How ChatGPT Will Impact Search and Advertising

“Although we are 25 years into search, I daresay that our story has just begun.”  Prabhakar Raghavan, Google’s SVP.

Google commands 84.9% of the market vs Bing’s 9%, and yet a ‘code red’ has been issued. Long absent Google co-founders Larry Page and Sergey Brin were pulled out of retirement. Brin, worth $77 billion, is apparently pushing code for the first time in years.

But what is making Larry Page and Sergey Brin so worried after all these years?

One name…ChatGPT.

Microsoft made an early bet on OpenAI, and recently followed up with an additional $10 billion in funding. Nadella announced the latest version of Bing would be powered by OpenAI. Users will be able to ask questions and get answers, rather than the traditional search results page.

Advertisers should take note: at long last, the structural model of internet search and its corresponding business model, advertising, are completely changing.

Since ChatGPT’s launch and partnership with Microsoft Bing (along with similar AI driven technology from companies like Neeva, You.com and more), Google has been in the classic “innovator’s dilemma”. Which means Google will 1) have to change the manner in which consumers search, and 2) significantly reduce the profit margins made by search advertisement.

Woah! What does this all mean for my advertising budget?

Before we get into how this affects your advertising dollars, let's first understand the purpose of these AI chatbots.

The purpose of synchronized AI chatbots.

Let’s clarify what these new AI driven chatbots are doing, simply: they are doing the legwork we had to do before.

Example: You want to plan an amazing weekend getaway from NYC for you and your partner, who loves BBQ and loves to lay by the pool.

Previously, you would put this into a Google search and hope to get very lucky on a few travel blogs. Most likely you are hitting a lot of websites to gather the pieces together, while getting ads the whole time. Then you are going back to search to look for parking, excursions, whatever else you would need to plan the getaway and it becomes a few hours of your day just planning.

Moving forward your search engine will do this legwork on your behalf.

The idea is that with a very specific question, AI chatbots will provide you with a very in depth answer within minutes.

How do these AI chatbots affect search vendors such as Google?

In an interview with the Financial Times, Microsoft’s Satya Nadella said succinctly: “From now on, the gross margin of search is going to drop forever.” Google has been sitting on a profit margin monster the past 25 years and in a blink of an eye that monster will soon take a hit.

Search is now in a potential race-to-the-bottom, meaning all search engines will nickel and dime each other just to gain more users which will further threaten ad availability and pricing.

Additionally, due to the sheer amount of cloud computing that will go into successfully running an AI chatbot, Morgan Stanley has estimated an AI driven search answer costs roughly two cents, about 7x the cost of current search. Which means for a player like Google, for every 10% of Google searches that successfully shift to their AI chatbot, BARD, will on average add 700 million to 11 billion dollars in operating costs.

Enter “innovator’s dilemma”: plug away with your current profit machine and die in the long run, or hurt yourself now to survive and stay in the game.

A race-to-the-bottom is generally not a good scenario for advertising…enter: subscription models and low ad or no ad experiences. Microsoft and others will be willing to forgo profits from advertising in order to gain market share and drive greater reinforcement learning for their AI algorithms to get smarter, faster than the competition.

Meaning more people that use their search machine, the smarter the machine gets which will yield smarter and more intelligent results for us. No longer will we have to spend hours searching, everything will be done within minutes for us.

So, we are looking at a future with more expensive/less availability search advertising.

What should marketers do now?

First, take a moment to realize that if you’re like most other marketers, you very well may already be over-invested in search because its measurement is perceived as being easier. Having deployed 1000s of incrementality experiments across all manner of business categories here at Measured, we know that search is the #1 area for most marketers to invest in.

So whether the new changes in the landscape of search become a reality or not, you should start to investigate how to shift your advertising budget from demand capture, to demand creation. While it may feel scary to take from the former, the chances are very good that you can do so without negative topline impact, while adding to the latter quite successfully.  

Through scale testing, measurement enables marketers to get ahead of the curve and diversify their media mix beyond search to other profitable channels. We do this through proven incrementality experiments that pressure test new media channels against smaller, but statistically relevant audiences and geographies. This means we can confidently test new platforms and strategies at conservative spend levels to determine whether they will work at larger, national spend levels.

As Satya Nadella said “it’s a new day in search and rapid innovation is going to come”. All of a sudden the very steady world of search is on shifting ground. Since we can’t know where it settles it behooves advertisers to start experimenting with new outlets now, before they may be forced to do so.

To learn more about how to diversify your media mix beyond search to other profitable channels CONTACT US.