AI Lifts Meta’s Ad Business But Puts Google’s Search Model Under Pressure

Google and Meta have shaped the internet for the past two decades, converting billions of users into a source of trillions of dollars in advertising revenue.

Yet as online behavior evolves in the ChatGPT era, their paths are beginning to diverge. Artificial intelligence is strengthening Meta’s advertising machine, while creating mounting pressure on Google’s search business.

In the third quarter, Meta’s advertising revenue grew at more than twice the pace of Google’s search and related revenues. The results reinforce Mark Zuckerberg’s argument that Meta’s AI investments are producing more effective consumer-targeting tools and helping brands promote products and services across Facebook and Instagram, according to a CNBC report reviewed by Al Arabiya Business.

Google faces a different problem. AI-powered chatbots are increasingly positioning themselves as alternatives to conventional search engines, potentially reducing users’ dependence on clicking the blue links that generate much of Google’s advertising revenue.

Competition is also intensifying with the rise of Anthropic’s Claude and Meta’s newly launched Muse assistant. At the same time, users are spending more time on Instagram, giving Meta additional opportunities to deliver ads.

Nate Elliott, an AI analyst at Emarketer, told CNBC that these shifts have contradictory implications. AI could change how people discover information and products, encouraging them to turn to tools other than Google.

He added that if ChatGPT, Claude, or Muse become more effective at helping users find what they need, they could alter search habits for the first time in a generation—a development that would pose a serious threat to Google’s advertising business.

Meta Widens Growth Gap

Meta’s advertising revenue rose 26% year on year in the third quarter to $63.1 billion, while Google’s search segment grew 12% to $63.4 billion.

The 14-percentage-point difference marks Meta’s largest growth advantage since 2021. The two businesses are now nearly identical in size, despite Google generating an additional $11 billion from YouTube during the quarter.

After Google reported disappointing third-quarter results on Wednesday, parent company Alphabet suffered its worst one-day share decline in history. The stock fell more than 12%, wiping out roughly $500 billion in market value.

Meta was not spared investor pressure. Its shares dropped 14% in October, their worst monthly performance since October 2022, after gaining 27% in September, their strongest month since November of that year.

The market reaction reflects concerns over the enormous scale of both companies’ AI spending, which has pushed them into negative free cash flow. Investors are questioning whether record investment in AI infrastructure will produce sufficient returns to justify the outlays.

Both companies are also seeking to diversify their revenue. Meta, which still derives nearly all of its income from advertising, is investing heavily in AI models and intelligent agents as it explores a future subscription-based business.

Google, meanwhile, already benefits from a large and rapidly expanding cloud-computing division, which posted growth above 100% and quarterly revenue of $31 billion, fueled by demand for its infrastructure and in-house AI chips known as Tensor Processing Units, or TPUs.

How AI Revived Meta’s Ads

The digital advertising boom, with its high margins, helped propel both companies to the top of the technology sector and gave them trillion-dollar market valuations.

Meta, however, needed AI to restore momentum to its advertising business after Apple’s 2021 changes to iOS privacy policies sharply curtailed its ability to target iPhone users. The following year, Meta recorded the first—and only—revenue decline in its history.

OpenAI’s launch of ChatGPT in late 2022 ushered in a new era of generative AI.

Although Meta initially struggled to articulate a clear AI strategy and trailed OpenAI and Anthropic in developing advanced models, it successfully integrated AI into its advertising products, giving brands more sophisticated tools to reach users efficiently.

Nearly a year ago, the company introduced the Meta AI Business Assistant, which advertisers can connect to Ads Manager to help create campaigns and improve performance.

Meta Chief Financial Officer Susan Li said during last week’s earnings call that advertisers using the system’s recommendations saw conversion rates rise by nearly 5% and increased ad spending by 9% compared with similar advertisers that did not use the tool.

Li cited Simply Organic Maple, a maple syrup producer, as an example. She said the company’s use of the AI assistant increased purchases by 57% while cutting the cost per purchase by 36%.

She added that about 10 million advertisers used at least one of Meta’s AI tools during the third quarter.

Gemini Expands in Ads, but Search Remains Google’s Weak Point

Google has a comparable opportunity to deploy AI across its advertising products, including YouTube.

Chief Business Officer Philipp Schindler said during the earnings call that Google is rolling out Gemini models across its entire advertising infrastructure to give advertisers additional tools and improve ad quality.

The company’s central challenge, however, is that its search engine now competes directly with ChatGPT and Claude. Google has increasingly displayed AI-generated answers and summaries through AI Overviews and AI Mode, rather than sending users straight to external website links.

Google said search volume reached a record level in the third quarter, but revenue growth slowed, raising questions about whether AI-generated summaries are weakening the traditional advertising model.

Analysts at UBS wrote after Google’s results that concerns over declining reliance on search amid the spread of AI would return to the forefront, especially given Meta’s strong quarterly advertising performance and the continuing threat from Muse and intelligent agents.

Betting Hundreds of Billions on AI

Both companies are making major bets on AI’s future and investing hundreds of billions of dollars in the infrastructure required to build new models and services.

Google expects capital expenditures to reach $205 billion this year, while Meta anticipates spending as much as $145 billion.

Advertising remains the core business for both companies, but each is investing in a future that could look very different from today’s model.

Google is further along in diversifying revenue, with advertising now representing less than two-thirds of its total income. Meta, by contrast, still generates about 98% of its sales from advertising.

Even so, Wedbush analysts argue that Google’s ability to monetize search remains central to its investment case.

In a report published Thursday, they wrote that Alphabet’s shares may struggle to regain their appeal unless sentiment about the future of search improves. That, they said, will likely require new advertising products and clear evidence that Google can generate search-related revenue in the AI era at levels comparable to those of the past.

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