Google admits AI search makes less money, but it's fixing that with more ads

Alphabet's third quarter brought in almost $128 billion in revenue, up 25% from last year, and more than $26 billion in net income. But net income was nearly $9 billion lower than a year earlier, earnings per share came in at $2.12 against expectations of $3.02, and the stock fell almost 12% by the time Ars Technica published.

The headline admission came from Chief Business Officer Philipp Schindler: each AI Mode query earns less than a comparable web search, with fewer ads that cost less. Search volume growth slowed to 12%, down from 17% in Q2 and 19% in Q1, and search revenue was flat.

We have spent months watching publishers and sites like Reddit lose traffic to AI answers. Now the company leading the shift is feeling it too. That is a meaningful moment. AI search is better for a lot of questions, and people are choosing it. It is just not yet a better business.

Google's answer is more ads in AI Mode, expanding internationally, plus multi-turn ads in the U.S. that change as a conversation goes on. Google says its research shows users find these ads more relevant. Maybe. But I'm watching this closely, because an ad that updates with each turn of a conversation is a different thing from a sponsored link at the top of a page. The more the answer and the ad blend together, the harder it is for users to tell advice from a pitch. That is where trust in AI search could erode if this scales.

Then there is the spending. Capital expenditures hit $51.4 billion in the quarter, full-year 2026 guidance stays at $195 billion to $205 billion, and Google is targeting more than $300 billion of AI investment in 2027. Negative cash flow deepened from $5.8 billion to $9.06 billion. Google is still profitable, but it is spending more than it brings in to win this race.

The bull case is real: cloud crossed $30 billion and beat estimates, and cloud revenue more than doubled over the past year. The risk is that a lot of that cloud demand comes from AI startups spending venture money. If that funding cools, the cushion thins exactly when search is softening.

Our read: Google is betting the entire company that AI search becomes as lucrative as the ten blue links. If ad load is the main lever, users pay for that bet in attention and clarity. We would rather see the economics fixed with better products than with more sponsored turns in a conversation.

Google has been shifting search toward an AI platform built on its Gemini models, and adding generative features across products from Gmail to Android. AI Mode ads were already becoming common in the U.S. before this expansion.