Microsoft (MSFT 1.45%) has landed right in the middle of the artificial intelligence (AI) industry in 2023 -- entirely on purpose, of course. Earlier this year, the company made a blockbuster investment in leading AI developer OpenAI, the creator of the ChatGPT online chatbot.

Microsoft wasted no time integrating the technology into its product portfolio. OpenAI's most advanced GPT-4 large language model is available on the Bing search engine and the Azure cloud platform, simultaneously transforming two enormous industries at once. 

But Microsoft's Build 2023 developer conference kicked off today, and the company revealed the integrations would run the other way, too. OpenAI will add a Bing plug-in to ChatGPT, potentially directing its 100 million monthly users away from other search engines. Here's why that's bad news for Alphabet's (GOOGL 3.32%) (GOOG 3.32%) Google. 

Microsoft's vision for search just entered another dimension

Bing has always lived in Google's shadow. In fact, that might be an understatement. It has a market share of just 2.8% in the global internet search industry, compared to Google's dominant 92.8%, so it's difficult to place the two on equal footing.

But since integrating ChatGPT into Bing, Microsoft has transformed the face of search in a matter of months. When a user runs a search on Google, it spits out a series of links, which the user must sift through to find the information they're looking for. But prompt-based tools like ChatGPT actually retrieve direct answers to the users' queries, making it a much faster, more convenient experience.

Since the Bing-ChatGPT tie-up launched in February, Microsoft says downloads of the Bing mobile app have surged by eight times. Some estimates suggest it amassed nearly as many downloads in the first two weeks as it did in the whole of 2022. Still, it's a long way from unseating a globally dominant competitor in Google, which is entrenched across billions of mobile devices and personal computers by default.

But that challenge hasn't deterred Microsoft. Earlier today, at the Build conference, it announced Bing would be integrated into ChatGPT with a new plug-in. That means whenever a user enters a query into ChatGPT, the chatbot can retrieve more up-to-date information directly from the internet via Bing. Then, its answers will feature citations, which link the user to web results generated by the search engine.

The latest estimates suggest ChatGPT has over 100 million unique monthly users, and according to web traffic data, OpenAI's website receives 1.8 billion visits each month. Since Bing already has around 1.1 billion monthly active users, this new integration into ChatGPT could quickly boost its monthly user base by 9%. 

However, the Microsoft-OpenAI relationship is about to run even deeper

One thing is clear from the early innings of the Build 2023 conference: Microsoft and OpenAI are jointly committed to full interoperability. That means AI plug-ins developers build specifically for Bing will also work with ChatGPT.

This should attract new innovations for the ecosystem -- and it's already working. Several organizations have started launching plug-ins, including real estate technology companies Redfin (RDFN 1.54%) and Zillow Group, travel giants Expedia and Tripadvisor, and more. 

By using the Redfin plug-in, for example, a user can describe their ideal home to Bing, and the search engine will retrieve suitable listings for them, saving hours otherwise spent manually looking through real estate websites. Moreover, the Expedia plug-in will help users plan a trip through conversation, conceivably saving them from jumping across dozens of different websites. 

Here is a bigger list of companies currently working on plug-ins for Bing and ChatGPT.

A graphic showing all of the companies building artificial intelligence plugins for Bing and ChatGPT.

Image source: Microsoft.

All this spells trouble for Google

The interoperability I mentioned also extends to Microsoft's other platforms like Dynamics, Office 365, and Windows through its Copilot tool -- an AI-powered assistant that runs on large language models like ChatGPT. A user writing content in Microsoft Word, for example, can lean on Copilot to write a first draft.

Picture this: A student who uses Word to complete a paper might visit Google a number of times to search for information. But in the future, what if every Word user has Copilot with a Bing-style chatbot inside the platform? It would reduce the need to visit an external search engine in the first place, entirely circumventing Google for more than 1 billion people who use Office 365 software.

Microsoft estimates the digital advertising industry generates about $500 billion in revenue each year, with advertising on search engines accounting for $200 billion of that. It means every percentage point in market share Bing snatches away from Google could be worth $2 billion in additional annual revenue -- but more importantly, Microsoft could drain the amount of traffic flowing to Google with some of its new in-app AI tools, disrupting its ability to earn search revenue overall.

To be clear, Google is working on its own chatbot called Bard to rival the ChatGPT-powered Bing. But it was only released to the public a couple of weeks ago, and given the pace with which AI is progressing, lagging months behind Bing is an eternity. So far, Bard hasn't quite generated the same level of enthusiasm as ChatGPT, and that's welcome news for Microsoft.