Is Google Search Threatened by ChatGPT and Generative AI?
Palm Capital looks for companies with enduring competitive advantages led by outstanding managers. They invest when their prices are lower than they think they’re worth, aiming to capitalize on them as they increase in economic value over time. They only sell if fundamentals deteriorate, or they find others offering potentially better after-tax returns.
In the three months ended March 31, 2023, Palm Capital’s portfolio increased by 24.3% after management fees and trading expenses. Since they started just over five years ago, their portfolio has returned 5.9% per annum after management fees and expenses. They outperformed the MSCI World Index by 0.3% a year.
Last year, Generative AI established itself with the launch of DALL-E, Midjourney, Stable Diffusion, and finally ChatGPT. ChatGPT can give users straight answers that they didn’t have to dig for themselves, and it racked up one million users within five days of launch. An early narrative about ChatGPT was how it would break Google Search because there’s no way for them to monetize by selling ads. The narrative caught on when Microsoft announced its plans to integrate ChatGPT into its search engine, Bing.
There are three types of Google search queries: navigation, informational, and transactional. Almost all ads on Google come from transactional search. In its current form, ChatGPT is unlikely to break transactional lookup. Google also has a significant distribution advantage, with a 90% market share in search. It has become its eponym and is the default search engine in almost all browsers and on all phones. Moreover, most websites are optimized for Google Search.
Google has been using machine learning and artificial intelligence to improve its search engine for many years. It recently launched its own conversational chat program, Bard, and is integrating it into its search engine. And it has several products where it can throw its AI capabilities.
Generative AI is probabilistic and non-deterministic. Can return very convincing incorrect answers. Until there is a way to verify its answers, it is unlikely to become the de facto destination for research. Europe and Canada, which have introduced heavy legislation in this regard, are a case in point. And regulation favors incumbents as it increases costs for a newcomer.
Palm Capital believes that generative AI is more of a propelling technology that will enhance Google’s products rather than a disruptive one that will replace them. Unlike the Internet, which reduced the marginal cost of information distribution to zero, artificial intelligence does not reduce the marginal cost of information generation to zero. Each query requires compute or GPU power. Only the largest companies with the resources to fund this and experience implementing and offering online products at scale will be able to do it for AI.
In conclusion, Palm Capital remains very comfortable with their position at Alphabet, and regulation favors incumbents as it increases costs for a newcomer.
Will AI Replace Google Search?
AI and ChatGPT are the buzzwords in the tech world, and there’s a lot of speculation about how they will impact Google Search’s dominance. The article suggests that while AI is evolving rapidly, it is still in its infancy and will not replace Google Search anytime soon.
Google has been using machine learning and AI for many years, and it recently launched its own conversational chat program, Bard. It also has several products where it can throw its AI capabilities. Google’s extensive experience in implementing and offering online products at scale gives them a significant advantage in the AI space.
Moreover, AI does not reduce the marginal cost of information generation to zero, which is a significant factor that will limit AI’s penetration in the market. Each query requires compute or GPU power, which only the largest companies with the resources to fund this will be able to do for AI.
The article suggests that regulation favors incumbents as it increases costs for a newcomer, which is another factor that works in Google’s favor. Europe and Canada have already introduced heavy legislation to regulate AI, indicating a cautious approach towards the technology.
In conclusion, while AI is a propelling technology that will enhance Google’s products, it is not a disruptive one that will replace them. Palm Capital remains comfortable with their position at Alphabet, and regulation favors incumbents as it increases costs for a newcomer.
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At Palm Capital, we look for companies with enduring competitive advantages led by outstanding managers. We patiently wait to invest when their prices are lower than we think they are worth, aiming to capitalize on them as they increase in economic value over time. We only sell if fundamentals deteriorate or we find others offering potentially better after-tax returns.
Our performance
In the three months ended March 31, 2023, our portfolio increased by 24.3% after management fees and trading expenses.
Since we started just over five years ago, our portfolio has returned 5.9% per annum after management fees and expenses. We outperformed the MSCI World Index by 0.3% a year.
Is Google Search Threatened by ChatGPT and Generative AI?
Last year, Generative AI established itself with the launch of DALL-E, Midjourney, Stable Diffusion and finally ChatGPT. ChatGPT caused the most uproar, probably because it was the first time a layman could use artificial intelligence and see the results firsthand. It racked up one million users within five days of launch.
An early narrative about ChatGPT was how it would break Google Search because it gave users straight answers that they didn’t have to dig for themselves. And if Google sticks to this model and users don’t have to click on links, there’s no way for them to monetize by selling ads. The narrative caught on when Microsoft announced its plans to integrate ChatGPT into its search engine, Bing.
We don’t think it’s easy to unseat Google (GOOG) (GOOGL). We will explain why below.
1. There are three types of Google search queries:
- navigation – search for a particular website,
- informational: learn something e
- transactional: intention to buy something.
- Almost all ads on Google come from transactional search. In fact, Google does not show ads, that is, it earns, on 80% of all searches. And in its current form, ChatGPT is unlikely to break transactional lookup.
2. Google also has a significant distribution advantage. With a 90% market share in search, it has become its eponym. It is the default search engine in almost all browsers and on all phones. In 2011, Bill Gurley expanded on his best moat:
“Android, as well as Chrome… are not ‘products‘ in the classic business sense. They have no intention of becoming their own ‘cheap castles‘. Rather they are very expensive and very aggressive ‘ditches‘, funded by google castle height and grandeur. Google’s goal is not defensive offensive. They are not trying to do aprofit on Android or Chrome. They want to take whatever layer that lives between them and the consumer and make it free. Because these layers are basically software products with no variables costs, this is a very viable defensive strategy. Essentially, they’re not just building a moat; Google is also burning the earth for 250 miles outside the castle to ensure that no one can get close. “
And to top it off, most websites are optimized for Google Search. It would be a big deal to optimize for another search engine like Bing.
3. Google has been using machine learning and artificial intelligence to improve their search engine for many years and has been leading the space. He is even the inventor of the transformer (the “T” in “GPT”), the key technology behind generative AI. It recently launched its own conversational chat program, Bard, and is integrating it into its search engine. And it has several products where it can throw its AI capabilities; the company has 15 products with more than 500 million users, six of which have more than two billion users. It showcased exciting generative AI features for its Workplace apps, including ways to generate articles in Docs based on a user’s bullet points and the ability to produce images and videos to illustrate presentations in Slides.
4. Generative AI is probabilistic and non-deterministic. A deterministic model, such as a calculator, provides exact outputs for certain inputs. Can distinguish between right and wrong. A probabilistic Large Language Model like ChatGPT, on the other hand, is a statistical model that works out which parts of language are likely to go together in different contexts. This explains why ChatGPT can return very convincing incorrect answers. Until there is a way to verify its answers, it is unlikely to become the de facto destination for research.
Clayton Christensen, in his book “The Innovator’s Dilemma” distinguished between two types of technologies: disruptive and sustaining:
“Supporting technologies…improve the performance of established products, (in a way that) mainstream customers…have historically appreciated.…Disruptive technologies have (new) features that some fringe customers appreciate.
Generative AI is evolving rapidly and is in its infancy, but the above points seem to indicate that AI is more of a propelling technology that will enhance Google’s products rather than a disruptive one that will replace them. And there are two other points that we think confirm this:
- Unlike the Internet, which reduced the marginal cost of information distribution to zero, artificial intelligence does not reduce the marginal cost of information generation to zero. Each query requires compute or GPU power (which is why the leading GPU maker, Nvidia (NVDA extension), seems to be the obvious winner of AI). So, only the largest companies with the resources to fund this and experience implementing and offering online products at scale will be able to do it for AI.
- Unsure of the implications of AI, governments appear to be taking strong positions on it. Europe and Canada, which have introduced heavy legislation in this regard, are a case in point. And regulation favors incumbents as it increases costs for a newcomer.
Both factors work in Google’s favor. This explains why (aside from being undervalued) we were and remain very comfortable with our position at Alphabet.
Editor’s note: The summary points for this article were chosen by the editors of Seeking Alpha.
https://seekingalpha.com/article/4610703-palm-capital-q1-2023-investment-manager-commentary?source=feed_all_articles
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