Alphabet's Search Revenue Growth Slows to 12% as AI Mode Queries Earn Less

According to the earnings report, Google Search revenue grew 12 per cent year on year in the third quarter, down from about 17 per cent in the second quarter. Growth in paid clicks, the ad clicks that earn Google money, slowed from 13 per cent to 8 per cent. Alphabet plans to spend about $200 billion on infrastructure this year, much of it for AI, and its shares have fallen about 14 per cent since the results, The Verge reported.

What Google Says

Chief Business Officer Philipp Schindler said currency movements were the largest cause of the slowdown, along with changes in ad spending in particular industries. He also acknowledged that queries in AI Mode, Google's conversational search, were growing strongly but earning less per query than traditional searches. He said Google's "ad experiments have shown promising results".

Google argues that AI is enlarging the market instead of eating into it. Schindler said most AI Mode queries are "incremental", meaning they are extra questions rather than replacements for existing searches, and that many come early in the buying process, before users know what they want. The company is extending ads in AI Overviews and AI Mode, including to markets outside the US and across multiple turns of AI Mode conversations in the US. It has also said ad formats built for AI Mode could be brought to the standalone Gemini app, but has not given a date.

The Measurement Problem

Advertisers are still getting results. Tinuiti, a digital advertising agency, told The Verge that its same-store clients raised their Google paid search spending 14 per cent year on year in the third quarter while still meeting their return-on-ad-spend targets. But Andy Taylor, the agency's vice president of research, said Google does not let advertisers target its AI ad inventory separately or see a breakdown of how it performs. Steady overall returns could mean AI ads perform about as well as standard ones. They could also mean AI traffic is still too small to show up in the totals, which Taylor said he suspects is mostly the case.

Nate Elliott, a principal analyst at eMarketer, described AI as "the first major disruption that Google is facing to its core business in decades." He said fewer click-throughs would be "a challenge that they need to figure out", and that richer conversations are "not a slam dunk" for more effective advertising.

Early evidence from rivals is mixed. The Verge cited an October working paper which found that US retail visits from ChatGPT ads produced 64 per cent less revenue per session than visits from Google Search ads, $0.89 against $2.45. The paper measures retailers' sales, not platform revenue, and says nothing direct about Google's own AI ads. Taylor also cautioned that the comparison may reflect different buying intent: someone typing a product name into Google may be ready to buy, while someone asking a chatbot for advice is still researching.

Why It Matters

For investors and for the companies that depend on search advertising, the open question is how much AI search adds to Google's ad business and how much it replaces. Additional queries could bring in new revenue even if each one earns less. But Google's claim that most AI Mode queries are additional does not show how much revenue it might lose from the searches AI Mode does replace. With roughly $200 billion of annual capital spending to justify, Google's ability to make conversational search pay as well as the old results page is likely to shape how markets judge its AI strategy.