Generative artificial intelligence (AI) has the potential to change numerous industries, but there's one that's already well along the adoption curve of this new technology.
Tech companies are building new advertising tools to take advantage of the capabilities of large-language models to do a lot of grunt work to optimize ad creatives. Even the slightest change in images, wording, or color can have a profound impact on the effectiveness of an advertisement seen online. And two companies are pushing the envelope to make it easier for marketers to make their most-effective ads using generative AI.
It might not be a surprise, but the two companies with the most to lose are also the two companies pushing the industry forward: Meta Platforms (META -0.52%) and Alphabet (GOOG 0.74%) (GOOGL 0.55%). And both have significant competitive advantages in the space that make them strong investments for anyone interested in generative AI.
What Alphabet and Meta are working on
Both Alphabet and Meta are working on generative AI tools to increase the efficiency of marketers using their advertising platforms.
Google is planning to launch new services within its Performance Max suite, which uses machine learning to determine the best placement for ads and recommend budgets for campaigns. Marketers will be able to provide Google's AI with some raw materials -- images, text, and the like -- and it'll "remix" it, according to a report from Financial Times. The ad creatives generated by the AI will be tailored to the intended audience and the marketer's goals.
Meanwhile, Meta is set to launch similar tools, building on top of its Advantage+ suite. The company already uses generative AI to "enhance" ad creatives uploaded by marketers using its platform. It says those enhancements provide a 14% improvement in incremental purchases per dollar spent on advertising.
Revenue from Advantage+ shopping ads increased sevenfold in the last six months alone. Meta plans a full-blown generative-AI advertising solution by the end of the year.
The two big advantages of the advertising giants
Google and Facebook aren't the only companies working on generative AI solutions in digital marketing, or in general, but they have a couple of key advantages over most competitors.
First of all, they have plenty of cash to throw at the problem. Meta ended the first quarter with $37.4 billion in cash and equivalents on its balance sheet. It also produced about $6.9 billion in free cash flow for the quarter. And that includes heavy capital expenditures of $7.1 billion last year, focused primarily on artificial intelligence.
Alphabet ended the quarter with $115.1 billion in cash, equivalents, and marketable securities. It also generated $17.2 billion in free cash flow for the period.
It's important to remember that developing the models and applications for generative AI are extremely expensive, and they're also very expensive to use. Mark Zuckerberg pointed this out on Meta's fourth-quarter earnings call: "A lot of the stuff is expensive, right, to kind of generate an image or a video or a chat interaction."
The second factor that sets both Facebook and Google apart is their scale. The two companies are absolutely dominant in the digital advertising space, commanding nearly half of all digital ad spending in the United States. And while that share is declining, the closest competitors are still a long way from catching either company.
That scale means a few things. First, Google and Facebook can amortize the fixed costs of developing generative AI applications over a greater number of users. Second, it means they will receive more data, faster, on what generative AI is doing well and where it needs improvements, allowing it to learn faster. That means the two companies' leads in AI will only grow wider over time.
Supercharging revenue
Both Alphabet and Meta saw significant slowdowns in revenue growth in 2022, but the top line could reaccelerate in 2023 with the help of generative AI tools.
The push into AI is especially important for Meta, which relies heavily on display advertisements that benefit most from generative AI applications. Google benefits from the bulk of its revenue coming from paid search traffic. It's also less exposed to the impact of data-privacy policies that can affect ad measurement.
If the two companies can create tools that produce better results for advertisers, marketing spend should flow back to them. That would mean reversing the duopoly's declining share of digital ad spending, and reinvigorating revenue growth. With analysts projecting extremely slow revenue growth from both companies in 2023 and 2024, both could outperform the low expectations.
On top of that, the long-term outlook from their investments in AI means outsize growth for a long time to come. The market may be undervaluing the opportunity both are creating.
