Philipp Schindler, Google's chief business officer. Nicolas Verity, CEO of Cleverly, runs a business in Los Angeles and has been advertising on Google for seven years.

About eight months ago, he noticed something odd with Google search ads: of the roughly $2,000 in daily Google ad budget he set aside, a portion consistently went unspent — there simply wasn't enough traffic browsing and clicking on ads to exhaust the budget. He believes the root cause is that more and more people are turning to AI chatbots to research information online.

"I'd happily spend more on Google, but I think that slice of search traffic is being diverted to scenarios where people use large models to do their own research," he said.

For more than two decades, leveraging its search engine monopoly and built-in automated ad system, Google built one of the most profitable advertising businesses in history.

But now Google's own AI push is eroding that business and putting growth under pressure, while Meta ad revenue is growing at more than twice the pace of Google search ads, and OpenAI has also begun entering the ad market.

On October 29, the day after Google's earnings release, Alphabet (GOOGL) shares plunged nearly 13%. The report showed full-year search ad growth slowed to 12% in the third quarter from 17% in the second quarter.

Chief Business Officer Philipp Schindler said part of the slowdown stems from weaker monetization in AI Mode, Google's AI-powered search version aimed at rivaling ChatGPT.

Google doesn't break out ad revenue from AI features versus traditional search separately, but the deceleration suggests Google earns less when users engage with AI Mode than with traditional search.

Ahead of that quarterly report, Google had already rolled out AI summaries and AI conversational features at scale as alternatives to traditional search, while continuing to experiment with ad formats inside those features.

Other companies have gone through similar growing pains when launching new products. When Meta launched its TikTok-rival Reels short-video feature in February 2022, ad growth also stumbled, though it regained momentum the following year by using discount policies and AI tools to attract advertisers.

As usage of AI Mode and AI summaries keeps climbing, Google's ad growth may also rebound.

Google management has been stressing the opportunities AI holds to investors and advertisers to reassure the market. Google uses AI to determine which search terms are suitable for triggering ads, to set the landing page after a user clicks an ad, and to automatically generate different versions of ad creative.

Behind the scenes, Google is in talks on partnerships and evaluating potential acquisitions, hoping to make ads in AI scenarios more valuable.

Even so, six advertisers and agencies said many advertisers have grown frustrated and started shifting budgets to other platforms, including Meta.

Like Google, Meta also offers automated creative tools to boost conversions, but ads placed in Meta's newer AI products, such as the Muse agent, don't compete with main feed ads; they appear alongside short videos and social updates.

Fahad Difcha, CEO of marketing agency AccuraCast, buys ads for multiple brands and said: "This year, truly viable alternatives to Google have emerged, such as ChatGPT ads and Meta. We'll reallocate budgets based on performance."

An industry shake-up

Google launched AI Overviews in May 2024 — AI-generated content shown above search results. Nearly a year later it launched AI Mode, and both products only began carrying ads months after launch.

Traditional web search ads are tied to keywords, while ads in AI Overviews and AI Mode are no longer bound to keywords but shown alongside long prompts and multi-turn conversations.

Advertisers can neither buy Google AI search ad placements separately nor choose to opt out of having ads run in AI features.

AI summaries and chatbots represent one of the biggest changes to the search industry since search shifted from desktop to mobile in 2016, and they carry a risk: AI could cannibalize Google's $224.5 billion annual search ad business.

Yet for several consecutive quarters, Google search ad revenue initially showed no signs of weakness.

But as usage of Google's AI features rose, search revenue growth began to slow.

Part of the slowdown reflects Google deliberately controlling ad density to avoid too many ads or jarring ad formats driving away AI search users; part of it reflects the growing pains of a new product — Google is still figuring out how to serve ads in conversational settings and how to set billing, rather than following the keyword ad model.

A Google spokesperson said in a statement: "We take a deliberate approach, prioritizing the best user experience, which lays a long-term solid foundation for our customers and our business. Our ad experiments in AI Overviews and AI Mode have made good progress, and we're now scaling monetization with ad formats that deliver verifiable return on investment for advertisers."

One core challenge facing Google's ad business: user behavior with AI features is completely different from web search.

Google says prompts users type in AI Mode are about three times as long as traditional searches, with richer context and deeper questioning.

For example: a user might search "Which tent is best for a week of hiking in the Sierra in September" rather than simply searching "tent."

Optmyzr is a Google ads management software vendor, and its CEO Fred Vallaeys spent nearly a decade in Google's ads division. He said this kind of browsing behavior means users often aren't ready to make a purchase, making them less likely to click ads or convert after clicking.

Based on 21,000 ad accounts managed by Optmyzr (many of them small-business accounts), Vallaeys estimates that in the third quarter, the conversion rate of ad clicks across Google's platforms (including search) fell 1.4% quarter over quarter; return on ad spend (revenue generated per dollar of ad spend) fell 2.9%, the second consecutive quarterly decline after a 3.8% drop in the second quarter.

Advertisers report that Google shows fewer ads in AI Mode than in traditional search.

Over the past year, that has pushed up cost per click: with fewer ad slots but the same number of bidding advertisers, Google's automated bidding mechanism has driven ad prices higher.

The search format overhaul also creates new attribution challenges.

Ad agencies say that when users research products in AI chatbots like ChatGPT and later complete a purchase on Google, advertisers find it hard to trace which step drove the conversion.

Before chatbots became widespread, consumers typically searched on Google, clicked an ad, and placed an order, letting advertisers directly attribute the sale to that ad.

Another problem vexing advertisers: Google lumps AI Overviews and AI Mode ad data together with traditional search, so advertisers can't view AI ad performance separately, and it's hard to see where and when ads appeared, or why the AI chose to serve a particular ad.

Google explains that because AI features are still scaling, it isn't providing standalone reporting for now.

To address advertiser concerns, Google has added reporting features to ad accounts that show information such as the search terms that triggered ads; it has also launched creative tools like Asset Studio, which uses the Gemini Omni and Nano Banana models to generate ad images and video assets.

Nick Stoltz, chief strategy officer at ad measurement firm Measured, which mainly serves large retailers, said: "These features are essentially about adapting to the shift in the search paradigm brought by AI."

Victor Batista, global head of search at London digital marketing agency Jellyfish, said advertisers are providing Google with richer product information, such as detailed product descriptions, to help Google's AI decide in which conversations to serve their ads.

Batista also noted that many advertisers now place more value on impressions (the number of times an ad is seen) than on click-through rates.

"The center of value has shifted from clicks to impressions, and many searches end without a click. Brands are now racing to be recommended in AI answers."

People familiar with the matter said Google's corporate development team is still evaluating acquisitions of AI ad creative tools.

Although Google itself already offers advertisers AI ad creation tools, those tools now face competition from rivals such as Higgsfield, Runway and Typeface; more and more companies are using these AI tools directly to replace traditional ad agencies.

At the same time, Google is also pursuing partnerships to boost the value of ads for advertisers.

According to people familiar with the matter, Google pays Hightouch to steer advertisers toward the startup's customer data-sharing tools.

These people explained that AI amplifies an old problem: when serving ads, Google often doesn't know what a given advertiser's customers have bought before, and many small and mid-sized advertisers don't sync that data to Google.

Google has also partnered with companies including Adswerve, CustomerLabs, Datahash, Fifty-five, Jellyfish, Lytics, Tealium, Treasure Data and Zapier to help advertisers connect their own data into Google's ad systems.