Search In Transition - Ads for Perplexity, No Login for ChatGPT, Google Subscriptions
Capabilities, behaviors, and economics are all facing change
Search is a big business. Google captured $175 billion in 2023 search revenue and controls most of the market, as you know. Generative AI marks the first time in nearly 20 years that Google’s search dominance is credibly under threat. This is leading to several interesting developments as competitors seek to exploit a rare opportunity to take search market share.
Microsoft directly confronted Google in 2009 when it launched the Bing search engine. In 2023, it took another shot at Google with the introduction of Bing Chat, a generative AI version of search. However, not much came of the effort. Bing received more downloads, led to new trials of the Edge browser and Copilot became an alternative to ChatGPT, but Google remains dominant.
As search shifts from the results with ten blue links to answers, Google looks strong but potentially vulnerable. The answer engine approach is materially better for users than links combined with the added effort of finding the answer inside the source material. Plus, ChatGPT has over 100 million weekly active users, many of whom use the solution for search. Perplexity has reimagined the knowledge-gathering experience and replaced it with an answer-engine experience. However, these maneuvers have led to some interesting developments.
Search Economics
Financial Times reported that Google is considering charging for premium search services. Google Search Generative Experience (SGE) was introduced in May 2023 as an experiment. It was designed as a hybrid between traditional (i.e., ten blue link) search and generative search. The answers are less robust than what you will find from Perplexity, Copilot, or ChatGPT, but they were often sufficient, nicely added data and YouTube click-through tiles, and the ten blue links followed in case the user required them.
Google faces two key challenges. First, it relies heavily on the search ad model, and the generative AI-enabled answer engines don’t naturally provide a logical vehicle for ad placement. It can be done, but ads may undermine the user experience and behaviors in unexpected ways. In addition, answer engines reduce the number of clicks and click-throughs, which has a direct impact on Google’s revenue engine.
Second, search enabled by large language models (LLM) is far more expensive than traditional queries. An executive told Reuters in February 2023 that it may be ten times more expensive.
Alphabet's Chairman John Hennessy told Reuters that having an exchange with AI known as a large language model likely cost 10 times more than a standard keyword search, though fine-tuning will help reduce the expense quickly.
Google is facing a potential revenue decline due to market share battles and reduced ad-serving opportunities while it confronts a significant increase in cost. This confluence of problems has Google considering subscription revenue as a method of recapturing some of that revenue.
What About Ads?
Ads will remain at Google and may also be added to the Perplexity experience. Although Perplexity offers a $20 per month subscription for added features, the vast majority of users are on the free plan. This means Perplexity incurs considerable cost every time a free user employs the service. Adweek reported that Perplexity plans to present ads alongside free users' search results to counter rising costs.
Perplexity uses AI to answer users’ questions, based on web sources. It incorporates videos and images in the response and even data from partners like Yelp. Perplexity also links sources in the response while suggesting related questions users might want to ask.
These related questions, which account for 40% of Perplexity’s queries, are where the company will start introducing native ads, by letting brands influence these questions, said company chief business officer Dmitry Shevelenko.
When a user delves deeper into a topic, the AI search engine might offer organic and brand-sponsored questions.
While Google intends to supplement ad revenue with subscription fees, Perplexity plans to introduce ads to complement subscriptions.
ChatGPT Drops the Login Requirement
A bigger player in the market is taking a different approach altogether. OpenAI offers an ad-free version of ChatGPT, which has some search capabilities. While there is a paid service with additional features, most users adopted the free service but were required to log in. OpenAI removed that requirement this week. Free users can now get ChatGPT answers without authentication. According to the company:
Starting today, you can use ChatGPT instantly, without needing to sign-up…We may use what you provide to ChatGPT to improve our models for everyone. If you’d like, you can turn this off through your Settings - whether you create an account or not.
OpenAI is already generating a lot of subscription revenue for ChatGPT. What OpenAI needs now is more data and more user exposure to the product. A key use case for these casual users is likely to be search.
Search Reimagined
The search market is in a transition period. Internet search experience is destined to change, at least for some queries and user cohorts. This is already disrupting the ad revenue model, and new competitors are experimenting with different approaches. Generative AI has already had a profound impact on software development and content creation. Search will be one of the most significant impacts, but it is still in the early phase of adoption. Google will continue to move slowly toward change, while Microsoft, Perplexity, and OpenAI look to accelerate it.