What do you have to believe about Google search

What do you have to believe about Google search

Every once in a while I step away from the keyboard and the X postings to do real work, and by that I mean consulting. And while I pretty much hate this line of work, sometimes I learn something, and one of those things is the phrase “What do you have to believe?” in reference to a given deal / company acquisition / or line of strategy. It’s a good framework for pressure testing the assumptions and acknowledging the uncertainty. If only one could communicate this kind of thing in a medium other than Powerpoint, we might be on to something.

With Google’s stock taking a dive this week due to — frankly well past due — news about challenges to its search business, I’d like to propose the question:

What do you have to believe about Google search to think it will sustain its business in the face of AI?

Let’s break it down, keeping in mind the uncertainty and complexity of the question.

What makes up search revenue?

Google search revenue is created by more-or-less multiplying the following drivers:

Google’s search share x 

Searches per user x 

Ads per search x 

CTR x 

CPC (cost per click)

Each one of these terms could then be broken down into a million cuts by geography, quality, monetize-ability, etc. Let’s do out best to look at the evidence.

Search market share

A federal judge has found that Google has a monopoly in search, so we don’t exactly have to be light handed in saying that Google dominates in share. Nevertheless I think most readers of this newsletter would agree that their personal use of Google for search is declining, in some cases precipitously, as ChatGPT, Perplexity, and other AI competitors evolve from providing search results, to providing answers. This change is one of those “10x better” moments that really change consumer behavior, and we’re not going back.

This week one observer, Eddy Cue of Apple, testified as much, saying searches using Safari were down. In January this newsletter highlighted data from Statcounter indicating that share had declined below 90% for the first time.

What You Have to Believe (“WYHTB”): Despite competition, Google will maintain a very high market share in the “Answers” market as consumers shift behavior away from search results.

WYHTB (2): The antitrust case will not be successful in breaking the monopoly share of Google by spinning out Chrome or otherwise reducing its current distribution and data advantages.

Searches per user

Depending on your definition of market share, usage of search may already be baked in. I think its important to talk about, though, because it might be the brightest spot in the story. The dawn of AI chatbots have not only changed the searching behavior to answering behavior, it has also notably changed the things consumers are searching for, expanding the addressable market significantly. A couple of years ago, no one was asking Google to write their college essays, plan their diets, or to become their girlfriend. Yet today, these important use cases are front and center. If the realm of what consumers want the technology to do for their lives and their real world problems expand, then the market expands (monetization and share being equal). This is potentially really bullish news for Google.

If you believe searches are up, then it is possible to square the seemingly conflicting statements from Eddy Cue about Google’s share decline, with the search company’s statement claiming that “overall query growth” was up. Both can be true. Here’s a study saying Google search volume is up 20% YoY.

WYHTB: Consumers will expand their use of search and AI into more parts of their lives, bringing more opportunity for monetization.

Ads per search

Pre-AI probably the biggest complaint of normies against Google was the proliferation of ads over search results. Arguably this cluttering of search results was the key driver in the company’s successful transition from desktop to mobile.

Google launched ads in AI overview last year and recently added ads to its “AI Mode." Unless something stops them, I think we can be confident Google will keep pushing more ads until something breaks.

WYHTB: Either the number of ads will stay high even though the answers are more relevant, or the ad format will change in some way to make this metric less important, or something else is going to change we can’t imagine today.

CTR (Click rate)

The amazing slight of hand Google search pulled off was both promising the consumer the correct answer to their query while also leaving enough wiggle room to allow the ads to fill in the gap between the platonic ideal answer and the one provided. What happens when the consumer expects a single answer that is correct the first time?

SearchEngineLand wrote about this following the recent earnings report:

Also from the same publication, an analysis of paid and organic CTRs with and without AI.

WYHTB: New ad formats will sustain clickability of ads, or the decline in clicks will be made up for with higher prices.

CPC (Cost per click)

Fewer ads with fewer clicks can be made up for with higher rates per click. There doesn’t appear to be any solid data on this but anecdotally many observers seem to think CPCs will rise with fewer ads and fewer clicks. There’s also anecdotal evidence that the value of AI clickers is higher than search clickers due to their additional context and understanding.

WYHTB: CPCs will rise as ads within AI more closely match consumer’s intent and more effectively moves them through the purchase funnel.

Where does that leave us?

Its a fascinating transition and will be interesting to watch. It seems to me like the one driver that’s more important than all the others is share, and the biggest threat to that is the Chrome divestiture. The rest seem like manageable problems. What do you think?

Reading list

• Proposed remedies in the Google antitrust case (link)

• Google lays off 10% of Sandbox team of 250+ (link)

• Criteo revenue up a bit (3%) but hammered over customer shift (largest client switching to self-serve from managed. Also they did address the Uber eats loss to Instacart) (link)

• Viant beats (revenue up 32% yoy, CTV now 45% of total) (link)

• Applovin beats (ad revenue up 71%), selling another mobile gaming property (link) and is very serious about buying tik tok (link)

• Liveramp Ventures publishes ads in AI market map (link). Joe Hirsch created an encyclopedia out of it (link). BOK takes it a step further! (Link)

• Liftoff (mobile app marketing/monetization) takes PE investment… valued at $4.3b (link)

• IAS now rating podcasts for Spotify (link)

• Friend of the pod Jay Friedman handing over the reigns at Goodway Group (link)