Google Search Revenue Growth Slows

Alphabet reported on Wednesday that its core search business is generating fewer dollars per user interaction as artificial intelligence reshapes how people find information. The company stated that while search queries are growing at their fastest rate in five years, the financial returns from that traffic are declining.

Search revenue grew 12 percent year over year in the third quarter, down from roughly 17 percent in the previous quarter. Growth in paid clicks, which generate the bulk of Google's advertising income, slowed from 13 percent to 8 percent during the same period. These figures come as Alphabet plans to spend approximately $200 billion this year on infrastructure, largely to support its AI initiatives.

Philipp Schindler, Alphabet's chief business officer, attributed the slowdown primarily to currency effects and changes in advertiser spending in specific industries. He noted that AI Mode queries are growing strongly but monetizing at a lower rate than traditional searches. Schindler said the company feels good about its trajectory and that its ad experiments have shown promising results.

Investors have reacted negatively to the earnings report. Alphabet shares have fallen about 14 percent since the announcement, as markets question the return on the company's heavy AI investment. Nate Elliott, a principal analyst at eMarketer, described the situation as the first major disruption to Google's core business in decades.

The shift in user behavior means that conversational AI tools are changing the path to purchase. Andy Taylor, vice president of research at digital advertising agency Tinuiti, explained that people looking for specific products like Nikes still see familiar shopping listings and text ads. However, those asking for recommendations are using AI Overviews, which generate summaries rather than driving immediate clicks.

Advertisers are currently maintaining their spending on Google despite the changes. Tinuiti's same-store advertisers increased their paid search spending by 14 percent year over year in the third quarter while meeting their return-on-ad-spend targets. Taylor noted that advertisers cannot yet isolate the performance of AI ads from the rest of Google's inventory, making it difficult to assess the true impact of the new features.

A working paper published in October found that US visits from ChatGPT ads generated $0.89 per session for retailers, compared to $2.45 for visits from Google Search ads. Taylor cautioned that these figures depend on user intent, noting that a person searching for specific shoes is often closer to a purchase than someone asking for general advice. Google is expanding ads in AI Overviews and AI Mode, including internationally and across multiple conversation turns, but has not announced a specific timeline for bringing ads to its standalone Gemini app.