Is Google Search Really Losing Its Grip? [Weekend Money]

Search advertising growth slows from 17% to 12%
Search volume is up, but ad prices are not keeping pace
Cloud provides support, but... all eyes are on a search rebound

There was a time when, if you had a question, you would type a keyword into a search box and sift through webpages such as news articles and blogs. These days, more people are asking AI chatbots directly and getting organized answers. The shift in search habits is shaking up how Google, the king of this market, makes money.

Alphabet, Google's parent company, reported its third-quarter results for July through September on October 28 (local time). Operating profit came in about 6% below the market consensus, and its stock plunged roughly 10% in after-hours trading. A major factor was that growth in search advertising, which accounts for half of revenue, slowed from 17% in the second quarter to 12%.

Search volume is up, but ad prices are not keeping pace... Growth slows from 17% to 12%

The fact that some users have turned to chatbots does not mean Google searches themselves have declined. Google has also added AI Mode, a search feature that provides answers through chatbot-style conversations, to its search box, and users are asking longer, more specific questions there. Alphabet executives said search volume growth this quarter was the highest in the past five years, and that more than half of searches in AI Mode represented new demand rather than a replacement for existing searches.

Search advertising revenue is driven by "the number of searches x the price per ad." The number of searches has increased, but searches in AI Mode generate less revenue per search than traditional searches. Search advertising revenue was $63.4 billion this quarter, 2.5% below market expectations.

In a recently published report, Park Jemin, a researcher at SK Securities, identified "intensifying competition" as the key reason for the slowdown. His explanation was that while searches had increased, the amount earned per search had fallen. He also noted the contrast with Meta, the operator of Facebook and Instagram, which raised ad prices by 14% year over year in the same quarter.

Revenue growth rates by major segment at Alphabet. Alphabet, Mirae Asset Securities Research Center

With competitors such as ChatGPT and Meta's AI model Muse in the market, Park said, "It is likely to be difficult to price aggressively for the time being, or even over the medium to long term." In other words, even if Google starts making money from AI Mode, it may not be able to raise prices as it pleases. However, he noted that prices per click also declined during previous transitions, such as the shift to mobile and video, and said Google was likely to weather this transition too, given the strength of its brand and its data advantage.

Kang Jaegu, a researcher at Hana Securities, said, "It is too early to interpret weakness in search advertising as a decline in the competitiveness of Google's existing business." He explained that revenue per search was low because the range of searches carrying ads was still limited, but revenue could grow as that range expands. Since September 2026, Alphabet has been automatically switching some search advertising campaigns to AI Max. The system uses AI to find relevant search terms beyond the keywords selected by advertisers and display ads for them.

Cloud is a pillar of support, but investor concerns are likely to persist until search rebounds

Cloud supported Alphabet's results despite weakness in search. Google Cloud revenue was $30.7 billion in the third quarter, up 102.6% from a year earlier and 6.7% above market expectations. According to SK Securities, the increase in cloud revenue was about $15 billion, far exceeding the roughly $9 billion increase in Google Services.

However, Park said Google also needs growth in its core search business to be regarded as a "full-stack" company spanning everything from AI chips to services. Alphabet's announcement that it expects capital expenditures (Capex, spending on data centers and servers) to reach as much as $205 billion in 2026 and increase substantially again in 2027 is also a concern. Park noted, "Current levels of capital expenditure make it difficult for investors to wait through a prolonged slowdown, as they have in the past."

This content was produced with the assistance of AI translation services.