Got an ecommerce challenge? Awin has you covered. With Awin’s affiliate platform, brands of all sizes can unlock endless marketing opportunities, reach consumers everywhere, and choose partners that fit their goals. Control costs, customize programs, and drive real results. Learn more at awin.com/emarketer.

Marcus Johnson (00:00):

Got an e-commerce challenge? Awin has you covered. With Awin's affiliate platform, brands of all sizes can unlock endless marketing opportunities, reach consumers everywhere and choose partners that fit their goals. Sounds good to me. Control costs, customize programs, and drive real results. Learn more at awin.com/emarketer.

Hey gang, it's Friday, August 8th. Yory, Jeremy, and listeners, welcome to Behind the Numbers, a Emarketer video podcast made possible by Awin. I'm Marcus, and today we have two folks joining me. We have our principal analyst who heads up on digital advertising media and tech teams living in New Jersey. It's Yory Wurmser.

Yory Wurmser (00:00):

Hey Marcus, how are you?

Marcus Johnson (00:44):

Hey fella. Very good. How are you doing?

Yory Wurmser (00:45):

Doing great.

Marcus Johnson (00:47):

Very nice. We're also joined by the senior director of briefings living across the Hudson River from Yory in New York, it's Jeremy Goldman.

Jeremy Goldman (00:54):

Hey, happy Frozen Custard day. I would've brought you something, but you're not with us in person.

Marcus Johnson (01:00):

Even if I was no need. It sounds horrible. I think I had it once. Wasn't great. America.

Jeremy Goldman (01:06):

It's really great. Sorry.

Marcus Johnson (01:08):

Yory?

Yory Wurmser (01:09):

It's a lot like ice cream. I'm not a huge fan, But I'll take it.

Marcus Johnson (01:14):

Uri said no, he doesn't like it either. Today's fact. What are the most digits of PI that have been memorized? So PI is a ratio of the circumference of a circle and its diameter. But how many numbers did someone memorize from the decimal place onwards? So three points then how many numbers on from there? Guesses?

Jeremy Goldman (01:42):

Ooh, I don't know, but he was very popular in high school. Yory any guesses how many-

Yory Wurmser (01:49):

I'm going to guess 600 and that just seems insane, but some people are really crazy that way. Who knows?

Marcus Johnson (01:56):

Well get ready for it. According to the Guinness World Records, in March of 2015, Rajvir Meena at the VIT University of Vellore in India reeled off 70,000-

Jeremy Goldman (02:13):

No.

Marcus Johnson (02:14):

... decimal places of PI from memory. That is insane. It took him nine hours.

Jeremy Goldman (02:21):

Nine hours without a meal to do that. You could have stopped at half that and won the record, right?

Marcus Johnson (02:27):

Yeah, probably.

Jeremy Goldman (02:28):

70,000. Wow.

Marcus Johnson (02:30):

Remarkable. God bless the people who were there checking his work.

Jeremy Goldman (02:35):

Oh my god.

Marcus Johnson (02:36):

I don't even know what episode we did last.

Yory Wurmser (02:38):

I can't remember a phone number when someone says it.

Jeremy Goldman (02:42):

That's not good. Yeah. Wow.

Marcus Johnson (02:45):

Impressive. Anyway, today's real topic, Google. Is AI killing Google search? It might be doing the opposite, writes Asa Fitch of the Journal. He explains that AI upstarts were supposed to lay siege to Google's search engine dominance, but so far the defense, Google, is winning. He points out that one of Google's lines of defense has been its AI overview tool where users can see answers generated by its Gemini AI model hovering above their traditional search results. And Google is also rolling out an AI mode that competes more directly with chatbots. But Yory, has Google already fended off the AI search competition with its AI overviews feature? Put another way, Jeremy, I liked how you put this in your article. Yory, he said, can Google slow the shift to AI challenges like ChatGPT and perplexity?

Yory Wurmser (03:41):

I think they've been successful so far. I wouldn't say they've completely fended it off for good. It's an ongoing process ChatGPT, perplexity, Claude, all of these are going to continue to innovate, get more commercial type of searches, have more features. Google's doing the same with AI mode. The game's not over until that plays out, but so far I think they reported 2 billion people are seeing AI overviews. It's a really impressive rollout., And they're monetizing it well, so far so good for Google.

Jeremy Goldman (04:19):

Yeah, I think by the way, Marcus, we talk so much now about training data and users are training data. And Google can run so many different experiments at scale simultaneously to see what works and what doesn't in terms of monetizing AI search. And all these competitors we're talking about, they're doing a lot of really interesting things, but they're starting off a very small basis in relation to what Google has to work with. And that just means that if Google is running the right experiments and drawing the right conclusions from that, they're going to be able to keep on growing and keep monetizing this space. And obviously they have a little bit of money to spend in terms of innovation.

Marcus Johnson (05:04):

[inaudible 00:05:04].

Yory Wurmser (05:04):

Just slightly. And consumer behavior is sticky. That's the thing you have to remember. So all that gigantic user base to Google has gives them runway to make changes and gives them a bulwark against ChatGPT in the short term. It's the longer term we'll see if once word of mouth spreads, already 700 million people are using ChatGPT. So a lot of word of mouth already. But that stickiness gives Google a big advantage at this moment.

Jeremy Goldman (05:33):

And controlling the interface, which that's why the Perplexities of the world, with Comet and OpenAI with their plans, that's why they want to control the interface too. But you're going to have to give a really good experience to people if you're going to expect them to jettison Chrome.

Marcus Johnson (05:49):

Yeah, the pushback there, David Streitfeld of the Times was saying OpenAI's ChatGPT has quickly become a viable Google competitor, pointing to an anonymous estimate showing that the daily total of ChatGPT queries is between 15 to 20% of Google's search volume, already making it more of a threat to Google than Microsoft's Bing Search ever was. However, Melissa Otto head of research at S&P global Visible Alpha notes that the lack of ads on ChatGPT are helping to drive this early usage. So what happens if and when ChatGPT adds to it? Will it be as an appealing service as a Google? Maybe that'll slow things down in terms of adoption,

Yory Wurmser (06:34):

There's no knowing exactly how ads will appear to on ChatGPT. They may be of a different type, they may be much more subtle. They may monetize partially by ads and partially by affiliate, or shopping features or subscriptions.

Jeremy Goldman (06:50):

And objectively, who would you trust more in terms of figuring out a really strong ads model? The company that's already done it, or the company that hasn't? So it doesn't mean that ChatGPT can't or that these other nascent players can't, but Google has thus far, if you think about how everybody loves to say this about flying the ship while you're rebuilding it or whatever, that's what Google's doing right now. They are serving up a lot of ads in a totally different way and calculating how much they need to get on a per ad basis, while at the same time convincing advertisers that there's ads are worth it and changing essentially people's approach towards ads.

(07:34):

If you see ads now in an AI mode, what Google's trying to tell people is that you should perceive this ad as different, because it's higher intent. Maybe there are going to be less ads in general, you're going to have lower click through, but there's higher intent. So in some ways it's an argument that retail media has made for a while, which is that it's okay to pay us more for this ad, because a lot of these people who convert from the ad are going to actually buy your product. So they're rebuilding their whole entire company while at the same time growing revenues and that's not that easy to do.

Yory Wurmser (08:12):

But I think it's also a valid point that Chat Gpt, with its pretty impressive traffic already, has established itself as a legitimate competitor in a way that Google hasn't had in 20 years for traditional search. So I think we're just at the start of a pretty epic battle.

Jeremy Goldman (08:31):

Yeah. And by the way, the definition of search is changing. If you think about how people search for things now, we classify search as a particular type of spending, and different from social media ad spending. But the way that human beings search now, they're often going to social, they're going to more and more different search engines and different types of experiences. So there's no reason to not continue to expect this bifurcation of what search is and it to just be on all these different platforms that are not necessarily Google.

Marcus Johnson (09:03):

Yeah. So Yory, I want to circle back to something that you'd said, which was AI overviews being used by more and people. You pointed out that Google just said that their tool now has over 2 billion monthly users. That's up from 1.5 billion in Q1. So very rapid growth. However, Mr. Fitch of the Times was pointing out that growing usage doesn't necessarily mean the ads business is safe. Now they did grow 10%, Google advertising, in Q2. That's up from 11% to the last Q2. So decent growth, very decent growth, especially given how big that business is.

(09:39):

But Mr. Fitch of the Wall Street Journal thinks the real test, you're a country, what you were saying of Google search engine resilience lies in the future, because whilst AI overviews are boosting how many links users see, metrics show people aren't actually clicking on revenue generating links as much. BrightEdge research showing that search impressions, the number of links that show up in searches, even if they're not clicked, grew 50% in the year since the overviews were launched. So can they hike up the price of those remaining links that are going to be clicked enough to combat this trend? Because this part of it doesn't look good for Google.

Yory Wurmser (10:21):

I think those prices are going to go way up, because the intent of people who click through on generative search is usually much higher. So it's a much more valuable click. And I think advertisers pay for it. And also I think if the tool becomes more useful, you'll have more search volume. Is that enough to offset what you're going to lose from all the clicks you would have had otherwise? All these zero click searches are going to take away ad revenue. Is it enough? Are higher CPCs or CPMs or however they are going to charge for it and increased search volume going to be enough to offset that? And I think that's a completely open question.

Jeremy Goldman (11:07):

There are some publishers that are going to be severely impacted by zero click. And if they're not getting a lot of clicks from Google, then does that just depress their ability to pay for Google Ads, which is something that they've been paying for for years. So Google is walking this tightrope of trying to keep publishers alive. Who knows how. They don't necessarily care about the margins of the publishers, but they do want them to survive. Because if not, then Google is on the hook for creating all of that content that makes Google very useful. It has to, again, walk that tightrope of trying to have a lot of utility and give people the answer, while at the same time getting enough people to click to then have these thriving businesses that see value in investing money back into Google.

Yory Wurmser (11:59):

And it's not just media publishers, it's retailers too. Especially as Google gets into agentic purchasing, completing purchases on Google's platform, they start directly competing with retailers. They have to create a model that creates them as partners, otherwise they're just not going to be advertising anymore. And you already see that with Amazon pooling all Google Ads last week. So I think we're just going to see more and more of a strategic calibration going on for Google. How much do they offer on their platform without alienating all the data and advertisers that they also need?

Marcus Johnson (12:44):

Yeah. I wonder if part of the conversation here is the click versus query piece of this. Because we're so used to speaking in clicks, it's hard to think differently, right? I was looking at some research on what AI overviews are doing to search behavior. And peer research said that users who saw an AI summary clicked on a traditional search result link in 8% of all visits. Those who did not see one clicked twice as often, 15% of visits. And Google users are also more likely to end their browsing session entirely after visiting a search page with an AI summary than pages without one. So I wonder if we're so used to talking about clicks, but really when you're talking about using something like a ChatGPT, it's about questions. It's about queries. It's about impressions.

Jeremy Goldman (13:34):

By the way, this is the same thing that other platforms have had to talk about for years is what should you be focused on? When you post something on LinkedIn? You might want to get 60 engagements, but if you post a video, then you're going to be focused on watch time. And if you've got people to watch your little video for 28 hours, then maybe Sophie who does our social will be proud of you. So I think that a lot of it depends on the metric that you're looking at. You're spot on. And I know that, again, this is something that Yory and I talked about offline, but could the model in terms of how people are generally paying, could it go from click to per impression a little bit more?

Marcus Johnson (14:16):

So the final piece of this for me in terms of Google fending other people off, AI overviews. Absolutely going to help. But the Journal article was pointing that Google has a track record of making devastating defensive moves when it needs to. Exhibit A, when search traffic was poised to shift to mobile phones two decades ago. Google bought Android and developed its own mobile phone operating system. Exhibit B, iPhones became ubiquitous. So Google started paying Apple billions of dollars to make its search engine the default in the company's Sapphire browser. And Exhibit C, when Microsoft got a head start on the AI boom when things really kicked off about three years ago. And there was concern about Bing taking market share from Google that led Google to splash out on AI computing, and Microsoft didn't manage to really put a dent in it at all. So you'd be misplaced to underestimate how good Google is at defending itself. And also how much money, Jeremy, to what you were saying earlier, it has to maintain its dominant position in the space.

Yory Wurmser (15:23):

They have so many advantages, but there's also one major weakness or vulnerability they have right now, and that's antitrust. All of these moves that they've done in the past have raised the eyebrows of antitrust regulators. And if they've lost these two trials now, the remedy will come out within the next few days or weeks on the search one, which could see them being forced to divest Chrome. I don't know if that's going to happen, but the latitude that they used to have on some of these big, big bets might be a little less than it was [inaudible 00:16:02].

Jeremy Goldman (16:02):

We should have two versions of this episode. You need to say like, "That's definitely going to happen." And then we can cut that in after the fact. Yeah, I agree. I definitely do not know what's going to happen. I think it's clearly a very important moment in time for them. I also think that building on your point to do certain moves right now, anything that the company does will be viewed maybe a little bit cynically and say like, "Oh, well they know something that we don't as regulators, so let's look really hard at this." In the same way that when Facebook bought Instagram years later, people said, "Oh wait, we should have known that we shouldn't have let you do that." And wanted a bit of a do-over. So now I think regulators are thinking much more proactively about this type of stuff.

(16:47):

I would say the other, I think it is a disadvantage right now, is maybe being a public company that is competing with a whole lot of private companies. Because one thing that I looked at very closely is the capital expenditures that the company is making in relation to its core ad business. I looked at search and network, and I excluded YouTube and the growth rate, that is not that high. We're talking about a lot higher growth. This was about 10% over a period of, I think I had looked at six to eight quarters, versus it going up about 300% in terms of capital expenditures. That's a lot, right? And for these private companies, they're not viewed or judged in the same lens, which means that they might have a little bit more time to figure certain things out. Google, it has a business model, but it's also held up to a lot more scrutiny as a result of being public.

Marcus Johnson (17:44):

Yeah, I completely agree with that last point. And that actually takes me, honestly, to my next last question because I want to talk a bit more about their earnings and what was most noteworthy for you guys with regards to their Q2 earnings. We mentioned that Google's ad revenue grew 10% this quarter, Q2 versus 11% I think it grew the previous one. But the thing that stuck out to me was exactly what you said, Jeremy. The company made over 70 billion in ad revenue in the quarter. It pocketed 28 billion in net income, which is pretty impressive, you would. Think it's up 20% year over year. And investors were still underwhelmed and shares only got a 2% bounce after the news.

(18:34):

Why? David Streitfeld of the New York Times pointing out exactly what you're saying, capital expenditures for the year will be 10 billion dollars higher than the company had projected because of its booming cloud storage business, which means Google is now estimated to spend 85 billion on CapEx. A few years ago, Google was spending about a quarter of that. And because they're a public company definitely something to watch as shareholders become wary of how much they're spending there for the future versus the returns that they're getting on the shares in the company. What stood out to you the most, Jeremy, with regards to Google's Q2 earnings?

Jeremy Goldman (19:11):

So in addition to the AI investment, the CapEx investment, which we just talked about, I think one of the interesting things building on AI, everybody's talking about AI is going to take our jobs. And Google's headcount was up 2.5% year over year. So if there's one company that could arguably afford to have less people and just have all the AI focus on it and just be really, really profitable, it would be Google. But I think that there are a lot of companies that see AI as a growth engine. And the fact that they are hiring, when if anybody could automate everything, you could clearly say Google could do it.

(19:52):

And that's not what we're seeing. You are seeing obviously a lot of companies that have this very conservative mindset that say, "Let's just go for having a bit more profitability, but let's just be smaller. And that's one way to go. But I think there are a lot of companies that say, "Okay, but what's the opportunity to create economic value based off of hiring people? And yeah, those people might just do different jobs than they would've done a year or two ago, but that's not necessarily a bad thing.

Marcus Johnson (20:23):

That's a good one. Yory, how about you?

Yory Wurmser (20:25):

I think the 85 billion was the number that popped in my mind, but for good reasons. Sundar Pichai always had a reputation of being a somewhat cautious leader. I think he's really not going all in on AI as he has to, and he's being pretty bold with this expenditure. So 85 billion I think is actually a good sign for Google, not something to cut back there. I wouldn't sell on that number, I'd buy on that number.

Marcus Johnson (20:54):

Okay. Well that's what we've got time for this episode. Thank you so much to my guests. Thank you to Yory.

Yory Wurmser (20:59):

Great to be here.

Marcus Johnson (21:00):

And to Jeremy,

Jeremy Goldman (21:01):

Pleasure as always.

Marcus Johnson (21:03):

Yes indeed. And thank you to the whole editing crew, to everyone for listening into Behind the Numbers, Emarketer video podcast made possible by Awin. Make sure you subscribe and follow, if you have the time, leave a rating and review if you could. I'll see you guys on Monday hopefully for that episode where we'll be checking out what's going on with Meta, Snap and Reddit. Happiest of weekends.