Google Bets on AI-Powered Ads to Offset Search Revenue Deceleration

The Deceleration Problem

Alphabet disclosed third-quarter revenue of $127.6 billion on 28 October, a 25 per cent year-on-year increase that nonetheless sent shares down 8 per cent in after-hours trading. The reason: search advertising revenue, long the company's financial backbone, grew just 12 per cent year-on-year - a sharp drop from 17 per cent in the second quarter and 19 per cent in the first. For a business segment that has reliably delivered double-digit expansion for years, the trajectory is striking.

At Opentechwire, we've tracked similar inflection points in platform advertising before - the moment when user growth alone can no longer sustain revenue momentum, and companies turn to new formats or surfaces to extract more value from existing traffic. Google now finds itself at precisely that juncture, with generative AI positioned as both the source of disruption and the proposed solution.

Philipp Schindler, Google's chief business officer, announced during the earnings call that the company is expanding ads within AI Mode - its conversational search interface - to international markets for the first time. The move also brings multi-turn ads, which respond to follow-up queries in a single session, to users in the United States. According to Schindler, click-through rates for sponsored product listings within AI Mode already match those of organic listings in traditional search, and internal research suggests users perceive the ads as relevant rather than intrusive.

Longer Queries, New Surfaces

Google's AI Mode represents a structural departure from the ten-blue-links paradigm that has governed search for two decades. Chief executive Sundar Pichai noted that queries submitted through AI Mode are three times longer on average than traditional keyword searches, and that one in five AI Mode searches globally incorporate voice, images, or documents. The company also reported surpassing 50 billion visual searches per month, though it did not break out how many of those occur within AI Mode versus legacy image search.

The shift to longer, more conversational queries creates new inventory for advertisers, but it also introduces complexity. Traditional search ads are optimised for short, high-intent keywords - "buy running shoes size 10" rather than "I'm training for a marathon in humid weather and need shoes with good ventilation that won't cause blisters." The latter query may signal intent, but it also demands a more sophisticated matching algorithm and a different creative approach from advertisers.

Pichai said that search query volume grew at its fastest year-on-year rate in five years, though the company declined to share the specific percentage. That growth is encouraging, but it does not yet appear to be translating into proportional revenue gains. The gap between query growth and revenue growth suggests either that AI Mode queries are less monetisable per impression, or that the company is still in the early stages of scaling its ad load within the new interface.

The International Expansion Gambit

Taking AI Mode ads global is a pragmatic move. Google has historically generated roughly half its revenue outside the United States, and international markets offer a larger addressable audience for experimentation. The timing also aligns with regulatory pressure in Europe and ongoing antitrust scrutiny in the US, both of which have raised questions about Google's dominance in search advertising. Expanding ad formats within AI-powered experiences allows the company to argue that it is innovating rather than entrenching existing market positions.

The formats introduced in May - conversational discovery ads and sponsored recommendations integrated into AI-generated answers - are designed to feel native to the AI experience. Unlike banner ads or text links appended to a results page, these ads are woven into the conversational flow, appearing as part of the AI's response rather than as a separate module. Whether that integration feels helpful or manipulative will depend largely on execution, and early user research is no substitute for sustained behaviour at scale.

It is worth noting that Google Cloud revenue surged 103 per cent to $30.7 billion in the quarter, a figure that underscores the company's success in selling AI infrastructure and services to enterprises. The contrast with search advertising is stark: one business is accelerating rapidly, the other is decelerating. The divergence raises the question of whether Google's long-term growth story is shifting from consumer advertising to enterprise cloud, with AI serving as the connective tissue between the two.

Monetisation Under Pressure

The slowdown in search advertising growth is not occurring in isolation. The broader digital advertising market has faced headwinds from macroeconomic uncertainty, shifting privacy regulations, and the fragmentation of user attention across platforms. Meta, Amazon, and ByteDance have all expanded their advertising businesses in recent quarters, eating into budgets that might once have gone exclusively to Google.

At the same time, generative AI introduces new costs. Running large language models at the scale required to serve billions of queries per month is expensive, both in terms of compute and energy. Google has not disclosed the marginal cost of an AI Mode query versus a traditional search query, but industry estimates suggest the former is significantly higher. That cost structure makes monetisation not just desirable but necessary - AI Mode needs to generate more revenue per query, or at least comparable revenue, to justify the infrastructure investment.

The company's user research indicating that people find AI Mode ads relevant is a positive signal, but relevance alone does not guarantee revenue. Advertisers will ultimately decide whether the format delivers return on investment, and that calculus will depend on conversion rates, attribution models, and the competitive dynamics of bidding within a conversational interface. If queries are three times longer and more personalised, does that mean three times the signal for targeting, or three times the ambiguity for matching?

What Comes Next

Google's third-quarter results and the accompanying expansion of AI Mode ads mark a clear strategic bet: that conversational, multimodal search can become a new advertising surface at scale, and that doing so internationally can offset the deceleration in traditional search. The company has the user base, the infrastructure, and the AI capabilities to execute on that vision. What remains uncertain is whether advertisers and users will embrace the new formats at the pace required to stabilise revenue growth.

The funding rounds we've followed across the region - from Southeast Asian e-commerce platforms to Indian edtech startups - often hinge on a similar inflection: the moment when a company must prove that a new product or surface can generate revenue, not just engagement. Google is facing that test at a vastly larger scale, with Wall Street watching closely. The next few quarters will reveal whether AI Mode is a growth engine or a costly experiment, and whether the international expansion can deliver the returns the company needs.