Search engines are the window to the internet, and Alphabet's (GOOGL +2.53%)(GOOG +2.92%) Google dominates the industry with a 93% global market share. But that leadership position has been under attack recently by the company's tech rival, Microsoft (MSFT +0.66%), which has integrated artificial intelligence (AI) into its Bing search engine.
The way people access the internet has changed dramatically over the last decade. In 2012, just 10% of website traffic came from mobile devices, but that number has surged to more than 60% today mainly thanks to the adoption of smartphones.
Google owes much of its success to its relationships with smartphone makers, which set Google as the default search engine on their devices in exchange for a fee. That means internet traffic generated by billions of people around the world is flowing to the industry leader almost entirely without competitive friction.
But according to a new report by The New York Times, smartphone giant Samsung Electronics (SSNL.F +116.80%) might be considering a switch to Microsoft Bing. That could lead to a Grand Canyon size crack in Google's dominance, and here's why.
NASDAQ: GOOGL
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How Bing rocked the search industry
Earlier this year, a private company called OpenAI unleashed the newest version of its AI-powered online chatbot called ChatGPT. It blew the minds of even the most experienced technology professionals for its ability to rapidly answer complex questions and even write computer code.
ChatGPT amassed 1 million users in just five days, and 100 million in two months. Here's why: When a user types a question into a traditional search engine like Google, it spits out a list of web pages that the user has to trawl through to find answers. ChatGPT, however, directly answers any question presented to it (within its capabilities). It's a faster, more convenient solution when seeking information.
Microsoft spotted OpenAI's potential back in 2019 when it invested $1 billion into the company. But following ChatGPT's success in 2023, Microsoft doubled down with a further investment to be spread out over the next few years, in a deal rumored to be worth up to $10 billion.
ChatGPT is now integrated into Microsoft's Bing search engine, much to the delight of users. In the week following that move, Bing saw almost as many downloads as it did for the whole of 2022!
Naturally, this saga has prompted an aggressive response by Google, which claims it has a top position in the AI space thanks to years of work behind the scenes. It officially opened access to its Bard chatbot in March, but it's not yet publicly available. According to The Times, however, Google is building an entirely new AI-based search engine right now, while working to upgrade its existing one with AI tools like Bard.
Losing smartphone deals would be catastrophic for Alphabet
According to the latest data from GlobalStats, Samsung accounted for 27.1% of all smartphone sales globally in March, which makes it the second-largest player in the industry behind Apple, which had a 28.3% market share.
Google pays an estimated $3 billion per year to Samsung to have its search engine set as a default across all devices. In turn, the search engine makes money by selling paid advertising spots in its rankings to businesses, which those users see when they're seeking information.
In the past, even if a competitor offered Samsung more money, it would prefer to stick with Google because it was a superior product that enhanced its users' experience. But if that's no longer the case, a larger cash offer by Microsoft might be enough to swing the deal in its favor.
See, Microsoft has everything to gain. It values the search advertising business at $200 billion per year, which means every percentage point of market share it snatches away from Google could lead to $2 billion in annual revenue. Bing has a market share of just 3% right now, so making a deal with the second-largest smartphone manufacturer could be worth an absolute fortune.
NASDAQ: MSFT
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But this battle is just warming up
The Samsung saga could merely be the opening round in an ongoing fight.
Wall Street analyst firm Bernstein believes the search deal between Apple and Google is up for renewal this year. While Apple only holds a marginal edge in smartphone share over Samsung worldwide, it has a significant edge in the more lucrative markets like the United States. The most recent data suggests Apple's iPhone owns 56% of that market, nearly double the penetration of Samsung.
As a result, the Apple-Google deal is much larger, at an estimated $15 billion per year. Apple isn't tied to Google in the same way Samsung is, because Apple doesn't use the Alphabet-owned Android operating system in any of its devices. Theoretically, then, Microsoft might have a greater shot at capturing Apple's business than it does at winning over Samsung.
In any case, it's clear Microsoft poses a real threat to Google's dominance. I believe Microsoft's investments in AI could lead to the company becoming the first ever to amass a $5 trillion market capitalization by 2030. If that happens, investors could double their money in Microsoft stock based on where it trades today.
Alphabet, on the other hand, will have to prove it can fend off this seismic competitive threat in the coming months.
