Google and Meta (formerly Facebook) have dominated the internet landscape for two decades, turning the attention of billions of users into trillions of dollars in advertising revenue. However, as the ChatGPT era changes how consumers interact online, the trajectories of these tech giants are diverging. Investments in artificial intelligence (AI) are significantly affecting their advertising businesses, favoring Meta and creating challenges for Google.
In the third quarter, Meta’s advertising business grew more than twice as fast as Google’s Search unit and other services. This supports Mark Zuckerberg’s claim that his company’s investments in AI are leading to better targeting tools for brands, enabling them to promote goods and services on Facebook and Instagram. After Apple’s iOS privacy changes in 2021, which significantly limited Meta’s ability to target users on iPhone, AI gave new life to its advertising business. The company, which initially struggled to find a sustainable AI strategy, has successfully integrated AI into its advertising products, offering brands advanced tools to reach user efficiently. Meta’s chief financial officer, Susan Li, emphasized that advertisers who adopted the recommendations of the AI system saw almost 5% more conversions and increased their advertising spending by 9%.
Google’s problem is that chatbots are becoming an alternative to traditional search, causing consumers to click much less on the blue links and, consequently, damaging Google’s advertising revenue. Anthropic’s Claude chatbot and the Muse assistant recently launched by Meta are adding to the range of options. Meanwhile, users are spending more time scrolling on Instagram, giving Meta more advertising opportunities. Nate Elliott, an AI analyst at Emarketer, emphasized that AI is revolutionizing discovery, leading people to find tools they may like more than Google. If ChatGPT, Claude or Muse are better at helping people find what they are looking for, search habits could change for the first time in a generation, which is potentially catastrophic for Google’s advertising business.
Meta’s advertising revenue rose 26% in the quarter compared with a year earlier, reaching $63.1 billion, while Google’s search division posted a 12% increase, bringing in $63.4 billion. This 14-point growth gap is the largest in Meta’s favor since 2021, leaving the two businesses nearly equal in size, although Google received an additional $11 billion in the third quarter from YouTube. After a disappointing third-quarter earnings report, Alphabet had its worst day ever on the stock exchange, falling more than 12% and wiping out about $500 billion in market value. Meta is also not exactly a Wall Street favorite at the moment, as its shares fell 14% in October, its worst month since October 2022, after a 27% rise in September.
Investor reactions reflected market concerns about the companies’ AI buildouts, which have pushed both businesses into negative free cash flow territory. Questions about whether their historic levels of spending on AI infrastructure will produce sufficient revenue are numerous. Meanwhile, both Meta and Google are aggressively trying to diversify their revenue sources. Meta, which still relies on advertising for nearly all of its revenue (98% of sales), is pouring money into AI models and agents with the aim of building a subscription business. Google already has a large and rapidly expanding cloud computing division, which just reported over 100% growth to $31 billion in quarterly revenue, driven by demand for its infrastructure and its custom AI chips called “tensor processing units” (TPUs).
Online advertising and the high margins that come with it catapulted both companies into leadership positions. However, UBS analysts write that Google’s AI Overviews will bring the fear of search cannibalization to the forefront, compounded by the strength of Meta’s advertising and the ongoing threat of Muse/agents. Wedbush analysts note that Google’s shares are unlikely to perform well until the search narrative changes. This will require new advertising products and evidence that Google can monetize in the developing AI era, as it did in the past. Both companies are so optimistic about AI’s potential that they are pumping hundreds of billions of dollars into the infrastructure needed to build new models and services, investing in a future that may look very different.
Taken from CNBC