Why AI is boosting Meta's ad business while hurting Google search

Meta's advertising revenue has more than doubled Google's Search business in the wake of the artificial intelligence (AI) revolution reshaping the online advertising landscape. The two tech giants have reigned over the digital ad market for nearly two decades, raking in billions of dollars through targeted ads on their platforms. However, the advent of AI tools like ChatGPT is altering how people search for information and discover products online, posing new challenges for Meta and Google.

Meta's ad business has experienced a remarkable growth spurt, more than doubling its increase over Google's Search business. In the third quarter, Meta's advertising revenue rose by 26% compared to a year ago, while Google's Search and other divisions reported a 12% growth, according to CNBC. This indicates that Meta is making significant strides in online advertising despite the disruptive impact of AI on internet usage.

Meta's advertising revenue for the third quarter amounted to $63.1 billion, closely matching Google's $63.4 billion. The two companies are now virtually equal in size, with Google holding a slight edge in advertising revenue from Search and other services. The divergence in their advertising growth rates stands at 14 percentage points, the widest gap in Meta's favor since 2021.

This widening gap confirms Meta's faster growth trajectory, supporting CEO Mark Zuckerberg's claim that the company's AI investments are driving advertisers to reach the right audience on Facebook and Instagram.

As AI technologies such as ChatGPT and Anthropic's Claude gain popularity, they are transforming the way users search for information and discover products. These AI-powered assistants can provide direct answers to queries, potentially diminishing the number of clicks on Google's traditional blue search links, which could affect the ads shown alongside those results.

Additionally, Meta has launched its Muse assistant, further bolstering its online presence and ad opportunities. Meanwhile, users are spending more time on Instagram, providing Meta with additional avenues to display advertisements.

AI advancements could present a formidable challenge to Google's advertising business if users increasingly rely on AI chatbots and assistants for information instead of traditional search engines. Analysts predict that this shift could significantly impact Google's advertising revenue. Moreover, Google's AI-driven features, such as AI Overviews and AI Mode, which generate AI-generated summaries instead of just displaying website links, may also contribute to a decline in search-related ad revenue.

UBS analysts have expressed concern that Google's advertising strength could face further pressure from Meta's strong performance and the growing influence of AI assistants. Meta has capitalized on AI to enhance its advertising business following Apple's 2021 privacy changes, which made it more difficult for Meta to track users and serve personalized ads to iPhone users.

In response, Meta has heavily invested in AI to improve its advertising tools, with the introduction of an AI business assistant for advertisers in 2023. This tool helps businesses optimize their campaigns and deliver better results, resulting in increased customer conversions and reduced advertising expenses.

Meta's AI advertising tools have proven effective, with nearly 10 million advertisers utilizing at least one of these tools in the third quarter, according to CFO Susan Li. Li reported that advertisers who followed Meta's AI recommendations saw a 5% increase in conversions and a 9% rise in ad spending compared to those who did not utilize the recommendations.

To illustrate the potential of Meta's AI tools, Li shared an example of syrup producer Simply Organic Maple, which experienced a 57% increase in sales and a 36% reduction in the cost per purchase after implementing Meta's AI assistant.

As AI reshapes the online advertising market, Meta and Google continue to adapt to the evolving landscape. Meta's rapid growth in advertising revenue, fueled by AI-powered tools, underscores the company's commitment to staying ahead of the competition. Google, on the other hand, faces the challenge of integrating its AI capabilities into its advertising products, as users increasingly turn to AI chatbots and assistants for information.