[DigitalToday reporter Chi-gyu Hwang (황치규)] Google, which has dominated the digital advertising market, is increasingly concerned about the cannibalisation dilemma stemming from the spread of AI search.

There have long been worries that AI services represented by ChatGPT could erode the presence of traditional web search, but Google continued to grow in its search business. It also invested aggressively in AI search and maintained search revenue growth rates that met shareholder expectations.

But the mood changed starting in the third quarter. As Google’s search revenue growth visibly slowed, cannibalisation concerns are regaining traction among investors.

In the third quarter, Google’s search advertising revenue growth rate was limited to 12 percent. It has been trending down from 19 percent in the first quarter and 17 percent in the second. Meta, which competes with Google in the digital advertising market, is growing more than twice as fast as Google in advertising despite staying in aggressive mode on AI investment, adding weight to concerns about Google.

Meta’s third-quarter advertising revenue rose 26 percent to $63.1 billion from $50.1 billion a year earlier. The gap in growth rates between the two companies was 14 percentage points, the most favourable situation for Meta since 2021, CNBC reported. Users are clicking links in search results far less, while time spent on Meta-owned Instagram is increasing, expanding advertising opportunities for Meta, CNBC added.

Details of Google’s dilemma in search advertising can be summarised as follows: as some search traffic shifts to people finding information directly through large language models, more advertisers are feeling that traditional web search ads are not as effective as before, and AI search still has many aspects that do not fit advertisers’ tastes.

According to a recent report by The Information, Google Chief Business Officer Philip Schindler also cited weak monetisation of AI Mode, Google Search’s conversational AI feature, as one factor behind the slowdown in search revenue growth.

Google unveiled AI Overviews, an AI summary feature shown at the very top of search results, in May 2024. More than a year later, it added AI Mode, a generative AI search chatbot service. Google later added ads to AI Overviews and AI Mode, but the recent slowdown shows Google is not generating as much revenue from AI as it does from traditional search, The Information reported.

Ads in AI Overviews and AI Mode, unlike traditional web search, do not appear next to keywords. Ads are shown based on the user’s prompt and the content of the conversation with the AI. But critics say advertisers cannot run campaigns separately that are tailored to Google’s AI search features, nor can they request that their ads be excluded from appearing in AI features.

The slowdown in search revenue growth was also affected by Google’s effort to minimise inconvenience to users by avoiding exposing too many ads in AI search or inserting ads that do not fit the user experience, along with trial and error during the process of establishing the service.

AI Overviews and AI Mode are seen as among the biggest changes in the history of search since the shift from desktop to mobile, so finding a sustainable advertising strategy may matter more than short-term performance.

If Google secures know-how for placing ads and setting ad prices based on conversation content rather than linking ads to search keywords, the slowdown in Google search revenue growth could remain a short-term issue.

Meta also took a hit to advertising revenue growth when it expanded Reels, a TikTok-like video service, on Facebook in February 2022. But it strengthened its ability to make money from Reels and advertising revenue returned to growth from the following year, The Information reported.

Against this backdrop, Google is said to keep highlighting the business opportunities that AI will bring to investors and advertisers. Google executives are increasing partnerships and are even considering acquisitions to provide ads useful for AI. The Information reported, citing a source familiar with internal matters, that Google is also reviewing acquisitions of related companies to secure AI tools for ad production.