Google’s dominance in the global internet search market has been unparalleled, with the company controlling over 90% of the market share. This position has allowed Google to generate enormous revenue from advertising, reaching an astonishing $238 billion in 2023 alone. However, concerns have arisen in the market regarding potential disruption from emerging competition fueled by artificial intelligence (AI).
Despite these concerns, Google still maintains a significant share of the global advertising market, estimated at 39%. Alphabet, Google’s parent company, holds the fifth position among U.S.-listed companies by market capitalization, standing at $1.7 trillion, trailing only behind Microsoft, Apple, Nvidia, and Amazon.com.
Investors who have held Google shares for the long term have seen substantial returns. For instance, an investment of $1,000 in Google shares during its initial public offering in August 2004 would be worth over $55,000 today.
However, cracks are beginning to appear in the Alphabet story. Despite its strong position, Alphabet’s stock has remained flat this year, lagging behind the 8% gain of the Nasdaq Composite and the 42% increase of digital-advertising rival Meta Platforms. Alphabet’s valuation reflects its status as a market leader but also highlights concerns about the vulnerability of Google’s search business, particularly in the face of advancements in AI technology, ironically an area where Google itself is a major player.
The rise of generative AI chatbots like OpenAI’s ChatGPT, Anthropic’s Claude, and Google’s Gemini (formerly Bard) over the past 15 months has introduced new avenues for consumers to access information. While it’s unlikely that these chatbots will directly supplant Google in the same way Google displaced Alta Vista, Excite, and AskJeeves, Google’s dominance in search now faces greater uncertainty, giving rise to three significant challenges for the company:
- Increased competition: The emergence of generative AI chatbots has provided users with alternative options for accessing information. Although Google remains the dominant player in search, competitors like Microsoft’s Bing, which announced plans to integrate OpenAI’s GPT software, have garnered attention. Despite Bing’s relatively small market share of 3%, the threat prompted Google to respond by introducing its own chatbot, Gemini, and integrating generative AI features into its standard search engine.
- Threat to search dominance: The introduction of alternative search methods challenges Google’s longstanding dominance in the search market. While Google has adapted by incorporating AI technology into its offerings, the emergence of new competitors poses a potential threat to its market share and influence.
- Regulatory scrutiny: In addition to competitive pressures, Google faces ongoing regulatory scrutiny regarding its market dominance. Government authorities, including Uncle Sam, have raised concerns about Google’s status as a potential monopolist, adding to the company’s challenges and uncertainties in the search landscape.
Google now finds itself in a perpetual game of chatbot Whac-A-Mole, as emerging AI-powered search engines threaten its dominance. One such contender is Perplexity, funded by tech heavyweights like Nvidia and Jeff Bezos, which offers a natural language search experience for a monthly fee. While chatbots like ChatGPT and Claude have limitations, such as the lack of real-time data, Google’s own Gemini is evolving to incorporate current news and sports information, posing a tangible threat to Google’s query share.
Moreover, Google faces internal challenges as it navigates the shift towards AI-powered search. As users increasingly turn to Gemini, Google must explore new revenue streams to offset potential losses in search ad revenue. Monetizing chatbots through transactional capabilities or subscription models presents both opportunities and risks for the company, especially considering the higher costs associated with AI chatbot queries compared to conventional searches.
Despite these concerns, Wall Street analysts maintain largely positive outlooks on Alphabet stock, with the majority maintaining Buy ratings. However, skepticism is growing among some analysts, reflecting uncertainty about Google’s ability to adapt to changing dynamics in the search landscape. Melius Research analyst Ben Reitzes, for instance, highlights the non-recurring nature of search revenue, emphasizing the importance of Google’s brand reputation and search quality.