Hurried Integration of search & AI can push Google into losses!

Google earned a profit of $59 billion in 2022, with total revenue of $282 billion, of which search ads accounted for 60% ($162 billion).

The computing cost of an AI-powered chat search is at least five to ten times higher than that of a standard search. Assuming that 10% of the search ad revenue is used for search computing cost today (i.e., $16.2 billion), if Google launches AI into search and offers unlimited access, its expenses could increase by at least another $64 billion, resulting in an annual loss even if user numbers and revenue remain unchanged.

To mitigate the threat of exponential rise, Google could:

  1. Make Google's Bard AI models more efficient.

  2. Improve the efficiency of Google Cloud computing for AI-specific needs. (MS Azure has been focusing on this for a while)

  3. Limit scope - Do not use AI for every search result.

  4. Limit access - Charge for unlimited AI-powered search.

Meanwhile, Microsoft can tease Google:

  1. All hell breaks loose - if Google limits AI-powered search and bing does not. Bing could offer unlimited AI-integrated search (bing.com/new) powered by GPT-4. Bing has a much lower market share than Google Search and thus does not have to worry about computing costs at the scale Google has to worry about.

  2. Microsoft's existing B2B revenue stream from AI could motivate them to discount B2C use cases. The OpenAI partnership deal also means that Microsoft's Azure cloud will be used for computing, with hundreds of startups built on top of OpenAI's infrastructure, sending their money to Microsoft Azure.

  3. Pressure to catch up - OpenAI and Microsoft are progressing with efficiency in models and computing. Google's pace on AI increased after it became clear in December 2022 that ChatGPT is a head-on competition with search. Last week's failed live demo of the Baidu AI cost Google $100 billion in market cap. Google cannot afford any more hurried reactions; it should level up its strategy.

TL;DR: Microsoft and Google are gearing up for another battle, armed with new weapons. Microsoft's strategy appears to be well-defined, but Google will sure catch up if they do catch up. It will be interesting to watch how their dynamics will evolve and how the