Alphabet faces a major challenge: the company must make its substantial investments in artificial intelligence profitable without putting revenue from its traditional search engine under pressure. Although Google reported the fastest growth in searches in five years, that increase is not translating into equally strong growth in advertising revenue.
In the third quarter, Google Search revenue rose by 12% to $63.3 billion (approximately €56.3 billion). Growth had stood at 17% in the previous quarter. Growth in paid advertising clicks also slowed, from 13% to 8%. Investors reacted negatively to the results. Alphabet shares fell by 12.6% on 29 October, their steepest one-day decline in more than 20 years. At the same time, the company is sticking to its planned capital expenditure of $195 billion to $205 billion (€173.4 billion to €182 billion) for 2026.
According to Philipp Schindler, Google’s chief business officer, several factors explain the slower growth in search revenue. Exchange rate fluctuations played the biggest role. Changes in advertising spending in certain sectors also weighed on the results. In addition, the rapid growth of AI Mode had an impact, as these searches currently generate less advertising revenue than traditional searches.
Google does, however, see opportunities to narrow that gap. The company describes its initial advertising experiments as promising and is gradually expanding advertising in AI Overviews and AI Mode. Nevertheless, the question remains how much revenue these new search experiences can ultimately generate. Google does not currently publish separate figures on the performance of advertising in AI Mode.
The type of search query is one factor determining how many adverts Google can display. Someone searching specifically for trainers, for example, is often already ready to compare different products and prices. Such searches offer advertisers clear commercial opportunities.
AI Mode also attracts users who are still at an early stage of their research. They ask more detailed questions and seek information before making a purchasing decision. Google calls these searches ‘upper-funnel’ traffic. According to the company, its AI features generate additional searches, creating new opportunities to display adverts over time.
To capitalise on these opportunities, Google is integrating adverts into AI Overviews and AI Mode. The company is rolling out these formats to more users and international markets. It is also exploring new advertising formats within the Gemini app.
The challenge of monetising conversations
The industry is still looking for ways to incorporate advertising into conversational AI without disrupting the user experience. A study of almost 1,900 websites indicated that visitors who reach online shops through ChatGPT adverts generate less revenue than visitors arriving through Google search adverts. In the US data examined, revenue per visit was approximately $0.89 (around €0.79) through ChatGPT, compared with $2.45 (approximately €2.18) through Google.
These figures do, however, need to be put into context. Users of AI platforms may more often be at the research stage and may not yet have made a firm purchasing decision. Their purchase intent is therefore not necessarily comparable to that of people searching specifically for a product through Google.
For advertisers, Google’s overall results remain strong for now. The company reported that its AI-powered advertising technology improves campaign performance. However, the lack of separate figures for AI advertising makes it difficult to assess how much additional revenue these features generate.
Meanwhile, investment in AI infrastructure continues to rise. Alphabet expects to spend between $195 billion and $205 billion (approximately €174 billion to €183 billion) in 2026 on servers, data centres and networking equipment, among other things. These investments put pressure on free cash flow and will also lead to higher depreciation charges and operating costs over time. Capital expenditure in the third quarter alone amounted to $51.4 billion (approximately €45.7 billion).
Google has already demonstrated in the past that it can adapt its business model, for example during the transition to mobile search. However, the current shift presents the company with a new challenge. Alphabet must demonstrate that AI not only generates more searches but also delivers sufficient advertising revenue. So far, no company has found a proven business model for conversational AI.
Business AM
Ltd
