By Aditya Soni and Stephen Nellis

April 29 (Reuters) - Microsoft's ( MSFT ) modest increase in quarterly cloud revenue growth on Wednesday failed to impress investors worried about rising competition in the artificial intelligence race, and its shares fell more than 2% in extended trading.

Revenue at the company's Azure cloud-computing unit jumped 40% in the period, slightly faster than the 39% growth in the previous three months. That was in line with a consensus estimate of 40%. 

Smaller rival Google Cloud posted a 63% rise in revenue that blew past estimates for 50.1% growth. Alphabet shares surged more than 4%.

"With Google blowing past revenue and earnings expectations, and big questions around Microsoft's ( MSFT ) spending on AI infrastructure, the market wanted to be wowed to be reassured, and the numbers didn't deliver," said Rebecca Wettemann, CEO of Valoir, an industry analyst firm.

For Microsoft ( MSFT ), "It's not a blow-away quarter, which is probably what they needed to get the stock moving in the right direction and to be a catalyst," said Melissa ‌Otto, head of research at S&P Global Visible Alpha.

Microsoft's ( MSFT ) sluggish adoption of its Copilot 365 assistant for businesses and a heavy reliance on OpenAI have raised fears that it may have lost its early lead in the AI race.

Users of M365 Copilot, the company's $30 per month AI assistant, rose to 20 million from 15 million disclosed in January, said Jonathan Neilson, Microsoft's ( MSFT ) vice president of investor relations.

"The fact that we added 5 million seats in one quarter is certainly a message that we feel very, very good about," Neilson said.

Microsoft ( MSFT ) also said it has an AI run rate of $37 billion, measuring how much revenue it expects to come from selling infrastructure to third parties such as OpenAI, plus sales of its own AI offerings over the next year.

Microsoft ( MSFT ) said capital expenditures in the fiscal third quarter rose 49% from a year earlier to $31.9 billion, but were down from $37.5 billion in the second quarter. Wall Street had expected $34.90 billion in quarterly capital spending, according to Visible Alpha.

The amount Microsoft ( MSFT ) spent on finance leases - which are often on large data center sites - declined to $4.7 billion in the fiscal third quarter from $6.7 in the previous quarter.

Neilson told Reuters that figure did not reflect a slowdown in AI demand but rather the specific calendar dates when particular leases commence, which is when Microsoft recognizes their full cost in its financial reporting.

To sharpen its competitive edge, Microsoft ( MSFT ) has aggressively added Anthropic's technology to its cloud service and products like Copilot amid rising demand for the Claude creator's models.

Earlier this week, Microsoft ( MSFT ) also overhauled its OpenAI deal to lock in its 20% cut of the startup's revenue through 2030 regardless of whether it achieves technological breakthroughs.

But the new arrangement also strips Microsoft ( MSFT ) of exclusive rights to resell OpenAI's products on its cloud, just as competition heats up from Alphabet and Amazon. 

The e-commerce giant has already started offering OpenAI's latest models and Codex coding tool on its cloud.

The move could free up cloud capacity for Microsoft ( MSFT ), which has blamed shortages for holding back revenue growth and used that to argue for its massive spending.

Funding those outlays has, however, forced companies to look for ways to cut costs. Microsoft ( MSFT ) earlier this month rolled out its first employee buyout program in more than five decades. 

Amazon ( AMZN ) and Meta have also announced job cuts affecting thousands of employees.