Google is facing a slowdown in its search advertising business as users increasingly shift to AI-powered search features. In the third quarter, search ad growth decelerated to 12%, down from 17% in the second quarter. Following the earnings report, Alphabet's stock price dropped by nearly 13% on October 29.
The company's AI-driven tools, such as AI Overviews and AI Mode, are currently less effective at generating ad revenue compared to traditional search. Data from Optmyzr, which tracks 21,000 ad accounts, shows that conversion rates fell by 1.4% quarter-over-quarter, while return on ad spend declined by 2.9% in the third quarter.
Advertisers are struggling with the lack of transparency in AI-driven placements, as Google does not provide separate performance reports for AI features versus traditional search. Additionally, the shift in user behavior—where prompts are three times longer and more complex—has made it harder for brands to track conversions and attribute sales to specific ads.
To address these challenges, Google is integrating new reporting tools and AI-powered creative features like Asset Studio, powered by Gemini models. The company is also partnering with firms such as Hightouch, Jellyfish, and Tealium to help advertisers better integrate their own customer data into the Google ad ecosystem.
Despite these efforts, some advertisers are reallocating budgets to competitors like Meta, which has seen ad revenue growth more than double that of Google's search business. Google is currently evaluating potential acquisitions of AI creative tools to remain competitive against startups like Runway and Typeface.
