Google, Ads, AI: Is There Room for The Customer?

Estimated reading time: 5 minutes

Is Alphabet The Next Kodak?

A long time ago Kodak was one of the biggest and brightest companies in the world. They owned the visual capture industry. They also invested heavily in digital when digital tech started to emerge, but it wasn't enough. Apple swooped in and wrestled away market share. Seemingly overnight, Apple dissolved one of the greatest public companies of the 20th century through better execution in technology.

I think this is where Alphabet (GOOG) is with the new technology of AI. AI is all over the tech industry and it's rapidly changing the way we interact with the world. "Google it" is a phrase that solidified Alphabet in the search industry, which greatly benefited the ads business. Now the problem is, what happens when people don't need 168 million results but just want the quick answer?

Example: I ask Google how to change a flat tire.

The results show us two things:

1. Nobody cares about that many results. 168 million results in 0.32 seconds is astoundingly impressive, a modern marvel. However, when I'm changing a tire, I just don't care.
2. Getting the results quickly in a featured snippet helps greatly. This is a good example of putting the customer first by eliminating steps.

But there's a hiccup: doesn't this affect ads? Yes! I'm not scrolling, clicking, or interacting with ads almost in any way, especially when it comes to mobile. The question here isn't "how do we get more ads in front of users" but instead "How do we align with new tech, serving customers, embracing the future, and doing it better than the next guy?"

There's a conflict between serving the customer, reducing ads, and embracing this new tech.

I don't think it's going to be a winner-take-all scenario with Large Language Models (LLMs), the thing we now know as AI. Different companies are going to have their LLMs inserted into products and services.

Microsoft might shine in one area, like inserting chat into Excel, while Alphabet shines in another area like combining search with chat. They aren't mutually exclusive.

The point is, these technologies are very new. We haven't seen V1 yet, let alone V2 or V3. It's been just over a year since OpenAI launched ChatGPT. I imagine the landscape will look vastly different in 6 months than they do today.

The main thing I'm paying attention to is this: How is Alphabet navigating the overreliance on ads? Most of their revenue comes from Google search and ads. Their next strongest segment, YouTube ads, has been stagnant or declining in the past year or so. This makes me more uneasy. I use much less of YouTube and Google because of ChatGPT, and the rest of the world is in agreement. Why watch ads and sift through 168 million search results when we can get a direct answer quickly and easily?

This also points to an assumption we've had leading up to ChatGPT and the introduction of LLMs: searching for answers warrants suffering through ads.

If you're like me then you hate ads, and would much rather pay an extra dollar or so to not have to deal with them. This carries over to streaming services, games, websites, and almost all tech that involves a screen. This leads me to ask the base question in investing: does Alphabet have the customers best interest at heart? Or have they just gotten away with pumping our online experience full of ads?

For product ideas, I imagine Alphabet will embrace this new tech and combine it with ads somehow. Still, it's unnerving seeing how the next few quarters play out.

In regards to earnings calls and comments from management: I'm uninterested in what the leadership has to say here. They can show me how they are navigating this technological shift by showing me how they are evolving their products and services.

Alphabet Revenue Stalling

Some of this is the tail wagging the dog, but I think it deserves mention. Remember: ChatGPT came out in November of last year, so keep that in mind:

Alphabet's revenue has been stalling since the pop in revenue in Q4'21, but it's hard to tell (for me, maybe not for you) if they're about to blow it out of the water from here moving forward or if they're going to continue to blather about the wonders of AI while their google search segment decreases.

I don't know the future, or the tech, and at this point I'm glad Alphabet has very smart people leading the way, but they need to shift something here if they're going to stay relevant and competitive.

Am I Selling Alphabet?

My confidence in Alphabet is wavering. ChatGPT might be to Alphabet what Apple was to Kodak. If Alphabet is truly a world-class business, they'll navigate this change well, and it'll reflect in quarterly financial results. Here's my plan: