The Daily: Is Google’s grip on the search universe starting to loosen?

On today’s podcast episode, we discuss what’s behind Google’s recent ad revenue growth, how OpenAI fusing SearchGPT to ChatGPT will affect them, and where we’re at with the search giant’s two major antitrust cases. Tune in to the discussion with Senior Director of Podcasts and host Marcus Johnson and Senior Analyst Evelyn Mitchell-Wolf.

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Episode Transcript:

Marcus Johnson (00:00):

eMarketer is your trusted partner, if you would like, for actionable data and insights on marketing, advertising, commerce, and more, if that's possible, but did you know eMarketer also has a division focused on B2B media solutions? "What?" I hear you say. It's true. You can partner with eMarketer today or tomorrow. We'll still be here, and connect your brand messaging with our powerful audiences. You can head to emarketer.com/advertise to learn too much more.

Evelyn Mitchell-Wolf (00:34):

So, if more consumers start asking more complex questions of their search engines, if more consumers start going to different search engines for different purposes, one thing I'm confident will not change with ChatGPT Search is that consumers will continue to use the path of least resistance to search in the vast majority of cases.

Marcus Johnson (00:56):

Hey, gang. It's Thursday, November 14th. Evelyn and listeners, welcome to the Behind the Numbers Daily, and eMarketer podcast. I'm Marcus. Today I'm joined by one of our senior analysts, covers everything digital advertising and media, based in Virginia. It's Evelyn Mitchell-Wolf.

Evelyn Mitchell-Wolf (01:14):

Hello, Marcus. Hello, everyone.

Marcus Johnson (01:16):

Hello there. We start with the fact of the day. The major marathons have finished for the year, with the New York one wrapping up November 3rd, but how many people have run a marathon? According to RunRepeat, approximately 0.05% of the US population has completed a marathon. That's about 170,000 people or one in every 2,000 people-

Evelyn Mitchell-Wolf (01:47):

Wow.

Marcus Johnson (01:48):

... in America. Worldwide, about 1.1 million runners finish a marathon each year, and about two million will run a half, which is also too far. Okay.

Evelyn Mitchell-Wolf (02:01):

I know. I was about to say. I mean, I think I could conceivably, at some point, run a half marathon, but a marathon?

Marcus Johnson (02:07):

No, thank you.

Evelyn Mitchell-Wolf (02:08):

Maybe not. Nope.

Marcus Johnson (02:12):

Yep. So, the reason it's called that, as people probably know, Pheidippides ran the 26 miles between Marathon and Athens to tell folks that the Athenian Greeks had won the Battle of Marathon against the Persian Army. I'm still not entirely sure why he had to run the whole way to tell them. They would've found out eventually. It's not like he was running to warn them of people that were coming. He ran to tell them that they'd won. It just kind of steals the glory from the people who actually fought the battle. Maybe he fought. I don't know. I wasn't there, but anyway, about 50 million people in the US ever then run or jog, according to Statista Research Department. That does not include me.

(02:55):

Anyway, today's real topic, is Google's grip on the search universe starting to loosen? All right, Evelyn. We're talking Google today. We'll discuss all of it, but we'll start by setting the table and looking at how they've been doing recently. They go by Alphabet, parent company, but we're just talking about the Google stuff, the Google advertising stuff in particular. And so, top line, Alphabet made 88 billion. So, people might have seen that headline figure for Q3 for the company, but Google, Google advertising bit was 66 billion in ad revenue in Q3, up 10% year-on-year. That's now four straight quarters of making over 62 billion dollars, each of those four quarters to land on 66 billion in Q3.

(03:47):

Evelyn, Slice of Pie is where we begin, and you're going to create a pie chart for us of reasons, three max, why Google was able to grow ad revenue over 10% in Q3, up a fraction from a little below 10% the same period a year ago.

Evelyn Mitchell-Wolf (04:00):

So, in the past, I've used this as an opportunity to address each of Google's three advertising units, and I think it'll set up the rest of our discussion nicely. So, I'm going to do it again.

(04:11):

First, we have Google Search, of course. It logged its fifth consecutive quarter of double-digit growth, and it accounts for 75% of Google's total ad revenues for Q3 and over 50% of Alphabet's revenues. So, I think healthy growth plus a commanding share of total revenues equals 80% responsibility for that over 10% growth you mentioned.

(04:35):

Second, we have YouTube. It too has seen double-digit growth in the last five consecutive quarters, and it's generally pretty solid, so I'm going to give it 20% of this pie. Finally, Google Network, which is Google's ad tech business, you'll notice that I've already given away 100% of this pie, but Google Network did account for 10% of Google's total ad revenues. I did want to mention it though because it's been shrinking since Q3 2022, so it's dragging down the growth rate. Worth mentioning, but in terms of the slice of pie exercise, it gets 0% share.

Marcus Johnson (05:09):

Okay. So, digging into that a bit more, I saw the reason that ... part of the reason that Google's ad revenues were held back was because of the Chinese e-commerce giants, Shein and Temu, two of Google's largest advertisers. They slowed their US ad spending in Q3 year-on-year, according to Sensor Tower. So, that had somewhat of an impact, but what else kind of goes into the soup? What other ingredients are piling into this, which led to Google getting 10% growth?

Evelyn Mitchell-Wolf (05:37):

I mean, part of it is just that there are macroeconomic fluctuations to take into account, and Google is not immune to advertisers pulling back when the economic situation is less than stellar, but Google is also sort of ... It's in a better position relative to a lot of its competitors in that it is exactly what performance advertisers are looking for. So, when budgets get pulled back because of macroeconomic conditions, which are sort of, kind of in a rocky place again these days, advertisers tend to prioritize performance advertising channels over brand advertising channels, which is to say those channels that can be tied very cleanly to sales. And Search is one of those channels, which means that when the going gets tough, the advertisers go to Google.

Marcus Johnson (06:30):

[inaudible 00:06:30]

Evelyn Mitchell-Wolf (06:30):

Yeah. So, that's part of it. Also, I think YouTube's growth is notable here. Google has been pulling a lot of levers to increase the ad surface area that YouTube makes available, so that's been helping. CTV is a huge, shiny growth narrative for the ad industry more broadly, so YouTube's CTV efforts are certainly notable there, and it is a combination of efforts, right? Google is sort of turning up the heat across a variety of places to try and make its product more valuable to advertisers or harder to escape. One of those things is Performance Max and automating the heck out of the advertising process, just making it super easy for advertisers to say, "This is how much money I have. This is what I want to get done. Go do your thing," and Google will do it. So, that's also helping Google grow its advertising business.

Marcus Johnson (07:24):

Yeah. You mentioned YouTube made nine billion in Q3, growing a little over 12% year-on-year. It's a touch below the 12.5 they made last Q3. Their share of Google Ad dollars, it's been about 13 to 14% for the past year and a half, so that's kind of stabilized. It was going up, and YouTube saying they got a boost, obviously, from election related ads, which would've helped things for that division.

(07:54):

There's two sides to the balance sheet that I wanted to quickly talk about. One is short term. One is long term, and in the short term, wildly profitable. Google has made the same amount of net income in the first three quarters of this year as it did the whole of last year, and we still obviously got Q4 to go. Net income Q3 was basically double what it was in 2022, so it was about 14 billion then. Now it's about 16 billion. That's short term.

(08:22):

Long term, Alphabet's capital expenditures were over 13 billion dollars in Q3. That's up 62% from the same period last year. Company expects to increase capital spending substantially in 2023, according to Alphabet's CFO, Anat Ashkenazi, in large part because of AI investments.

(08:42):

Although, I thought, Evelyn, Miles Kruppa of the Wall Street Journal made a good point here, basically saying it is not just Google this applies to, but he was saying Google hasn't broken out exactly how much revenue it has made from AI services. And that's the breakout that folks, investors are going to be looking for more and more, right? Money invested in AI plus money made from AI equals what?

Evelyn Mitchell-Wolf (09:05):

Yeah. I think definitely investors will be looking for that, and advertisers, too, to a certain extent, but I think it'll be really, really challenging for Google to break that out accurately because of the extent to which AI has sort of penetrated every part of its business.

Marcus Johnson (09:05):

Fair.

Evelyn Mitchell-Wolf (09:19):

And it'll be hard to know, at least where advertising is concerned, which dollar Google made because of AI versus just because of all its other strengths in the space.

Marcus Johnson (09:31):

Yeah. Quick note are the bright spots in terms of their performance. Google's Cloud division poured in over 11 billion in revenue in Q3, up 35% year-on-year. That's even more than the 29% it was up Q2, so very impressive, Cloud becoming increasingly, increasingly important, now accounting for 27% more revenue than YouTube Ads and 50% more revenue than Google Network, that line item that Evelyn mentioned has been going down for basically the past two years. They were bringing in about the same as those two a year ago. So, Cloud, YouTube Ads, and Google Network were bringing in about the same, and now Cloud is way ahead of both in terms of how much money they're pulling in for the company.

(10:12):

So, there was some news recently, Evelyn, which I thought was going to make a bigger splash than it did. So, October 31st, Ina Fried of Axios writing that the addition of an ad-free search engine to ChatGPT will likely further shake up a search industry that has already seen the ground shift with the rise of gen AI. Web search was added to ChatGPT's existing interface, now offering users results that include sports scores, news, stock prices, and weather, the service available for paid ChatGPT users now and free ones later. What happened was the SearchGPT people might have heard of, that was the initial release, and then, now, that's been rolled up into ChatGPT. So, that can search for things, better act more like a search engine. Now that SearchGPT has been rolled up into ChatGPT, how will that affect Google and the search space?

Evelyn Mitchell-Wolf (11:03):

I have said it before, and I will say it again. Google will remain the top player in search as long as it's the default search engine across major browsers and mobile operating systems. ChatGPT Search and other AI-first search engines like Perplexity will shake up the search base insofar as they change consumer behavior. So, if more consumers start asking more complex questions of their search engines, if more consumers start going to different search engines for different purposes, one thing I'm confident will not change with ChatGPT Search is that consumers will continue to use the path of least resistance to search in the vast majority of cases, so when they're looking for factual information like movie release dates, store hours, the date of winter solstice. That is one that I recently looked up because I am already over it being dark at 5:00 PM, those little searches that are so much a part of how we operate these days that we don't even notice them anymore.

(12:01):

And then, when they're just trying to get somewhere on the internet, what we call "navigational queries," there's ... It's like when you type "Perplexity" instead of "perplexity.ai" into your browser URL bar, and you end up on a Google Search page where Perplexity is the top result. Consumers will rely on whatever search engine is the default in or on whatever app, browser, or device they're using, which, for now, mostly means Google. And factual navigational queries aren't typically the most monetizable, but what Google is able to monetize is a function of how often consumers rely on Google. And if consumers go to Google for most of their searches anyways, and Google offers a native AI search experience, which it is doing with its AI Overviews, then, theoretically, Google will continue to satisfy most search needs for most consumers. And that's not to say that ChatGPT Search won't see any traction, just that ChatGPT Search will not disrupt Google's dominance solely by existing. I think the more pressing challenge for Google Search is antitrust enforcement.

Marcus Johnson (13:07):

So, before we get to that, let me push back just for a second because I think the argument against Google not losing out to rivals is that it's kind of already happening. And the elephant in the room here isn't what OpenAI is doing with ChatGPT or Anthropic's doing or what Microsoft's doing. It's what Amazon's already done-

Evelyn Mitchell-Wolf (13:26):

Yes.

Marcus Johnson (13:27):

... because Google's share of the search ad revenue pie has been heading in the wrong direction for a while, way before the announcement of SearchGPT, dipping below 50% for the first time this year, according to our estimates. So, from 2022 to 2026, we expect Google's share to fall eight points, from 55% to 47%, that's of the search ad revenue pie in the US, by 2026. Second place, Amazon will have a 27% share of the search ad revenue world.

Evelyn Mitchell-Wolf (13:57):

Yeah. I think what's important to contextualize there though is that Amazon, for the most part, has been growing the search pie. So, Google is-

Marcus Johnson (13:57):

Good point.

Evelyn Mitchell-Wolf (14:05):

.... losing share, but the pie is growing, and it's mostly that most new search ad dollars are going to Amazon, where ... Not most new search ad dollars, just more new search ad dollars are going-

Marcus Johnson (14:05):

Right.

Evelyn Mitchell-Wolf (14:16):

... to Amazon, and Google is still very much dominant in the traditional search space, which still accounts for over half of search ad dollars for now. So, there are more dynamics to that that sort of lay under the surface of that 50% market share threshold that Google is approaching, but absolutely. Yes. Amazon has been and remains a threat to Google's search empire.

Marcus Johnson (14:39):

Yep, and that's, again, search ad revenue. When you're looking at just overall search, Google accounts for 90% in the US and I think even slightly higher, a little bit higher worldwide, according to Similarweb. So, overall, search queries, it's a lot higher than the actual dollars.

(14:56):

So, Amazon, definitely a concern at this point for Google. It's got to pay attention to them and something that could slow down growth a little bit. Something else you just mentioned is antitrust, two cases happening, one that happened in the summer, still to be decided on what the ramifications are going to be for that one, and another one that is currently going on. Talk to us about where those, both of those cases stand.

Evelyn Mitchell-Wolf (15:19):

Yeah. So, the U.S. District Court for the District of Columbia ruled in favor of the Department of Justice and its antitrust case regarding Google's search business, which means, for the time being, we can say that Google monopolizes the search market, which is ... It's nice to be able to just say that.

Marcus Johnson (15:36):

Right. This is the one that happened in the summer, right?

Evelyn Mitchell-Wolf (15:39):

Yes. Yeah. That one, we are currently in the remedies phase, where the DOJ and Google are recommending how Google's business practices or the structure of its business should be altered to correct the situation. A breakup is on the table, but there are questions about how aggressively the incoming presidential administration will pursue such a heavy-handed remedy. What's more likely is that Google will no longer be able to maintain exclusive agreements to be the default search engine on browsers and mobile devices, and that is a bigger threat to Google's search business than ChatGPT search, like I mentioned. The expected timeline here is that the judge will rule on remedies in August 2025, and then there will be appeals after that, so we still have a long sort of road ahead of us with that case.

Marcus Johnson (16:24):

Quickly, on that case, you mentioned that we don't really know what's going to happen now with the new administration. Daniel Konstantinovic and Jeremy Goldman were writing in our briefing that President-elect Donald Trump has shifted between supporting and opposing the idea of a Google breakup.

Evelyn Mitchell-Wolf (16:37):

Yeah.

Marcus Johnson (16:37):

However, his VP-elect J.D. Vance said over the summer that the company should be split up. So, if that's any indication, so we really don't know what's going to happen because Mr. Trump seems to have advocated for both sides of this in the past.

Evelyn Mitchell-Wolf (16:53):

Right. Yeah. That tends to be. We just don't know. It could also be that whoever he appoints to head up the DOJ's Antitrust Division takes a hard line on big tech. It could be. A lot is up in the air at this point.

Marcus Johnson (17:07):

Yep. Second case.

Evelyn Mitchell-Wolf (17:09):

Second case, okay, the DOJ has another antitrust case against Google regarding its ad tech business, and witness testimony and evidence submission wrapped up in September. Closing arguments are just around the corner on November 25th. After that, the judge is expected to issue her ruling by early 2025, and then, of course, we will have the remedies phase and then any appeals that result.

(17:32):

Like I mentioned before, Network is dead weight for Google right now. If Google were to lose this case as well and be forced to divest some or all of its ad tech stack, it wouldn't be the end of the world for Google. It actually might be positive in the long run, but time will tell on if that ends up being the course of action that the government takes and then if there are any appeals pushback that the government will need to work through in order to secure that ultimate remedy.

Marcus Johnson (18:00):

So, remedies for that after remedies for the first one?

Evelyn Mitchell-Wolf (18:06):

They could happen at the same time because the-

Marcus Johnson (18:09):

Okay, because remedies for the first one is next summer, right, at the earliest?

Evelyn Mitchell-Wolf (18:12):

Yeah. August 2025 is the timeline we've been working towards, and the court that has been handling the ad tech case is a lot faster than the court that's been handling the search case. We could even see remedies decided for the ad tech case before the search case. I feel like that's not out of the realm of possibility, so-

Marcus Johnson (18:12):

Interesting.

Evelyn Mitchell-Wolf (18:34):

... yeah, stay tuned. It'll be really great season of antitrust drama.

Marcus Johnson (18:39):

Yeah. I mean, one entity that is paying attention is the market's Alphabet shares, down about five points from a July peak as it deals with several antitrust lawsuits and some concerns to its core business being upended by AI competitors, but, as Evelyn said, mainly the antitrust cases that people are paying attention to at this point. We'll end the episode, Evelyn, with a grade for Google's Q3 performance. What would you give them?

Evelyn Mitchell-Wolf (19:05):

So, I'm having a hard time finding a reason not to give Google an A on these earnings.

Marcus Johnson (19:09):

Hmm.

Evelyn Mitchell-Wolf (19:09):

It's facing more existential crises now than it has at any point in its 26-year history, but zooming in on this quarter, these results are really solid. They beat investor expectations across the board, so I think Google deserves an A.

Marcus Johnson (19:24):

26 billion dollars in net income, hard to argue with that.

Evelyn Mitchell-Wolf (19:27):

Yeah.

Marcus Johnson (19:28):

Yeah. All right. That's all we've got time for for today's episode. Thank you so much to my guest today. Thank you to Evelyn.

Evelyn Mitchell-Wolf (19:34):

Thank you, Marcus.

Marcus Johnson (19:35):

Yes, indeed. Thank you to Victoria. She edits the show. Thank you to Stuart, who runs the team. Sophie does our social media, and thanks to everyone for listening in, of course. We hope to see you tomorrow for the Behind the Numbers Weekly Listen. That is an eMarketer video podcast.