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90%
That is Google’s global market share for search.
Google has enjoyed one of the strongest monopolies in modern corporate history.
But now it faces an existential threat.
While some mega cap companies have sat on the laurels of their founders, Microsoft continues to innovate. First in the cloud and now in the commercialization of AI.
It makes a lot of sense for Microsoft to infuse AI into their productivity suite, but now they’re also going after the golden goose of search.
Through an exciting product launch on Tuesday, Microsoft showcased how AI-powered Bing and Edge will serve as a copilot for web browsing.
But also Google rose and answered with their own showcase for Bard on Wednesday.
We’ve got an exciting showdown here between major players with major balance sheets. Will the mega caps “Hog the ball?” or is there enough love to go around as AI might become the new software?
This week, in <5 minutes, we’ll cover the AI race:
The Resurgence of AI 👉 Why Now? Commercialized Products
Buzzy Headlines…The Next “Crypto” 👉 Stocks pop on AI announcements
Search 👉 A Revenue Generating Machine
Product Walkthrough 👉 Microsoft’s Bing/Edge + ChatGPT
Product Walkthrough 👉 Google’s Bard
Let’s get started!
1. The Resurgence of AI 👉 Why Now? Commercialized Products
Back in December, I wrote this piece that outlined the history of AI, the key opinion leaders, and an intro to the killer apps of ChatGPT and DALL-E 2. For a refresher on the background, be sure to check it out.
The piece was published on December 11, shortly after ChatGPT crossed 1M users. It now has 100M users, only 2 months after launch. It took TikTok 9 months and Instagram 2.5 years to do this.
This explosion in Monthly Active Users has shown the broad-stream adoption of AI.
It used to be some massive black box that was focused more on enterprise and B2B operations where guys like Palantir and accountants like Accenture would say they were using AI and no one really knew what it meant.
Now, we have an AI tool we can interact with. We can play around with it and have equally ridiculous and insightful outputs. By no means is it perfect, in fact, it is far from it. But by having a consumer-facing interface like we do with image and chat generation, we can see this technology really coming to life.
As this gets integrated into more and more technologies, the applications that we discover will continue to expand.
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2. Buzzy Headlines…The Next “Crypto” 👉 Stocks pop on AI announcements
We are now having companies like BuzzFeed and C3 making loose announcements about how they will incorporate generative AI into their business, sending their stocks up 50-100%+.
It reminds me of not too long ago when companies like Kodak and Long Island Ice Tea announced crypto-related pivots resulting in similar stock moves.
Some are temporary flashes-in-the-pan, while others will have massive impacts on how major technologies will build out their road maps.
Some headline examples are:
NetEase Inc Said to be developing ChatGPT-like AI service for learning – financial press
FiscalNote Holdings Inc Said to Combines Proprietary Datasets & AI With OpenAI Platform to Transform Analysis
Alibaba Reportedly Alibaba DAMO Academy is developing a ChatGPT-like dialogue robot – press
Youdao plans to launch ChatGPT-like education product – Shanghai Securities Journal)
BuzzFeed Shares Surge 120% on Plans to Embrace OpenAI (1)
C3.ai Soars as ChatGPT Spurs Buying Frenzy for All Things AI
My prediction with most of these is that this pop will not last long and mostly end up the same way those that slapped “.com” on their name in the Dotcom bubble or “blockchain” onto their name during the crypto bubble…dead in the water.
3. Search 👉 A Revenue Generating Machine
Google’s search ad revenue counts for roughly 60% of total revenues for the company, while their network component adds another 12% and YouTube another 10%. Overall, 80% of Google’s revenue is selling ads.
The part to consider “under attack” here is the Google Search Ad revenue, as Microsoft is trying to take market share.
The problem for Google is its starting position. When you already dominate a space completely, you run up against an over-saturated market where you can’t capture anymore. When you run at 90%+ market share the only way to go from there is down.
And that’s what Microsoft is betting on.
Much to the surprise of many, Bing actually isn’t dead. In fact, Microsoft generated over $7B in revenue from Bing last year. While paling in comparison to Google’s search revenue, it’s still a decent amount. However, Bing’s market share has hovered around incredibly low levels:
During the ChatGPT + Bing showcase, Microsoft expressed that every 1% gain in market share could drive ~$2B in revenue. Any incremental market share needle mover here could pay off in spades if Microsoft ends up pulling this off.
Now, when people usually say, “Look at the TAM! If I capture 1% market share, I will have X billion in revenue”, this is usually a terrible approach. It is far more effective to dominate a niche and then expand.
However, I believe the public was so WOW’d by the efficacy of ChatGPT and they are so tired with the same old search bar, that enough will at least try a new way of search instead of immediately shifting their default browsers to chrome.
Microsoft’s attack doesn’t only include increased functionality, it also is going after something else – gross margins.
A rich and famous book-selling bald guy once said, “Your margin is my opportunity” and it seems like Microsoft has a similar attack-style approach. In a follow-up interview, Satya Nadella (Microsoft CEO) said he is willing to cut gross margins in search in order to eat into Google’s search revenue.
In summary, there were three main salvos fired at Google from Microsoft:
Comparing the current opportunity in AI-powered search to the cloud in 2007-2008
Framing search as the most profitable, large software business, that can be earned 1 user at a time
Suggesting that the gross margin of search is going to drop forever, but that it’s all incremental to
Let the games begin.
Now onto the Demos…
4. Product Walkthrough 👉 Microsoft’s Bing/Edge + ChatGPT
Better search that will provide more relevant search results and a sidebar with comprehensive results. Looks like they’ve tossed in a sidebar that kind of looks like a juiced-up Wikipedia page to me.
Complete answers. Bing reviews results from across the web to find and summarize answers.
A new chat experience that will streamline more complex searches.
Creativity that enables the new Bing to generate content.
New Microsoft Edge experience that now features a sidebar that can summarize content as well as a chat function to compare and look beyond the content and compose content (adjusting for tone, format, and length)
Here are some more screenshots:
Summarizing content like an earnings call transcript…
Comparing this data to out-of-sample data…
Rewriting Code in another language…
Composing content natively in your browser…
How MSFT is accelerating AI adoption…
It’s hard not to get VERY bullish on MSFT after this…
5. Product Walkthrough 👉 Google’s Bard
On all accounts, the Google demo was extremely… uninspiring.
The stock was even down 7.5% on demo day vs. MSFT flat.
The event on Wednesday did not showcase much of Bard’s capabilities & suffered from technical glitches, including an incorrect AI-generated query response in videos & promotions…
Google also spent more time showing how AI has been integrated across a number of products, much of which has been previously revealed.
Bard is Google’s conversational AI service rival of ChatGPT, and it seeks to combine the breadth of knowledge that Google has amassed over the years with the power, intelligence, and creativity of its large language models including LaMDA.
Specifically, Google believes Bard can improve the search experience by exploring a diverse range of outcomes for subjective searches (‘Buying a New Car’ for example) powered by generative AI.
The interface looks very similar to Microsoft + Bing in that it shows a generative AI answer on the top, followed by more opinions and views using the old search methods so you can dig into more information, as there is NORA (No One Right Answer).
Outside of Bard & generative AI, showcased how AI has been integrated into many different Google services including Search, Lens, Translation, & Maps. However, much of what was shown at the demo day was previously announced/previewed at Google I/O & Stream On 2022.
Key highlights include: 1) Lens, which combines the power of image & text AI models and is used 10B+ times/month, can “search your screen” on Android soon and combine text and image search in multi-search; 2) Maps pairs advanced AI with AR to power Immersive View, a multi-dimensional framework allowing consumers to experience a location virtually, and Live View, which overlays information such as directions and nearby point of interest on top of live camera view.
Wrapping Up…
AI right now, is the next new thing.
A lot of VC capital and buzz will crowd around novel companies with some semblance of AI involved. I think this revitalized movement has two possible outcomes:
AI becomes the new software: In this scenario, a bunch of burgeoning startups come up through the ranks solving very niche and specific use cases and essential build “applications” on top of existing AI infrastructure. In this scenario, the TAM is so big that it allows multiple companies to get funded, go public, and carve out their own product/application-specific use case, much like there is in the software stack today.
The big guys eat everyone’s lunch: Microsoft already focuses so heavily on productivity gains that they have so much collected data when it comes to productivity optimization that AI is an easy slot-in to existing products. Google’s dominance in data collection in search gives it enough of a moat to stave off fast-moving Microsoft to some degree, but Microsoft still steals some share. Smaller companies are either rolled into the mega caps, or can’t compete on cost because of extensive CAPEX build-out amongst the mega cap majors. Reminder – Microsoft casually invested $10B into ONE company (OpenAI). While up 425% since 2020, total VC investment in Generative AI is only at $2.1B.
Choose your fighter wisely.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
What else we Grittin’ On?
HOUSING. Mortgage demand jumped as homebuyers reemerge. Mortgage rates have fallen for 5 straight weeks.
PESSIMISM. US consumers are largely pessimistic on economic growth and the stock market. A record high 48% say stocks will decline over the next 6 months.
TARIFF. The US is planning a 200% tariff on Russian aluminum. This would effectively end US imports of Russian aluminum.
SOFTBANK. Masayoshi Son's Vision Fund lost $5.9 billion last quarter. The fund lost $63 billion in 2022.
DENIED. A federal judge denied a request to allow SBF use of messaging apps. Good call.
Sources
https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-note-2023-02-01/
https://openai.com/blog/chatgpt/
https://backlinko.com/bing-users
https://blogs.microsoft.com/blog/2023/02/07/reinventing-search-with-a-new-ai-powered-microsoft-bing-and-edge-your-copilot-for-the-web/
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