Google hasn’t figured out how to make AI pay like its search engine

Google's AI search is less profitable per query than traditional ads, impacting revenue growth.

Google's parent company, Alphabet, reported a slowdown in search revenue growth to 12% year-over-year in the third quarter, down from 17% in the prior quarter. Paid clicks, a key revenue driver, also saw slower growth, increasing by 8% compared to 13% previously. This deceleration comes as Google invests heavily, around $200 billion this year, in infrastructure primarily to support its AI initiatives. Investors have reacted negatively, with Alphabet shares dropping about 14% after the earnings announcement, signaling concerns about the cost and profitability of its AI ambitions. While currency effects and advertiser spending shifts contributed to the slowdown, Google acknowledged that its AI-driven search modes, which monetize at a lower rate than traditional searches, are also a factor. The company is actively experimenting with ad formats within AI Overviews and AI Mode, but the effectiveness and monetization strategy for AI-generated content remains a challenge, with a working paper suggesting lower revenue from ChatGPT ads compared to Google Search ads.

The core challenge for Google is that AI-driven search, while potentially increasing query volume, generates revenue at a lower rate than traditional search. This means that even with user engagement in AI modes, the monetization per interaction is not yet keeping pace with the massive infrastructure investment. Advertisers are still seeing overall returns, but the inability to isolate AI ad performance and the lower revenue indicated by early studies suggest a fundamental shift is underway in how search advertising will function and be valued.

The market is now grappling with how AI will fundamentally alter the search advertising landscape, a paradigm that has been dominant for decades. Google's historical success in adapting to changes, like the shift to mobile, provides a precedent for future adaptation, but the current AI disruption appears more profound. The company is experimenting with new ad formats and expanding their reach, but the long-term viability and effectiveness of advertising within conversational AI interfaces are still undetermined, leaving both Google and its advertisers in a period of significant uncertainty.