If you are old enough to remember the search engine Ask Jeeves (now Ask.com) or recall the epigrammatic responses from Data on Star Trek: The Next Generation, then you may find this article amusing. If you don't understand these references, then buckle up for a history lesson. It seems like just yesterday users could ask the all-knowing butler, Jeeves, just about any question that popped into their heads. However, in the early 2000s Alphabet (GOOG 1.25%) (GOOGL 1.27%), then just known as Google, came on the scene and quickly dethroned Ask Jeeves, Yahoo!, and others as the dominant search engine. How did Alphabet do this?
Well, without getting into too much tech jargon, the simple answer is that Alphabet developed a more robust and sophisticated algorithm. In other words, Alphabet created a better mouse trap. Over the last several years, investors have witnessed Alphabet grow from a search engine to a video sharing platform (YouTube), a hardware business (Android mobile phones), and a cloud computing leader. Now, however, Alphabet may have reason to believe that its search business, which is its primary revenue stream, is at risk.
A company called OpenAI, which was co-founded by serial entrepreneur Elon Musk and start-up savant Sam Altman, has released a tool called ChatGPT. In a matter of days, ChatGPT seems to have taken over the internet. Let's explore what this means for Alphabet, and how the company may respond.
What is artificial intelligence and how does it work?
Artificial intelligence is a form of processing information using machines. Unlike humans or other living creatures, machines do not have emotions and, therefore, when prompted with a set of inputs (questions) they do their best to provide a straightforward, linear output (answers).
It's this process that allows search engines like Google to help answer questions about historical figures or notable events. However, machines are not capable of answering more cerebral questions that may have unlimited explanations, or to an extent, are rhetorical in nature. However, for research purposes, news headlines, and general inquiries, Google has become the de facto encyclopedia of the internet.
ChatGPT, for its part, certainly offers users some interesting features. The chatbot can write software code, tell stories, and provide some information for fact-checking. However, unlike Google, as of now ChatGPT can only synthesize information from specific parameters, including dates. For this reason, when asking ChatGPT a question related to history, the bot may not know the answer if the specific event or person you're asking about falls outside the range of its current knowledge bank.
Moreover, while writing software code sounds like a game-changing feature, it's important to remember that machines are still very much fallible. While ChatGPT may be able to push you in the right direction for your code, the likelihood of it writing a perfect algorithm is slim.
In many ways ChatGPT could be viewed as a "jack of all trades, master of none" type of machine. By contrast, Google has effectively become the most reliable search engine in the world. So while Google does not explicitly write software for its users or provide interesting stories when prompted, it does carry the ability to provide you with straightforward answers to your questions nearly instantaneously.
Image source: Getty Images.
Has Alphabet acknowledged ChatGPT?
Alphabet has acknowledged the rise of ChatGPT, but it may not be showing all of its cards. According to a report from CNBC, Alphabet's executive leadership is aware of ChatGPT, but does not view the artificial intelligence bot as a direct threat at the moment. Leadership stated that while ChatGPT provides an in-demand service, there is more scrutiny of a large technology company like Alphabet. For this reason, Alphabet is better served moving more slowly when releasing products.
CNBC also cited a research note from Morgan Stanley in which the bank states that while ChatGPT is impressive, it would be short-sighted to believe that billions of people worldwide would leave Google search overnight.
It's also important to remember that Alphabet carries a much stronger balance sheet than a young company like OpenAI. Alphabet has invested significant capital in artificial intelligence, and boasts tools such as its conversational tool called Language Model for Dialogue Applications, or LaMDA. But unlike OpenAI, Alphabet is not in any rush to commercially release such products. Therefore, the company will likely continue reinvesting and testing these products until they are perfected for worldwide use.
Could ChatGPT catch up?
Alphabet's business is broken down into the following categories: Google Advertising, Google Cloud, and Other Bets. For the quarter ended Sept. 30, 2022, Alphabet reported $69 billion in total revenue. The overwhelming majority of Alphabet's revenue comes from Google Advertising, which was $54 billion, or nearly 80% of total revenue, in Q3 2022. To put this into perspective, technology companies across the board have seen advertising revenue dwindle, yet Alphabet still managed to grow its ad business year over year by 3%. Although 3% is a far cry from Alphabet's peak growth, the fact that the company is generating any growth during a time of high inflation and fear of recession should not be discounted.
According to technology journal TechCrunch, OpenAI is on pace to generate $200 million in revenue in 2023 and is projecting $1 billion by 2024. While this growth is impressive, OpenAI's flagship product, ChatGPT, is not even close to generating the tens of billions of dollars in revenue that Google Search yields.
At the end of the day, ChatGPT seems to be the latest frenzy on the internet. And although the product is useful in some capacity, it certainly has its limitations. Alphabet, for its part, still easily takes the crown for the internet's most popular search engine, and has other multi-billion dollar businesses underneath its umbrella, including its fast-growing cloud computing segment.
Investors should keep a keen eye on OpenAI and its progress; however, there does not seem to be any near-term or intermediate-term risk from ChatGPT. Rather, investors should be far more cognizant of inflation's impact on corporate budgets and what that could mean for advertising, as well as short-form video platform TikTok and how it is rivaling YouTube.
