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Google is spending record sums on artificial intelligence as the much-hyped technology begins undermining its lucrative advertising business and Donald Trump’s trade war threatens to turn away clients.
Parent company Alphabet’s capital expenditure soared to $US17.7bn ($27.69bn) in the three months to March 31, with its earnings power largely holding up – for now. It delivered operating income of $US30.6bn, beating analyst estimates of $US28.7bn, but didn’t provide financial guidance.
In the same period its shares have dived more than 18 per cent.
AI is fast changing the way people extract information from the internet, including how they use Google, and in turn, how Google makes money from advertisers.
Google has countered this by using its AI model Gemini to generate summaries at the top of searches. While this is helpful, providing references to other websites, it pushes sponsored links further down the web page as well as other links.
Kipp Bodnar, search engine optimisation expert and chief marketing officer at advertising software company Hubspot, said Google was “running lots of experiments”.
“But clearly, they haven’t rolled out a brand new search advertising model and probably still haven’t found the right formula yet,” Mr Bodnar said.
“Quite frankly, Microsoft, with Bing, hasn’t yet either. Literally anybody that has a traditional search business, whether it be YouTube or anything else, has this kind of innovators dilemma: what’s the new business model here? Do I disrupt this really high margin existing advertising model to test something new? And how do I do that?”
It’s not just AI-generated summaries that is up-ending traditional search advertising models. Mr Bodnar said people were not only expecting answers but also actions.
“Google search was very good in a world of answers, like, ‘hey, I just want to go and find the answer to this thing’. But now people want to not just get the answer, but be able to do something with it, you know, whether that’s instantly book a trip … or I want you to write this email that I need to send to my doctor.
“Google has combated that a lot with their AI overviews, doing AI summaries of given topics and everything. I think that’s a very good user experience. What this means for businesses is they’re starting to see less search traffic from Google because if they’re giving you the answer that you need right in that window, why do you need to go to the website, read an article or a product page?
“And so I think that’s what we’re in the midst of seeing happen right now, and it’s a pretty, seismic shift in how people kind of research and discover companies.”
Complicating things is the shift comes at a time of global economic turbulence from Donald Trump’s trade war. While Google isn’t directly affected by the new tariffs, most of its advertisers are, and UBS analysts wrote in a report earlier last month that “budget commitments particularly for advertising will remain frozen”.
Others are happy to continue to spend, just not on Google.
AirTasker spent $51m on media partnerships in the past year, its founder and chief executive Tim Fung has criticised Google and Facebook owner Meta’s dominance of online advertising, saying it was “taxing” businesses who were looking to promote their wares.
What’s more, he said AI was muddying the return on investment for those who continue to use Google and Meta, given they own the analytics businesses used to measure engagement, which Mr Fung described as “marking your own homework”.
“As AI has come to the fore, there’s so much pressure on a lot of these digital performance marketing channels like Google. Google used to be the go-to place to advertise but now that game has completely changed,” Mr Fung said.
“Brands are looking more and more towards being able to tell their own story, rather than relying on Google.”
That’s why Mr Fung and tech companies, including Atlassian, Kick and Rokt, have sponsored Formula One teams.
F1 has surged in popularity in the US. Last year’s Miami Grand Prix attracting 3.1 million viewers – the highest ever for an American F1 race. But many more have watched Netflix documentary series Drive to Survive – which features in the top 10 watched programs in 39 countries and has been credited for the sport’s resurgence.
“F1 is so exciting,” Mr Fung said. “It’s a way to build your own brand and talk to consumers directly, rather than having to pay Google and Meta a tax every time you know you want to talk to people.”
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