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

Key points

• Google's search revenue growth slowed to 12 percent in Q3 from about 17 percent the prior quarter.
• Alphabet shares fell about 14 percent since earnings as investors question AI spending and returns.
• AI Mode queries grow strongly but monetize at a lower rate than traditional searches, Google says.

Google's search queries are growing at their fastest rate in five years, but the money they bring in is growing more slowly, Alphabet said in its earnings report last week. Search revenue growth fell to 12 percent year over year in the third quarter, down from roughly 17 percent in the previous quarter, and growth in paid clicks slowed from 13 percent to 8 percent.

Alphabet shares have dropped about 14 percent since the report, as investors weigh the cost of the company's AI plans against their returns. Google plans to spend about $200 billion this year on infrastructure, largely to support AI.

What Google says

Chief Business Officer Philipp Schindler said currency effects were the biggest driver of the slowdown, along with changes in spending by advertisers in particular industries. He said AI Mode queries were growing strongly but monetizing at a lower rate than traditional searches, and that Google's "ad experiments have shown promising results." Schindler said most AI Mode queries are additional questions rather than replacements for existing searches, and many are early research before a purchase.

Google is expanding ads in AI Overviews and AI Mode, including internationally and across multiple turns of US AI Mode conversations. It has floated bringing ads to its standalone Gemini app but hasn't announced when.

They absolutely do not have it all figured out. No one has it all figured out.

— Nate Elliott

Advertisers see steady returns

Tinuiti's same-store advertisers raised Google paid search spending 14 percent year over year in the third quarter while holding their return-on-ad-spend targets, said Andy Taylor, the agency's vice president of research. He said advertisers can't isolate how Google's AI ads perform, since Google doesn't let them separately target that inventory or break out its results.

An October working paper found US visits from ChatGPT ads generated 64 percent less revenue for retailers per session than visits from Google Search ads, $0.89 versus $2.45. Taylor cautioned that such comparisons depend on what people are searching for.

Analysts on the challenge

Nate Elliott, an eMarketer principal analyst covering AI and advertising, told The Verge this is the first major disruption to Google's core business in decades. He said finding effective ad formats can take years, and that today's formats may not be the ones that ultimately work.