Google regains AI initiative by playing to its strengths

Alphabet CEO Sundar Pichai speaks at a Google I/O event. (AP Photo)
Alphabet CEO Sundar Pichai speaks at a Google I/O event. (AP Photo)

Summary

Adding generative AI to search and Android shows the tech giant’s distribution muscle while lessening risk to key businesses.

Sometimes, a good offense makes for the best defense.

Google has been seen as playing defense for much of the past 18 months after OpenAI launched ChatGPT in late 2022. The online chatbot powered by generative artificial intelligence was seen as a major threat to the internet search business that still powers the most of Google’s revenue and operating profit.

Google’s own missteps—including a bungled launch of its Gemini chatbot earlier this year—fed that image further. In the weeks following Gemini’s launch in February, shares of Google-parent Alphabet were lagging behind the trailing 12-month performance of OpenAI-backer Microsoft by 14 percentage points, according to FactSet data.

But Google isn’t so easily displaced. The company whose name was added to dictionaries nearly 20 years ago as a verb for web search still powers more than 90% of the world’s search activity, according to data from Statcounter. Its Android mobile operating system also runs more than 70% of the world’s smartphones. Those two areas alone are powerful points of distribution for Google’s AI technology. Microsoft’s Bing search engine, where the company incorporated ChatGPT in 2023, currently has about 3.6% of the global search market, according to Statcounter data.

Google made it clear on Tuesday that it plans to play to its strengths. The company kicked off its annual I/O developers’ conference with a two-hour keynote featuring a slew of announcements and demonstrations showing how its latest generative AI tools will integrate into its widely used services such as search and Android. These will include a new feature called AI overviews, which will allow search users to generate more conversational answers to certain queries with a single click.

The company also showed how mobile device users will be able to have audio-based conversations with its Gemini chatbot—a day after OpenAI held an event showing similar developments for its latest AI model called GPT-4o. No mention was made of a much-rumored Google licensing deal with Apple. But the iPhone maker likes to tightly control its own news flow, and will likely save any AI announcements for its own developers’ conference next month. Apple is also reported to be in licensing talks with OpenAI.

Investors seem to have more faith in Google now. Shares of parent company Alphabet edged up Monday following OpenAI’s announcements and picked up Tuesday following its own event—closing with a net gain of about 1% over two days. That follows an 8% rise since the company’s strong first-quarter report nearly three weeks ago. Alphabet’s stock is now up nearly 22% for the year—double Microsoft’s performance in that time.

Also, the total dividend-adjusted return on the two is now nearly identical since the public launch of ChatGPT boosted Microsoft’s stock starting in late November 2022, according to data from S&P Global Market Intelligence. “We don’t believe there will be only one AI winner, but we think Google has successfully proven that it will remain a leading player in this AI race," Mark Mahaney of Evercore ISI wrote in a note to clients on Tuesday following Google’s event.

The challenge for both companies now is to show how their expensive AI race will pay off. Both have signaled plans to boost their already record-high capital spending to further build out the technical infrastructure for AI services. Wall Street projects combined capital spending for just those two will reach just under $97 billion this year—up 42% from last year, according to consensus estimates from FactSet.

That payoff could prove to be a little clearer in the near-term for Microsoft, which has a massive base of enterprise software customers that it can market new AI tools such as CoPilot to. For Google, the economics of generative AI-based search are less clear, as advertisers may not yet be willing to pay a premium for placement in chatbot-generated results.

But that could also change fast as more internet users try those services. In a note Tuesday, Morgan Stanley analysts reported a recent survey showing 36% of Google’s Gemini users are using the chatbot to shop for products, compared with 23% of ChatGPT users doing the same. Google’s position as the internet’s starting page should never be taken lightly.

Write to Dan Gallagher at dan.gallagher@wsj.com

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