- Both Google and Microsoft launch AI chat bots
- High computing costs increase cost of search
Artificial intelligence chat bots are already revolutionising the search engine market. This week, Microsoft (US:MSFT) announced it would be integrating an AI chatbot into its Bing search engine and Edge web browser. Chief executive Satya Nadella was open about the goal of the new Bing - take market share from Alphabet's (US:GOOGL) Google, which has dominated internet searches for almost two decades.
Currently Google has around 93 per cent of the search market and has a historical gross margin of 55 per cent. However, Nadella believes this will start to fall. “From now on the [gross margins] in search are going to drop forever,” he said in an interview with the Financial Times.
Microsoft's chatbot is based on OpenAI’s model used to create ChatGPT. Microsoft recently invested a further $10bn (£8.3bn) into OpenAI having originally invested $1bn in 2019. The new Bing feature will allow users to ask questions of the chat bot alongside the normal search function. For example, to create a travel itinerary for a holiday rather than just showing potential destinations.
The huge popularity of ChatGPT shows there is clearly consumer appetite for this product. ChatGPT is estimated to have reached over 100mn users in January, having been released just over 2 months ago. For comparison, Twitter has existed for almost 17 years and has only around 300mn users.
Alphabet has already responded to the challenge it faces from OpenAI’s ChatGPT. Chief executive Sundar Pichai published a blog introducing its new chat bot Bard a day before Microsoft revealed its new Bing features. Google is opening Bard to testers before revealing it to the public in the “coming weeks”. The company then plans to integrate it into search.
One problem for these companies is that the computing power required for these chatbots is significantly more than traditional search. OpenAI chief executive Sam Altman said the costs of running ChatGPT were “eye-watering” and it has since launched a subscription version of the product.
Given this constraint, Google is launching a lightweight model. “This much smaller model requires significantly less computing power, enabling us to scale to more users, allowing for more feedback,” wrote Pichai.
Microsoft has limited its costs by only providing access to the new Bing service to select users initially. Microsoft chief financial officer Amy Hood said on a call with analysts it would be “rolled out to millions in the coming weeks”. However, despite the limited release, she believes new users will be “incremental gross margin dollars even at the cost to serve we are discussing”.
As the smaller player, Microsoft is mainly focused on growing users rather than how it is going to specifically grow earnings. “I’m less focused at this point on where the growth is going to come from because I’m confident it’s going to come from an ad model, it’s going to come in subscriptions and its going to come in the consumption businesses,” said Hood.
With less to defend, Microsoft can be more aggressive than Google in search. Ruining Bing isn’t as much of a risk given its such a small percentage of revenue. Markets though are just happy to see innovation. Microsoft and Alphabet’s share prices were up 5 per cent and 4 per cent respectively, in response to the AI search announcements.
