‘AI Mode’ Is Denting Google’s Search Revenue

investors punish alphabet as google's ai summaries eat into ad revenue search remains the core of its business so if search isn't working then the whole stock is going to suffer plus jd vance reaches out to iran in a bid to restart peace talks and president trump ratchets up his election fraud allegations in alaska's senate race it's thursday october 29th i'm luke vargas for the wall street journal and here is the am edition of what's news the top headlines and business stories moving your world today hyperscalers microsoft and alphabet have reported their most recent quarterly earnings and now the market is having its say microsoft is getting a pop after showing accelerating growth in its cloud business while alphabet is down around 10 off hours after showing a decline in growth for its cash cow search advertising with more on how investors are reacting to those results as both companies continue to plow money into their ai investments i'm joined by markets reporter joe stoner joe let me start with alphabet because we're seeing this big sell-off in shares here something we've pinned on slowing search revenue and i want to hear from google's chief business officer philip schindler on this because on their earnings call yesterday he said that okay yes a growing number of people are using ai mode to get their answers and currently that is less monetized than traditional search but he was optimistic that could be an area for growth the majority of ai mode queries are incremental creating more monetization opportunities over time additionally our user research shows that people are comfortable with ads on these surfaces and find them highly relevant click-through rates are already similar between sponsored and organic product list items within ai mode joe analysts are they convinced google is going to be able to keep ad revenue humming as more people just don't even bother scrolling down within search results frankly no and that's in the numbers so unless we're expecting google to make 98.5 billion dollars from its search business it was around two billion dollars short of that and that kind of points to the central problem for google is how do you make money from search sure they say people are loving using ai and search but if they can't demonstrate a clear way to monetize it they're going to be worried analysts at the key bank capital company are going to be worried about that and they're going to be worried about the partners said that the print reinforced their concerns that margins are compressing and have peaked in the near term and that this result will cast something of a shadow over google going forward as analysts look to whether they can turn ai search into a money maker to be sure yesterday google announced it was expanding its ads within ai mode into international markets so we'll see how it goes and i'll be watched closely all right they've got their work cut out for them there and we'll see how users respond to these ads they say it's positive but let's let people be the judge of that i mean otherwise though the company actually reported quite strong revenue growth overall up 25 for the quarter on the back of gains in cloud and not small ones we should say 103 year over year broadly speaking are many analysts willing to look past the ai search questions when there is that much growth occurring elsewhere in the business no at least not right now and that's the kind of crazy thing about this market that you can have huge numbers and still investors are disappointed and in google's case that growth in revenue in cloud is enormous but search remains the core of its business so if search isn't working then the whole stock is going to suffer all right so there's growth in cloud 103 percent year over year it's pretty impressive are most analysts willing to look past ai search questions when there's that much growth occurring elsewhere within the company most analysts aren't downgrading their outlooks for alphabet or anything like that it's not quite existential but whether it's analysts at davidson frieze or other shops people are saying that this print is going to cast a bit of a shadow over alphabet in the quarters to come as people try and figure out whether search can make money because sure cloud revenues are booming and that's great but alphabet remains a search business and search is the bulk of its revenue so if that's not hitting the stock's going to suffer let's look at microsoft now where it's cloud business much more central to how it makes money and if you thought google's 25 quarterly revenue growth in that segment was impressive microsoft's said try doubling that revenues in its azure business are up 48 percent for the quarter and its shares are moving higher off hours what is the read among analysts about how microsoft is faring these days because at least on ai their fortunes had actually been a bit dimmer earlier in the year yeah that's right i mean in the past microsoft has been kind of dogged by questions over its ai strategy it doesn't have a frontier model like google does or other companies but i think this is a bit of a tortoise in the hair situation because what microsoft is doing now by focusing on its traditional cloud business its traditional services business is showing in contrast alphabet how to monetize ai so as you say cloud is at the core of microsoft's business and analysts at yorkville ives say that this print shows that not only have they locked in demand they've got the capacity to make money from it and another key contrast to google is that microsoft is doing this whilst balancing its books its capex figures actually came in late in the year and they're not going to be able to make money from it lower than expectations in this latest print and it's got enough cash to return some of it to shareholders and they obviously love that i was going to say we have not seen the pullback in capex forecasts really among any of the hyper scalers is that going to be the maybe the new thing to watch over the next few quarters is the market had kind of become numb to the fact that these numbers would just keep going up and up and up and uh nothing you can do about it but now maybe a little bit more belt tightening is what companies are going to be rewarded for i think that's certainly true with the backdrop of the pandemic i think it's going to be a little bit more of high yields and high borrowing costs but i think monetization will remain the key focus because you can spend hundreds of billions of dollars and if you're making more than that then unless they're going to be okay it just becomes a problem when you're not making enough to satisfy all the money you're spending reporter joe stoner covers equity markets for the journal and dow jones news wires joe thanks so much thank you luke coming up the rest of a very busy morning of earnings news and president trump calls for democrats alaska senate candidate to be elected from the ballot those stories and more after the break in other earnings updates shares of samsung are pulling back despite the memory chip giant posting a fourth straight quarter of record earnings investors were left disappointed after it said it would withhold details about a shareholder return plan until early next year that's after korean tech peer sk hynix yesterday pleased investors by using its record earnings to announce it would return 75 billion dollars to shareholders this year well speaking of which shell is upping its quarterly share buybacks to five billion dollars after its earnings doubled on the back of higher oil and gas prices caused by the iran war shell's refineries where it turns crude into diesel jet fuel and other products where its standout winners for the quarter with margins jumping to a record of 42 dollars a barrel to automakers now ford has reported lower q3 revenue and profit amid softer sales of its gas and hybrid models and persistent losses in evs though it's not giving up on evs with ceo jim farley expressing optimism that the company's 30 000 fathom electric pickup due out next year can bring in subscription revenue through its hands-free driving system blue cruise the digital suite including the embedded apple maps is really a game changer for any cd let alone at this price i think for me personally that is going to be the most exciting upsell opportunity it's really the long-term subscription uh and digital experience for the customer meanwhile q3 losses deepened at volkswagen as it continues to deal with a downturn in china as well as write-downs linked to its stake in porsche the german carmaker had already sharply lowered its guidance last month and today said it would continue to implement restructuring plans and work on the future of the carmaker as well as the future of the carmaker on lowering vehicle costs and that is as china's number two electric vehicle maker geely reported a rise in its third quarter profit as a surge in exports helped to counter stumbling sales in its domestic market and shares of ebay are rising after saying that customers continue to flock to it to buy items like trading cards coins and sports memorabilia and his new ai scanning tools make it easier for sellers to list and price items ceo jamie iononi said its second-hand fashion platform is going to be a big deal for the carmaker as well as the platform d-pop which it bought from etsy this year was proving to be a particular bright spot i think initiatives like what d-pop is doing is really unlocking stuff that's sitting in the closets you know i like to say that the average household has four thousand dollars of stuff that could be online and less than 20 of it is online um you know if you if you talk to gen z's they'll tell you everything that you ever want already exists in this world just days before the mid-terms president trump is going to be the next president of the united states to be the president of the united states to be the next president Trump is ramping up his allegations of election interference in alaska's senate race speaking at a rally last night in ohio trump called for democratic candidate mary peltola to be criminally prosecuted and removed from the ballot he made those comments hours after the new york times reported that peltola campaign staffers were part of an effort to try to recruit an independent challenger with the same name as republican incumbent dan s sullivan this is voter fraud at the highest level and the Democrat candidate who is involved in the scheme mary peltola who said she didn't know anything about it, in court. She should be removed from the ballot and prosecuted, and so should the fake Dan Sullivan. When asked if he agreed with Trump's call to prosecute Peltola, a spokesman for Senator Sullivan's campaign said he'd wait for the legal process to play out. In court filings yesterday, the Justice Department said it plans to seek information from the Peltola campaign as part of a lawsuit ordered by Trump. The Alaska Supreme Court has ruled that both Sullivans could appear on the ballot. In a statement following the Times report, Peltola's campaign said it had had no involvement with either Sullivan campaign. Let's shift to the Iran war now, as Vice President J.D. Vance is engaging one of Tehran's most powerful hardliners in an attempt to revive peace talks, even as President Trump threatens to restart U.S. attacks after the midterms. We are exclusively reporting that Vance sent a letter to the head of Iran's top security body, the Supreme National Security Council. We report the letter and subsequent discussions between U.S. and Iranian officials focused on a possible framework for negotiations rather than specifics for a peace proposal. A Vance spokesman declined to discuss the initiative, and a spokesman for Iran's foreign ministry said he had no information on the vice president's outreach. And the U.S. has expelled a Cuban. diplomat after the country's foreign minister, Bruno Rodriguez, got into a heated exchange with U.S. Ambassador Mike Waltz earlier this week in the hall of the U.N. General Assembly, as Waltz was criticizing Havana's leadership. This individual needs to back away from this podium. He's not going to intimidate me in the United States of America like he tries to intimidate political prisoners. And I'll ask everybody to go back to their delegation. And I'm the representative of the United States of America. Back up. Back up, ambassador. Back away. This isn't Havana. I'm suspending the meeting. You're not going to intimidate me. I'm suspending this meeting. Do you understand who you're dealing with? That exchange unfolded during an annual debate about Washington's economic embargo of Cuba, in which 130 U.N. members called on the U.S. to end its embargo. A State Department spokesman said an individual from the Cuban mission had been told they weren't welcome in the U.S. and had since left. The Cuban consulate didn't respond to requests, nor comment. And that's it for What's News for this Thursday morning. Today's show was produced by Hattie Moyer. Our supervising producer was Daniel Bach. And I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show. And until then, thanks for listening.