What does Alphabet have to fear from Microsoft?
Alphabet may be in trouble but not why you think
I have been seeing and hearing quite a lot about how Microsoft will be a huge threat to Alphabet’s search business, and while I think there is a lot to worry about, I think much of the discussion greatly misses the point.
Google are not at risk of Microsoft dominating search but at risk of reducing the value of their own search.
With the release of chatGPT by OpenAI, there has been a lot of talk that someone, likely Microsoft with their partnership with OpenAI, will start to take share from Google’s search business. While this is valid, I think it is a bit overblown, mainly because most people that cover the latest in AI research agree that Alphabet’s DeepMind has a clear lead in the space. Now as with everything I say here there will be quite a few caveats, in this case, the main caveat to DeepMind’s lead in the AI space is that as it is an emerging area, a big lead this early can be quickly surpassed by a newcomer. With that said just comparing OpenAI’s GPT model and Google’s unreleased large language models it seems that Google has the lead.
With that said let’s stipulate that Google has a risk of someone usurping their business but the likely outcome is that googles tech will win out and they will keep their dominance. In other words, sure they are at risk but with everything, we currently know Google are the favourites to win. So they have nothing to worry about? Not quite.
Google, and also Microsoft’s Bing, make their ad money by showing a few ad’s at the top of the search results. If these AI interfaces can do what is hoped in the near future, we will simply ask a question and get one well-researched answer, and therefore have no room for ads.
So the risk of this AI war to Google is not just its dominance in search but its profit margins in search. Now while the same is true for Microsofts Bing, it is worth the risk for them, if they can beat google and gain dominance, earning half the money per search but getting 10 times the searches is still a big win. For Google, there is much less room to gain more searches but there is plenty of room to earn less on each search, not just due to showing fewer ads but by spending more resources to provide each answer.
Is there hope for Google search?
There’s always hope, first, like I have assumed above they need to make a better product than Microsoft and keep their search dominance.
Second, despite what I said above about them not having room to grow the number of searches, that is not quite true. While they have no room to grow their market share they can and do regularly grow the number of searches they process. If their new AI chat interface becomes nearly as good as a personal assistant, it is believable that the total number of searches would significantly increase.
Third, they need to monetise their new search features to a comparable level as before, this could be done by providing search results with the chat answer or by charging a fee to use this personal assistant. I would assume it will be the first option, and I hope for the last year while Alphabet has been sitting on its large language models they have been workshopping ways to monetise them.
Fourth, they don’t need to worry as the searches they are losing are worth a lot less than the ones they are keeping. I like most people have been disappointed in the results I get back from Google over the last few years. If you ask a specific question like “when is season 2 of squid game coming out” you will get no ads but a load of articles that seem to be written by bots that take 1000 words to say that they don’t know. But if you search “flights to new york” I get an ad for a flight comparison website that goes straight to a page for a list of the cheapest flights from the city I am in, to New York. which is exactly what I was looking for. With the advent of improved search, I am likely to get a better answer to my first question and the same answer to my second. Google would make the same money off me as before.
Fifth, they could bundle their new AI search to be exclusive to a new Pixel phone, a competent assistant in your pocket could be enough of a must-have app to catapult google to a significant share in the smartphone market to make up for their lost revenue in the search market.
In conclusion
Like most commentators are pointing out Alphabet is in a fight to keep its dominance in search but the point a lot miss is that they could win the fight and still lose half their business if they don’t figure out a way to monetise these new searches. Alphabet is one of my biggest holdings not because I think it is guaranteed to succeed but because I think the market is pricing in a bigger chance of failure than I think there is.