The selloff in Alphabet stock continues on Thursday as the market grapples with the possibility that Microsoft's Bing search engine has become a credible threat to Google's near-total dominance of the internet search market.
This week brought a torrent of news on the intersection between internet search and large language model chatbots like ChatGPT from the start-up OpenAI. Microsoft (ticker: MSFT), the single largest investor in OpenAI, on Tuesday announced plans to integrate technology from OpenAI into Bing, which has been a distant second-place player in search. Data from the market research firm Statcounter shows that Google in January had 93% market share, with Bing at 3%.
Alphabet (GOOGL) this week announced plans to launch a competitor to OpenAI called Bard, and the company also said it intends to insert new natural-language AI functionality into its core search service. In an event in Paris Wednesday morning, Alphabet also provided updates of expanded AI functionality in map, translation, and image search services.
The biggest takeaway from the flurry of news is that investors now see Microsoft Bing as a legitimate competitor to Google for the first time ever. Bing was launched in 2009, and succeeded previous Microsoft attempts at creating a viable search engine. But the software giant has never made much progress in denting Google's overwhelming market dominance. Until now.
Microsoft Chief Financial Officer Amy Hood this week estimated that search advertising accounts for 40% of the $500 billion digital ad market, or about $200 billion. Most of that goes to Alphabet, which reported $163 billion in search advertising last year.
Philippe Ockenden, Microsoft CFO for the Windows, Devices, and Search business, pointed out to analysts that "for every 1 point of share gain in the search advertising market, it's a $2 billion revenue opportunity for our advertising business."
In addition to the threat to its market share, Google also faces potentially higher for costs for the shift of search queries to AI-based large-language models.
In a research note on Thursday, Morgan Stanley analyst Brian Nowak asserted that for every 10% shift of queries to AI-powered search, Google's operating costs will go up $1.2 billion -- shift 50% of queries over, he adds, and expenses grow $6 billion, trimming pretax profits by 6%. His view is that AI-powered queries will cost Alphabet about five times as much as the current approach.
That makes Microsoft's deal with OpenAI a kind of double-whammy for Alphabet investors -- they could lose market share, and see their costs rise -- ironically while the company is fending off a pair of Department of Justice antitrust lawsuits accusing it of monopolizing search and online ads.
Alphabet stock has declined 11.7% since Tuesday's close, losing $170 billion in market value in the process. For the year, Alphabet stock is still 7.7% higher, though lagging behind the rest of the large-cap tech companies. Microsoft stock is fractionally lower on Thursday, and 10% higher for the year.
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