By Tae Kim

The rapid progress in artificial intelligence means many large technology companies are currently facing their first big challenge since the dawn of the internet.

And Google is in the crosshairs like no other. The biggest debate on Wall Street right now is whether Alphabet's Google search is being disrupted by AI-driven chatbots -- and whether the company is up to the task of pushing back.

This week, Google offered its most significant response with the introduction of a major change to its search engine. The technology looks generally impressive, but it still isn't enough.

Google is facing the classic "innovator's dilemma": It is difficult for a business to move quickly to the next paradigm because the new model threatens to cannibalize the profit of the current business. And perhaps no one has ever had a business like Google Search. Last year, Alphabet generated $100 billion in net profit with the vast majority coming from its search engine, analysts say.

But things are changing quickly. I'm now doing most of my information-related searches on AI apps like ChatGPT, Grok, Gemini, and Perplexity, not Google. Alphabet investors have been skittish. Despite a 2% rise this week, the company's stock is down 10% this year. Among the Big Tech platforms, that decline is second to Apple's 22% slide, another company dealing with AI worries.

At its I/O developers conference this past week, Google announced impressive new technology, but it was buried inside confusing product launches and conflicting business goals. The presentation was a case study in the innovator's dilemma.

The company unveiled a new AI video-generation model called Veo 3, which impressed experts, along with coming features and capabilities such as data visualization, better personalization, and AI agent capabilities that can book a restaurant or sporting event for users.

More significantly, Google introduced "AI Mode" for its core search engine. CEO Sundar Pichai said that AI Mode is "a total reimagining of search," allowing users to ask more complex queries in a conversational chatbot interface similar to ChatGPT and Google's own Gemini, where follow-up questions can be asked.

Google has been territorial about google.com ever since its 1998 launch, avoiding advertisements and clutter. So, any change to the page is significant. But given the stakes, AI Mode isn't significant enough. It's strangely hidden to users, so as not to actually encourage its use.

To find AI Mode, Google users have to click on a small icon in the search bar or in a new tab on top of the site or app. Most users won't make the extra effort -- and apparently that's OK with Google.

The company is also putting many of its best AI features behind a new $250 a month subscription.

Even the rollout of AI Mode feels symptomatic of Google's AI ambivalence. "I'm excited to share that AI Mode is coming to everyone in the U.S. starting today," Pichai said live from the Google I/O stage on Tuesday. Wall Street analysts and reporters took Pichai at his word, assuming AI Mode would be available to everyone imminently. But that hasn't been the case. When Barron's reached out to Google asking why AI Mode wasn't available a day after Google I/O, a company spokesperson pointed to a blog post that said the rollout would happen "over the coming weeks."

In his book The Innovator's Dilemma, author Clayton Christensen explained how difficult it is for successful companies to maintain their relevance over time. History is littered with examples of incumbents moving too slowly when the next big technology shift arrives. Christensen wrote about how IBM dominated mainframes but then missed the emergence of minicomputers. No major mainframe company was able to become a leader in the minicomputer business.

The same thing happened to minicomputer companies like Digital Equipment when the world moved to PCs.

Here's the pattern: A start-up enters a niche market with a new paradigm and innovation. Large companies ignore the new area, given its small profit pool relative to current business. But as the start-up gains more customers, it can iterate new features and capabilities faster than weighed-down incumbents. Eventually, it displaces the more established company and the cycle begins anew.

It's hard not to see the same pattern in play today as AI threatens search and Google takes tentative steps into the arena.

It should make AI Mode the default option in its search engine and open its best features and models to all users.

To be sure, the move would hit Google's results and its rich stream of search advertising. And that would hurt the stock -- investors' short-term focus plays a significant role in the innovator's dilemma.

But the longer Alphabet waits to lean in to AI, the worse off the company will be in the long run.

Google should beat the innovator's dilemma by pretending it doesn't have an incumbent business to protect. If it maintains the No. 1 position in the future AI-driven search world, monetization will come.

On Wednesday, the company said it was already testing ads for AI Mode. It's a promising first step.

There's plenty more to do. Pichai said on a recent podcast that he had never read The Innovator's Dilemma. The Google CEO should start there.

Write to Tae Kim at tae.kim@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 23, 2025 12:44 ET (16:44 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.