What Google advertising business?
To be fair, Google did earn $127.6 billion in Q3 this year, up a staggering 25% from a year before. And that’s practically all from advertising. YouTube Ads cleared $11.2 billion, up almost 10% year over year, while Google Search advertising grew from $56.6 billion last Q3 to $63.4 billion.
And chief executive Sundar Pichai opened with a staggering revenue benchmark: Alphabet is now at a half-trillion-dollar revenue growth rate.
But advertising hardly came up at all during its earnings call on Wednesday evening – until, that is, an investor asked a pointed question.
The investor called out a slowdown in Google’s search advertising growth this year, from 19% in Q1 to 17% in Q2 and 12% in Q3. Does this mean Google is showing fewer ads in AI search mode, the investor wondered.
“The strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode,” responded Google SVP and Chief Business Officer Philipp Schindler. He added that Google is scaling ads inside both AI Overviews and AI Mode to more queries and more international markets.
So, as of now, it looks like Google’s AI ambitions are a drag on its advertising business. As a result, its stock price dropped more than 10% in after-hours trading.
Cloud nine
What did Alphabet hype instead of ads? AI, of course, in addition to cloud infrastructure.
Pichai noted Google Cloud growth of more than 100%. He added that “our AI infrastructure and solutions are the major drivers for cloud growth.”
There is strong demand for Google TPU platform sales (which is the combination of chip and systems hardware plus software for managing AI models), according to Pichai. And the company’s first-party AI model APIs now process 32 billion tokens per minute, a 40% jump from just a few months ago.
Meanwhile, the Gemini AI assistant has reached a billion users “and is the fastest-growing product in Google’s history,” he said.
Pichai did not mention the Google Search ad business. But he said that queries in AI Mode are on average three times longer than standard search engine queries. Also, Google boasts more than 50 billion visual searches per month (meaning the searches include pictures, videos and documents).
Pichai mentioned YouTube throughout the earnings call, but talked about YouTube’s subscription businesses and creator tools.
However, Schindler did bring up the YouTube and Google Search ads businesses. To highlight their momentum, he said, “we continue to accelerate the deployment of Gemini models across our entire ads infrastructure to boost performance.”
Okay, that’s more AI hype. Gotcha.
Ad product upgrades
Even Google’s ad product upgrades were framed in light of how they advance the company’s AI ambitions.
In Q3 this year, Schindler said Google made the biggest upgrade to its sponsored product listings business in a decade. The new shopping feature gave Google’s AI model greater discretion over which product details to feature and how to personalize ads.
“Overall, AI is accelerating our ads development and drives the majority of our product launches,” he said.
On the creative side, Google’s Gemini models generated more than 1.5 billion assets in Q3 alone, according to Schindler.
And the company is early in scaling ads to its AI “surfaces,” such as AI Mode and AI Overviews (the generative responses atop Google’s traditional search engine response pages).
But there’s good reason to expect strong future monetization for these AI surfaces. AI Mode queries are suited to upper-funnel use cases, like shopping for insurance or researching other products. They already generate click-through rates on par with search ads, Schindler said. “Additionally, our user research shows that people are comfortable with ads on these surfaces and find them highly relevant.”
The Google Network business, Display & Video 360, mobile ads, CTV, YouTube Ads, web advertising in general and Google’s many fines and antitrust lawsuits this year went unmentioned. Or they were only glancingly mentioned in a litany of earnings line items by CFO Anat Ashkenazi during her opening statement.
On the other hand, the terms “Argon,” ‘Carbon,” “PyTorch” and “Genie” were cited a combined 21 times on the call. These are, if you’re unaware, terms related to Google’s AI models and its chip manufacturing to support AI models.
For Google, its main focus no longer comes down to driving up advertiser ROI. Now, there’s a new metric for success, and it’s all about a different word that starts with “A.”
“We’re in a unique position to be able to monetize our AI investments across many products that reach billions of users and enterprises,” Ashkenazi said. “Our AI investments in search are driving our highest query growth in half a decade; Google Cloud has generated tens of billions of dollars in AI revenues year to date; Google One is our fastest-growing subscription product driven by demand for AI plans.”
Get the picture?
Update 10/29/26: This story has been updated to add details about an investor question regarding Google’s search advertising business.
