times this year (with the last three all being an increase of 75 basis points), reaching a benchmark rate of 3% to 3.25%. Thats the highest its been since the 2008 financial crisis, as Fed chair Jerome Powell sticks to his vow to bring some pain to households and businesses in an attempt to tame prices. As much pain as a recession? Solomons saying thats how it looks.

The Fed has been criticized heavily and blamed for potentially pushing the U.S. into a recession, with economists like Jeremy Siegel saying its slamming the brakes way too hard, as it raises interest rates, and Mohamed El-Erian saying the Fed waited too long to act on high inflation. 

Some economists expect the Fed to announce another rate hike by 75 basis points in November. 

There is no question that economic conditions, in my opinion, are going to tighten meaningfully from here, Solomon said.

He added: I think in the United States, particularly in the last week or two, theres been a clear message from the Fed that theyre going to get to the current path target of 4.5 or 4.75, and then pause because theres a lag effect to all of this.But if they dont see real changes in behavior, my guess is, theyll go further.

For Solomon, those changes mean a decrease in demand and a loosening of the labor market. If not, the U.S. will continue to see this shift away from low inflation and interest rates that were once close to zerowhat Bank of America has called an aberration. 

Were living in an environment, where at least from a monetary perspective, the decisions weve made over the last 40 years, were in the process of unwinding a multi-decade period, and theres consequences to that, he said.   

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Yes company, Mascotte Holdings Inc., appears to operate a portfolio of more than 160 trademark applications and registrations for his Yeezy brand, but Adidas owns the rights to the designs of most Yeezy shoes, including the well known Yeezy Boost 350.

How exactly the divide in IP rights will affect the breakup isnt clear, and the answer will turn on the details of the contract Yeformerly known as Kanye Westinked with Adidas in 2016, which isnt public, attorneys say.

The contract may include termination clauses that allow one party to take the IP from the other or a morals clause that allows early termination of the deal, according to trademark attorney Josh Gerben, founder of the Gerben Law Firm PLLC.

Because we dont know whats in the contract between Adidas and Kanye, we dont know how smooth or how ugly the separation will end up being, he said.

Litigation or arbitration over the collapsed partnership may be possible, but branding agreements typically include a detailed dispute resolution mechanism, said attorney David Martinez, partner at Robins Kaplan LLP.

If the contract allows both parties to maintain ownership of their respective IP, Ye would most likely be able to sell Yeezy apparel on his ownsomething he indicated he wanted do in a September interview with Bloomberg News.

Those products would need entirely new designs, said attorney Zak Kurtz who founded the law firm Sneaker & Streetwear Legal Services.

If he really wanted, he could probably sell other clothing or possibly footwear, he said. But when I say other, that will have to be brand new silhouettes and brand new everything that would have his trademarks on it.

Adidas Tuesday announcement ending the yearslong partnership comes after Gap Inc. and Kering SAs Balenciaga separated from the rapper, who has made a string of antisemetic remarks on social media and caused controversy by wearing a White Lives Matter shirt at a Paris fashion show. Gap announced Tuesday that it would pull Yeezy-Gap apparel from its stores.

The German sportswear giant said it would end production of Yeezy-branded products and stop all payments to Ye immediately. Ending the partnership will be costly: Adidas said its expecting a $247 million hit to net income this year due to the breakup, and outside estimates peg the collaboration as responsible for as much as 8% of the companys revenue.

At the very least, Adidas will owe Ye royalties for everything thats been sold since the last royalty payment they made to him, said Heidi Howard Tandy a partner with Berger Singerman in Miami who specializes in intellectual property law. Because of the long tail for shipping and sales, and revenue collection, that process could go into 2023.

IP Split

Adidas said it owns the design rights to existing products and past and future color combinations of the shoes. Filings with the US Patent and Trademark Office show that Adidas obtained a series of design patents for the Yeezy Boost 350 shoe in 2017 and 2018.

The shoes were created by Nic Galway, Adidas vice president of global design, according to the filings.

The partnership between Ye and Adidas appears to be a standard licensing deal that was labeled as a collaboration, according to Kurtz.

That means that Kanye is licensing to Adidas his trademarks and intellectual property, Yeezy and YZY, to put on shoes and apparel, he said. Adidas looks to be the one whos doing the manufacturing and the designing, and thats why theyre the ones on all the design patents.

The Yeezy business earned more than $500 million in total royalty payments and marketing fees through 2020, the first four years of the Adidas deal. Yes pact with Adidas gave him a 15% royalty on wholesale Yeezy products, Forbes reported in 2019, but Ye told Bloomberg News in September that he wanted to renegotiate to a 20% lifetime agreement.

Filings with the PTO show that his company, Mascotte, has registered or applied to register 164 trademarks related to the Yeezy brand, including Yeezy, Donda, and Yeezus.

The trademarks cover products in a variety of industries from shoes, sportswear, food, and beverages, to cosmetics and products in the metaverse. The Gerben Law Firm, based in Washington, D.C., compiled the filings.

Unlike the other Yeezy footwear, Ye did obtain a design patent for the Yeezy Slide in 2020. In a since deleted Instagram post from June, Ye accused Adidas of creating knockoff Yeezy Slides.

Brand Value

The fallout may also serve as a warning for companies to complete their due diligence when jumping into co-branding deals, which have risen in popularity in the past few years, said trademark attorney Kazuyo Morita, who is a partner at Holland & Hart LLP.

Celebrity co-branding can often provide increased sales, consumer hype, and can distribute economic risk, she said. And really, the more controversial the figure, the bigger the splashand maybe the bigger the payoffbut theres also this exact type of risk.

In theory, Adidas could continue selling shoes that look identical to Yeezy shoes as long as they dont use the trademarks owned by Ye. But Gerben said the controversy around the partnership has already diminished the value of Adidas designs.

If Adidas is going to move forward with any use of a product that resembles something they did with Kanye, I dont think thats going to go over well, he said.

It is essentially just a complete loss for them.