Could artificial intelligence pose a risk or present a chance for Google? Investors at Alphabet, the parent company of the massive internet search engine, are faced with a difficult decision. A close and profitable partnership with Apple poses a greater financial risk than the current question of whether or not AI-based chatbots will help customers find better information more quickly.
Since its founding in 1999, the $1.9 trillion business led by Sundar Pichai has nearly completely controlled the online search market, penalizing rivals like Microsoft's Bing in the process. Its defenses appeared unbreakable until recently. According to data aggregator Similarweb, Google held a 99% market share in global searches in 2021.
Yet when Microsoft and startups like OpenAI release rival artificial intelligence technologies, small cracks are starting to appear. Google's share of the market dropped by three percentage points from early 2022 to late 2023. Despite its modest size, the decline is significant, particularly considering how soon it occurred following years of resolute control over the sector. It means that users of the internet are willing to try out different options.
Google's search engine is, in some ways, a victim of its own success. It is now standard procedure for users to scroll over sponsored links in order to reach the top results when they type a query. Furthermore, given how much money businesses spend these days to guarantee that their pages appear in Google's algorithm, even those results might be less helpful. This business model has made room for AI opponents, who often don't offer pages of URLs but rather a single, concise response to a query.
Another significant advantage for Google in keeping out potential competitors is its incumbency. Newcomers must overcome deeply embedded patterns in which the term "Googling" has come to mean doing an online search. What's more, Google has access to data, which is a crucial resource for developing the large-language models that are the foundation of artificial intelligence systems. According to analysts from Barclays, Alphabet has vast pockets as well. It has already invested nearly twice as much as Facebook parent Meta Platforms, or $280 billion, in data centers and corresponding artificial intelligence projects. Furthermore, analysts predict that as AI encourages people to use their smartphones, PCs, and other devices an average of 170 times each day, up from the current 120 times, the entire internet pie will continue to rise.
Another thing working to Google's advantage is the unclear economics of AI-powered searches. Users can use its search engine for free, but marketers must pay to access them. When it comes to AI-based chatbots, which combine facts to answer questions, the same method is less effective. Expenses represent another problem. John Hennessy, the chairman of Alphabet, said last year that an exchange with an AI chatbot may cost ten times more than a typical keyword search.
Some new products, like Perplexity AI, charge users in exchange for more customized outcomes. However, the number of people who will pay for it is limited. Google itself is an example.
Google One, the company's cloud storage service, now has a premium edition with a number of fee-based plan options. Pichai stated earlier in the year that there are roughly 100 million users of the program. Based on the assumption that around 20% of the current package subscribers switch to the $20 monthly Gemini AI version, Stifel analysts estimate Alphabet would only gain $480 million in new revenue. Estimates obtained on LSEG indicate that the total amounts to approximately 0.1% of the company's projected top line for this year.
Moreover, not all of Google's forays into AI have been successful thus far. Its image-generation technology caused a lot of people to laugh in February when it began to spit out false images of historical figures. The business postponed the initiative.
With $2.6 trillion in income from iPhone users, Alphabet's largest threat could still be the $2.6 trillion Apple. According to Barclays analysts, Apple's smartphones will generate approximately $118 billion, or 60% of the company's search income, in 2024, even though they only account for a very small portion of queries. Both those who consciously select Google and those who access it through Apple's Safari — which by default utilizes Google — are included in their computation. Nearly 40% of the money that Alphabet makes from these recommendations is sent back to Apple, per witness testimony given during an antitrust trial last year.
This extremely lucrative agreement carries risks. Persistent trustbusters in the US or Europe might be able to get Apple to allow competitors to use its search queries. Even if Alphabet might still be able to attract some of those customers on its own, the fact that a deal has been made wherein a significant portion of the economics are given up suggests the firm values the relationship highly. Using an enhanced Siri chatbot, Apple may potentially begin referring iPhone users to its own AI-powered search engine. The company's music service is proof of its influence over users: Despite rival Spotify Technology's singular focus on audio services, Midia Research reports that it has approximately one-third of the world's streaming music subscribers.
The two titans of technology are strengthening their alliance even as these challenges grow. For instance, Bloomberg revealed last month that Apple and Google are in discussions to integrate Google's Gemini AI engine into the iPhone. The answer to the topic of Google's future in the era of artificial intelligence is concerning since, despite these signs of collaboration, there are more reasons for them to be at war with one another.