Microsoft (MSFT  ) is spinning out its popular, AI-based Chinese chatbot into an independent company. Xioabing's new CEO will be Di Li, who was previously the general manager of the group.

Microsoft will hold an equity stake in the project but believes an independent company would be able to "accelerate the pace of local innovation of the Xiaobing product line and promote the improvement of the Xiaobing commercial ecological environment." Xiaobing will also continue to focus efforts on building new chatbots for markets in Asia.

The newly formed company will license technology from Microsoft for research and development. The move also follows Microsoft shutting down its voice assistant, Cortana, in many countries including China, and its general shift away to focusing on business customers rather than consumers.

Xiaobing initially started as a small project by a group of Bing researchers to demonstrate Microsoft's AI development and add a more human and social element to chatbots. It turned into an unexpected phenom in China with many claiming it as their virtual girlfriend.

Surprise Hit

Xiaobing was a surprise hit, especially considering that Microsoft has had more misses than hits when it comes to building consumer products. Microsoft released chatbots for many different countries, but it ended up gaining the most traction in China since its 2014 debut.

The chatbot has the personality of a teenage girl, and it was developed using search data from Microsoft's Bing, search engine. It's been integrated into several Chinese chat services like Weibo (WB  ) and WeChat. Xiaobing has more than 660 million users, has been used to power third-party smart devices, and engaged with 900 million content viewers.

The chatbot has been applied in many different areas including finance, retail, autos, fashion, and real estate. It can engage with users and help companies gain insight into users' emotions from their tone and text.

Controversy

The move to separate the unit from Microsoft makes sense, as it has a huge amount of commercial potential given the wide array of its applications. However, it had failed to catch on in most markets which limited its upside. Additionally, given Microsoft's size, it wasn't going to be big enough to make a meaningful difference to its business.

There's also the political considerations of doing business in China which is easier for a Chinese-based company. There would always be more scrutiny of a U.S.-based company's chat app interacting with Chinese users. Xiaobing has already run into controversy and was temporarily banned by Tencent over suspicions of politically sensitive speech.