Google hasn’t figured out how to make AI pay like its search engine
Google's Search revenue growth is slowing despite an increase in AI-driven queries, raising investor concerns about the monetization of its significant AI investments.
Intelligence analysis by Gemini 2.5 Flash
Alphabet's recent earnings report revealed a slowdown in Google Search revenue and paid clicks, even as AI-powered searches surge. This discrepancy highlights a challenge for Google: effectively translating its substantial AI investments into profitable business models, leading to investor skepticism and a notable drop in Alphabet shares.
Imagine Google is like a giant library where people ask questions. Now, Google has a super-smart robot helper that gives really good answers, so more people are asking questions than ever before! But here's the tricky part: when people use the robot helper, they don't click on the little ads as much as they used to with the old library system. So, even though more people are using Google, it's not making as much money from those ads, and that's making some of the grown-ups who own parts of Google a bit worried.
Analysis
Alphabet's recent third-quarter earnings report has cast a shadow over Google's ambitious AI endeavors, despite claims of increased search activity. The company reported that search queries are growing at their fastest rate in five years, a trend largely attributed to the integration of AI. However, this surge in user engagement has not translated into accelerated revenue growth for its core Search business, which saw its year-over-year growth slow to 12 percent, down from 17 percent in the previous quarter. This deceleration, coupled with a drop in paid clicks from 13 percent to 8 percent, has prompted a significant investor reaction, with Alphabet shares falling approximately 14 percent since the earnings announcement. The market is clearly questioning the return on investment for the estimated $200 billion Google plans to spend this year on infrastructure, primarily to support its AI initiatives.
Philipp Schindler
Google Chief Business Officer Philipp Schindler offered several explanations for the revenue growth slowdown, citing currency effects and shifts in advertiser spending across particular industries as primary drivers. Crucially, Schindler also acknowledged that Google's AI makeover contributed to the deceleration, noting that AI Mode queries, while growing strongly, are monetizing at a lower rate compared to traditional searches. Despite this, Schindler expressed confidence in Google's trajectory, stating that the company's "ad experiments have shown promising results." This suggests Google is actively working to integrate advertising more effectively into its AI-powered search experiences, including expanding ads in AI Overviews and AI Mode internationally and across multi-turn conversations in the US. The company is also exploring bringing ads to its standalone Gemini app, indicating a broader strategy to monetize its AI offerings.
Tinuiti
Digital advertising agency Tinuiti provides an interesting perspective on the current state of Google's advertising business amidst its AI transformation. Andy Taylor, Tinuiti's vice president of research, noted that their same-store advertisers increased their Google paid search spending by 14 percent year-over-year in the third quarter, while successfully maintaining their return-on-ad-spend targets. This suggests that, for now, advertisers are still seeing value from Google's platform. However, a significant caveat is that Google does not allow advertisers to separately target or break out the performance of AI ads, making it difficult to ascertain their specific impact. Taylor suspects that AI ad traffic is currently too small to noticeably affect overall results. This lack of transparency leaves a critical question unanswered: how much new revenue will AI add, and how much might it cannibalize from more effectively monetized traditional searches? The promise of conversational advertising lies in richer user data, but platforms like Google and OpenAI are still grappling with how to effectively match these deeper insights with relevant ads without alienating users.
Key points
- Google's Search revenue growth slowed to 12 percent year-over-year in Q3, down from 17 percent in the previous quarter.
- Paid clicks, which generate revenue, also slowed from 13 percent to 8 percent growth.
- Alphabet shares fell about 14 percent after the earnings report, reflecting investor concerns over AI costs and returns.
- AI Mode queries are growing strongly but monetizing at a lower rate than traditional searches, according to Google's Chief Business Officer Philipp Schindler.
- Advertisers are still seeing good returns on Google paid search spending, but cannot isolate the performance of AI-specific ads.
Google believes AI is expanding its business by generating incremental, 'upper-funnel' queries, which could lead to more ad opportunities over time. The company's ongoing ad experiments in AI Overviews and AI Mode, along with plans for the Gemini app, suggest a path to improved monetization as these formats mature and become more effective.
The current slowdown in Google's Search revenue growth and paid clicks, despite increased AI queries, indicates a fundamental challenge in monetizing AI-powered search. There's a risk that AI Mode could draw users away from more effectively monetized traditional searches, leading to a net loss in revenue if the new ad formats don't perform as well.
Market signals
- GOOGL Alphabet shares fell about 14 percent since reporting earnings, as investors questioned the costs and returns of the company’s AI ambitions.
AI-generated analysis of potential market relevance. Not financial advice.
