Microsoft sees AI reshaping search as Google appeases investors

(Bloomberg) — Alphabet Inc. Google and Microsoft Corp., whose quarterly earnings each received a boost from their established search and cloud-computing businesses, used their time with investors to emphasize what’s next: artificial intelligence.

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In their respective earnings calls on Tuesday, the tech giants that are becoming rivals in the race for the future of search offered starkly different assessments of how disruptive the market is. Google executives encouraged investors to rely on the company’s long-term track record as the world’s leading search engine and framed AI as another transformation in its ever-evolving business. Microsoft suggested that something more dramatic was afoot.

Investors seemed to like Microsoft’s thesis, sending its shares up 7.7% in premarket trading before the New York exchanges opened, while Alphabet rose less than 2%.

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Until recently, Google was seen as invincible in the market for internet search, dominating it worldwide. That changed with the introduction of OpenAI’s most popular chatbot, ChatGPT. Microsoft has begun weaving OpenAI’s technology into its Bing search engine, and the partnership has increased pressure on Google to rebuild its core search business.

Speaking to analysts, Alphabet CEO Sundar Pichai emphasized that Google is investing heavily in AI, but downplayed what the technology could mean for the company’s lifeblood search advertising business. He expressed hope that users will continue to value online ads even if they provide a summary of their searches compiled by a larger language model rather than the familiar list of links that Google has long provided.

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“Over the years, we’ve gone through many, many changes in search,” Pichai said. “Since we’ve built search, I think we’ve always had a strong, grounded approach to how we build ads.”

However Microsoft CEO Satya Nadella suggested his company faces a formidable challenge. He said app installs have quadrupled since the introduction of AI-powered Bing in February. He said Bing gained US market share in the quarter, without providing specific metrics.

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“We look forward to continuing this journey in a generational shift in search — the largest software category,” Nadella said on the company’s earnings call.

Even relatively small changes in market share can generate billions of dollars in revenue. But last quarter, at least, Google’s search business faced heightened competitive threats and a broader downturn in the digital advertising market. The company’s revenue from its search and related businesses rose to nearly $40.4 billion in the period ended March 31, topping analysts’ estimates.

As Google moves to incorporate generative AI into search, Pichai said the company will draw on its enterprise knowledge. “We will be guided by data and years of experience about what people want and our high standards for quality,” Pichai said. “Because we know billions of people trust Google to deliver accurate information, we test and iterate as we go.”

However, the company has enough reasons to worry, said Max Willens, an analyst at Insider Intelligence.

“Google’s core business is facing some of the most serious challenges it has faced in some time,” Willens wrote in a note.

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Google’s partnership with manufacturers of Android phones gives Microsoft another chance to gain ground. Still, Pichai suggested that Google’s long track record would win the day.

“When we work with our partners, we work hard to create a win-win experience,” Pichai said. “Ultimately, partners choose us because that’s what their users want.”

(Updates with premarket trading in third column)

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