Is AI an Overhang or Opportunity for Alphabet (GOOGL)?

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Shares of Google owner Alphabet (NASDAQ:GOOGL) declined more than 2.6% on Monday after a New York Times (NYT) report that Samsung has been considering replacing Google as the default search engine with Microsoft’s (NASDAQ: MSFT) AI-powered Bing product.

The news comes as Bing becomes a looming threat to Google’s undisputed search engine, after implementing the sophisticated artificial intelligence (AI) technology powering ChatGPT – the latest internet sensation and the fastest-growing consumer app, reaching 100 million active users in just two months after its launch.

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Potential Multi-Billion Dollar Headwind

The NYT report says that Google’s staff panicked when it found out about the possibility of losing Samsung to rival Microsoft. The report said that Google earns roughly $3 billion in annual revenue from the Samsung contract that is set to expire soon. An additional $20 billion is tied to a similar Apple contract, which is also up for renewal this year.

Bank of America analysts also said today that they estimate Google pays Apple about $20 billion for its search to be the default search engine across iOS devices. On the other hand, Barclays analysts believe Samsung represents 9% of Google’s total operating income in 2023.

Google pays billions of dollars each year to manufacturers of electronic devices such as Samsung and Apple, to be their default search engine. These contracts contribute to Google’s revenues from advertising - the company’s key profit center.

According to data from StatCounter, Google currently controls over 90% of the search market and is in dispute with the U.S. Department of Justice (DoJ) over its dominance. The DoJ argues that Google’s strategy to pay clients to remain a default search engine has “harmful effects on competition and consumers.”

However, the looming Microsoft threat could be a blessing in disguise for Alphabet as it could prove it is no longer a dominant market player in the online search market.

In the meantime, nine U.S. states have joined DoJ’s lawsuit against Alphabet, which is accused of violating the antitrust law through its digital advertising operations. The U.S. government, which filed the ad tech lawsuit in January this year, had alleged that Google needs to be forced to sell its ad manager suite because it illicitly abused its supremacy in online advertising.

Google has denied the accusations and has urged Judge Leonie Brinkema in the Eastern District of Virginia to drop the suit. According to the DoJ, states that have backed the lawsuit include Arizona, Illinois, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Washington, and West Virginia.

The move came after the DoJ filed a separate lawsuit in 2020, accusing the Silicon Valley company of breaking the antitrust law to maintain its dominance in the search business. This case is scheduled to go to trial in September.

ChatGPT - A Game-Changer

Google’s unchallenged power in the search market has left Bing in its shadows for years, but that might change soon. Microsoft’s search engine saw a surge in demand after launching its AI chatbot recently, which uses the same language model found in OpenAI’s ChatGPT. Microsoft invested $10 billion in ChatGPT in January.

Just weeks after launching its AI-powered Bing Chat feature, Bing reached 100 million daily active users.

“Roughly one third of daily preview users are using Chat daily,” said Yusuf Mehdi, Microsoft’s head of consumer marketing. “We’re seeing on average, roughly three chats per session with more than 45 million total chats since the preview began.”

Microsoft and Samsung already have an active partnership. The company’s widely-used Office apps are preinstalled on Samsung phones, which also have built-in software that makes it easier to connect them with Windows PCs.

But it remains unclear whether Microsoft would be willing to pay Samsung the same money Google would for the South Korean company to start using Bing as the default search engine. A key factor here is that Microsoft does not rely on search and advertising as much, but rather derives a significant portion of its revenue from enterprise and cloud products.

If the deal happens, it would mark another major blow for Google’s parent company Alphabet, which lost ~$100 billion in market valueearlier this year after its own chatbot Bard shared inaccurate information in a promotional video.

Reuters first pointed out an error in Google’s ad video for Bard which displayed inaccurate information about which satellite first took pictures of a planet outside the Earth’s solar system.

During the live-streamed presentation, the tech company did not share details about when and how it plans to integrate Bard into its search engine. The chatbot’s error was revealed just before Google started the presentation.

"While Google has been a leader in AI innovation over the last several years, they seemed to have fallen asleep on implementing this technology into their search product," said Gil Luria, senior software analyst at D.A. Davidson

The tech giant has been rushing “to catch up on Search and that caused the announcement yesterday (Tuesday) to be rushed and the embarrassing mess up of posting a wrong answer during their demo,” added Davidson.


Alphabet shares dropped following a report that Samsung has considered replacing Google with Microsoft’s Bing as the default search engine on its devices. This would mark a major hit for Google given the company’s years-long investments in generative AI technology. Investors are now likely to focus on the management’s remarks about Bard and Bing competition during the upcoming earnings call.

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.