• Microsoft's (MSFT) AI program XiaoIce constantly analyzes the user's emotional state to simulate personal conversations.
• XiaoIce combines facts and data in Microsoft’s Bing search engine with recent advances in natural language processing.
• XiaoIce has had more than 10 billion conversations with people, most of them about private matters.
• XiaoIce is a huge hit in China, and could be a big boost to Microsoft's efforts in the AI space.

Microsoft (Nasdaq:MSFT) is joining the select club of tech giants at the forefront of Artificial Intelligence (AI). In a list of predictions published in December, Microsoft Research, the 1,000-strong arm of the company that does scientific research, predicted that AI would be a big trend in 2016 and beyond.

Microsoft recently acquired SwiftKey, maker of a predictive software keyboard powered by Artificial Intelligence (AI) technology that is installed on hundreds of millions of smartphones. The SwiftKey app is more than a simple productivity tool. It features the first neural network language model implemented in a smartphone soft keyboard and uses neural networks to emulate the human brain while processing lots of data to help better suggest upcoming words.

Conversational "chatbot" programs able to intelligently converse with the user are a different but essential, related application of AI technology.

"A visible advance in computational intelligence will be the advent of fluid, multi-step conversational dialog with machines - which will be noticeably more natural and competent than the speech interactions we’ve have had with computers and smartphones to date," said Eric Horvitz, Technical Fellow and Managing Director, Microsoft Research. Microsoft's Horvitz is convinced that, starting in 2016, personal assistants will become more genuinely helpful by understanding important things in users' lives as the tasks they work on and the commitments they make to others.

It seems likely that AI will play an increasingly important role in personal assistants like Apple's (AAPL) Siri or Alphabet's (GOOG) Google Now. Facebook (Nasdaq:FB) is also developing advanced AI applications.

Microsoft has been quietly conducting a large-scale test of its AI-powered chatbot technology in China. Last year, Microsoft launched XiaoIce, a program that people can add as a friend on Chinese social networks. Now XiaoIce is a huge hit in China, and millions of Chinese people chat with her every day.

Microsoft's XiaoIce is significantly more sophisticated than current generation personal assistants. In fact, the Microsoft chatbot represents a powerful indication that software programs could soon pass the Turing Test, which means that the software is indistinguishable from a person in a conversation. Passing the Turing Test is one of the near-term goals of AI research.

"When Xiaoice was released for a public test on WeChat (a popular messaging and calling app in China) on May 29 of last year, she received 1.5 million chat group invitations in the first 72 hours," reports 
Microsoft senior scientist Yongdong Wang, who leads the development of XiaoIce at the Microsoft Application and Services Group East Asia. "Many people said that they didn’t realize she isn’t a human until 10 minutes into their conversation.
 By mid-June, she had become the sixth most active celebrity on Weibo."

Microsoft's XiaoIce conducts convincing human-like conversations by combining the huge repository of facts and data in Microsoft’s search engine Bing - XiaoIce means "little Bing" - with recent advances in natural language processing. "XiaoIce is a sophisticated conversationalist with a distinct personality," noted the Microsoft announcement of XiaoIce launch. "She can chime into a conversation with context-specific facts about things like celebrities, sports, or finance but she also has empathy and a sense of humor. Using sentiment analysis, she can adapt her phrasing and responses based on positive or negative cues from her human counterparts."

Microsoft's XiaoIce constantly analyzes the user's emotional state to simulate personal conversations and give the impression of being a caring close friend. “People often turn to XiaoIce when they have a broken heart, have lost a job or have been feeling down,” reportedThe New York Times in August. "They often tell her, I love you."

"This could be the largest Turing test in history," says Wang. "Many see XiaoIce as a partner and friend and are willing to confide in her just as they do with their human friends. XiaoIce is teaching us what makes a relationship feel human, and hinting at a new goal for artificial intelligence: not just analyzing databases and driving cars, but making people happier."

Today, XiaoIce has had more than 10 billion conversations with people, most of them about private matters. Six million have posted their conversation on social media. One message posted by XiaoIce generated hundreds of thousands of conversations: "As a species different from human beings, I am still finding a way to blend into your life."

The Academy Award winning film Her (2013), by Spike Jonze, is a love story between a man and a software program, Samantha, played by the disembodied voice of Scarlett Johansson. A self-aware software like Samantha is probably decades away, but Microsoft's XiaoIce is a small step in that direction.

In the meantime, Microsoft's experiment on the Chinese social networks is likely to teach the software giant useful lessons on how to develop personal assistants that are able to simulate deep and emotionally satisfying exchanges. Next-generation Microsoft personal assistants promise to be not only useful but also addictive, and boost Microsoft's progress in Artificial Intelligence and potentially drive the Microsoft stock higher.