Alphabet released its third-quarter earnings on 10 28. During the earnings call, management acknowledged that rapidly growing AI Mode generates less revenue per query than traditional search, and that search revenue growth fell short of analyst expectations, causing the stock to drop sharply. On the same day, Google announced it would expand ads in AI Mode to 10 countries, including Australia, Canada, and India, and would launch ads in the US that change with multi-turn conversations.
Confidence: High (100) · Event time 2026-10-28
Rationale
- This is direct evidence that AI search is disrupting the traditional search business. According to The Decoder, search and other advertising revenue grew by 12%, below the 15% expected by analysts; Chief Business Officer Philipp Schindler stated that the rapid growth in AI Mode queries had an impact due to lower monetization. Google's response is to add ads: it plans to enter Brazil, Mexico, and the UK in the fourth quarter, and claims that click-through rates for sponsored products in AI Mode are now close to those for organic results.
- Sundar Pichai provided the following AI data during the earnings call: Gemini app users reached 10 hundred million; the company's own model API processes nearly 320 hundred million tokens per minute, more than four times the level from a year ago; AI Mode queries are on average three times longer than traditional searches, with one-fifth using voice, images, or documents; Google Cloud revenue grew by 103%.
- The cost is continued increased investment: according to Ars Technica and The Decoder, third-quarter capital expenditures were 514 hundred million dollars, with full-year estimates between 1950 hundred million and 2050 hundred million dollars, and a significant increase expected in 2027; quarterly free cash flow was negative.
Usage
- Users of Google AI Mode will see more ads labeled "Sponsored," which will also appear for US users during follow-up questions; advertisers can refer to Google Ads documentation on AI Mode ads. No other changes.
Risks
- Inconsistent growth metrics: The Decoder reports search revenue growth of 12%, while Ars Technica reports search volume growth of 12% and flat search revenue; Alphabet's earnings filings have not been directly verified.
- Stock price decline figures vary by source (The Decoder reports a maximum drop of approximately 10%, while Ars Technica reports an intraday drop of approximately 13%); Ars Technica states that the 2027 AI investment target exceeds 3000 hundred million dollars, while The Decoder only says it will be "significantly higher."
- Google claims users find AI Mode ads relevant and helpful, based on its own internal research.
Open · Google Blog: Pichai's Earnings Call Remarks · Google Blog: AI Mode Ad Expansion · Ars Technica