Beck Diefenbach/Reuters
- Google's challenges seem to be piling up, with AI competition looming over its Search business.
- Combined with layoffs, lower ad revenue, and antitrust issues, Google has a tough year ahead.
- Google needs to focus on building up its AI business while also keeping costs under control.
Google has had a tough go of it lately.
Between its sweeping round of layoffs and paring back on moonshots and cutting costs, to the threat of genuine competition from Microsoft's Bing and a federal antitrust lawsuit, there's been a lot going on at the Googleplex. And its window to act is closing.
The heart of the issue is that Google's core search business is under pressure, as we saw when the company reported earnings last week. Customers are slashing their ad spending with Google amid economic uncertainty, with YouTube particularly hard-hit.
That's led to lowered morale, as the company slashes headcount and office space to cut costs in a bid to appease Wall Street. The company has typically provided ample employee perks and has a history of stability, making for a tough period of adjustment for its remaining workforce.
Meanwhile, the Department of Justice and eight states recently filed a lawsuit against Google, alleging that its advertising business constitutes an illegal monopoly.
And rivals are circling: Microsoft announced this week a new OpenAI-powered update to the Bing search engine that has many speculating that Google's total domination of the search engine industry could be ending. OpenAI CEO Sam Altman even called Google a "lethargic search monopoly" in an interview with Ben Thompson's Stratechery newsletter this week.
Insider spoke to industry analysts who said that Google needs to move quickly through the rest of the year to stem all of those threats. In short, it needs to shore up its AI business to compete with Microsoft and keep its leadership in search, while also rebuilding its corporate culture and overcoming regulatory challenges.
Building up its AI business needs to be a top priority
The events of the last few days show Microsoft and Google are clearly in an AI arms race — one that Google needs to win for its own sake.
On Monday, Google officially announced Bard, its rival to OpenAI's mega-successful ChatGPT chatbot. A day later, Microsoft unveiled its own ChatGPT-powered Bing upgrade, in a move widely hailed as bringing competition back to search.
Google needs to double down on its own AI prowess right now, given the threat, Wall Street analysts said. After all, Google was the first company to plant its flag in the AI business in a major way, Gene Munster of Loup Ventures pointed out. Now, it has the opportunity to bring ChatGPT-style AI to its own products, as CEO Sundar Pichai said in the company's recent earnings call.
Google also has the benefit of years of building its search business and access to more data than ChatGPT, several analysts said. Evercore ISI analyst Mark Mahaney said in a note to clients that the firm believes that Google's "AI technology is at least as good as the competition," and that the combination of its scale and the cash that it's put into AI over the years "should help the company defend its market position in the long run."
However, speed is going to be very important in this competition. Even if Google's technology is better, if it doesn't keep up with Microsoft's pace, it could lose market share to Google.
Google's already quickened pace in releasing commercial AI tools or integrating it into more products is the right strategy, analysts said. However, they emphasize that Google needs to be thoughtful and show why its technology is better than OpenAI rather than being reactive.
Maintaining efficiency while retaining an innovative culture
To win in AI, however, Google needs to maintain its culture of innovation. That becomes extra-tricky when going through a period of economic uncertainty and cost-cutting.
"There's a cultural challenge that they're going through of being this benevolent place to work, that it's more of a family, to caring more about profits," Munster said.
Indeed, on the company's earnings call last week, executives emphasized that they are focused on "investing responsibly" and "defining areas where we can operate more cost-effectively." That means that the company's experimental business units, known as Other Bets, are under pressure, even as it cuts back on lavish perks.
Under these circumstances, Google has difficult calculations to consider around how much to invest in risky, long-term bets that may take a while to pay off, said Bernstein analyst Mark Shmulik. In general, he says it's good for Google and its culture to invest in taking risks, as long as it's realistic about the expected return.
Similarly, RBC analysts wrote in a note to clients that Google will need to spend more on technology and infrastructure if it wants to succeed in AI, which it will have to square with its more miserly attitudes.
The looming antitrust challenges — in particular the recent lawsuit from the DOJ alleging its ads business is an illegal monopoly — add further pressure and distraction at a time when the stakes are high, analysts said. Some speculate that it could result in Google spinning off pieces of its ad technology empire.
Ultimately, though, the risks to Google may prove more existential: As people use technology like Google's own Bard AI bot more, it stands to reason that they'll use the traditional Google search interface less. That means fewer people will see the search ads that pay the bills at Google. But if it does nothing, others will race ahead anyway.
"Google faces an innovator's dilemma," Shmulik said. "If you believe that this is the future of search, or at least is gonna augment search, and you are the market leader in search, how do you commercialize something that effectively competes and potentially cannibalizes your cash cow?"
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