Google hasn’t figured out how to make AI pay like its search engine

Alphabet reported that search queries are growing at their fastest rate in five years. At the same time, Search revenue growth slowed to 12 percent year over year in the third quarter, down from roughly 17 percent the quarter before, and growth in paid clicks fell from 13 percent to 8 percent. Shares have dropped about 14 percent since the report.

Google's business chief, Philipp Schindler, blamed currency effects and shifts in advertiser spending for most of the slowdown, but acknowledged that AI Mode queries are monetizing at a lower rate than traditional searches. All of this comes as Google plans to spend about $200 billion this year on infrastructure, much of it for AI.

We think this is the clearest look yet at the central tension in AI search. People clearly find AI Overviews and AI Mode useful; usage is up. That's good news for the product. The business model, though, was built on people clicking ads, and a conversation that answers your question doesn't need you to click much of anything.

Google's case is that most AI Mode queries are incremental, extra questions rather than replacements, and that research-stage searches are future ad opportunities. That's plausible. But as The Verge points out, saying most queries are additional doesn't tell us how much revenue is lost from the searches AI Mode does replace. That's the number we'd want, and Google isn't giving it.

Advertisers aren't panicking. Tinuiti says its clients raised Google search spending 14 percent while hitting their return targets. The catch is they can't isolate how AI ad placements perform, because Google doesn't let them target or measure that inventory separately. Steady returns could just mean AI ads are still too small to matter. Opacity at exactly the moment the format is changing is a problem for buyers.

The early outside evidence is mixed. An October working paper found ChatGPT ad visits generated far less retailer revenue per session than Google Search ads, though, as The Verge notes, it doesn't measure Google's own AI ads, and purchase intent may explain much of the gap.

Where this leads matters beyond Google. If AI answers keep growing while ad clicks shrink, the pressure to stuff conversations with ads will grow too, and that risks eroding the usefulness that made people adopt AI search in the first place. Google has time and a huge cushion. It also has a $200 billion bill.

Google is expanding ads in AI Overviews and AI Mode, including internationally and across multiple turns of US AI Mode conversations, and has floated bringing ads to the Gemini app without a timeline. Analysts quoted by The Verge note that past shifts, like mobile, took years before ad formats caught up.