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Earnings from social and search players signal that AI will be a long-play investment

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Madison Avenue and Wall Street are receiving similar signals from Silicon Valley this earnings season: Generative AI will be worth the investment. It just might take a while.

Google, Microsoft and Snap all reported results yesterday that exceeded expectations. And while CEOs celebrated solid results, leaders in social and search also warn it will take a while to scale the business side of generative AI across those areas.

Without disclosing exact dollar amounts, Microsoft said quarterly search and news advertising revenue rose 12%, its highest year-over-year-growth since the generative AI race began. (Cloud revenue led the way with $35.1 billion for a 23% increase.) Although Bing and Edge gained market share as Microsoft adds generative AI into its search and browser offerings, the company expects revenue from search and news advertising to remain relatively flat.

On a call with investors, Microsoft CEO Satya Nadella said Bing had 140 million daily active users and that the company is “particularly encouraged by our momentum in mobile.” Nadella also noted its AI software Copilot was rolled out to Microsoft’s ad platform during the quarter, which is now helping marketers generate recommendations for images, headlines and descriptions.

Although adoption of Microsoft’s Copilot is happening faster than for any previous suite the company has sold, Nadella said the AI shift still will “require workflow and process change.”

“We’re seeing it even in the horizontal use of Copilot today, where everyday people are discovering new workflow so they can optimize,” Nadella said. “It’s like the PC when it became standard issue in the early ’90s. That’s the closest analogy I can come up with. And so yes, it will take time to for it to percolate through the economy.”

Meanwhile, at Meta

Meta CEO Mark Zuckerberg echoed a similar sentiment a day earlier. Although ad revenue across Meta’s family of apps brought in $35.6 billion in the first quarter of 2024, Zuckerberg set expectations for a “multi-year investment cycle” before the company can scale Meta AI and business AIs. Even if AI investments take longer than Reels and Stories, Facebook’s co-founder thinks the bets will pay off in a similar way. Along with introducing ads or paid content into AI interactions, Meta is also looking beyond ads when it comes to monetizing AI, including scaling business messaging and charging for more computing power or access to bigger AI models.

“Historically, investing to build these new scaled experiences in our apps has been a very good long-term investment for us and for investors who have stuck with us,” Zuckerberg said. “And the initial signs are quite positive here too.”

Google going forward

For Google, search advertising remained the biggest revenue driver, but the company also saw strong growth for YouTube ads despite a slowdown for Google Network. Generative AI’s impact on search was also a big topic for parent company Alphabet.

Google’s Search Generative Experience has had billions of queries, according to CEO Sundar Pichai. Meanwhile, recent additions of generative AI tools for advertisers have helped drive conversions through AI-generated text and images. Pichai also noted the company’s recent announcements to merge Alphabet’s device and platforms teams to further integrate search across hardware and software.

“We’ve always found that over many years, when things work well on the organic side, monetization follows,” Pichai said. “Typically, the trends we see carry over well. Overall, I think with generative AI in search, with our AI org news, I think we will expand the type of queries we can serve our users and they can ask more complex questions. … Obviously, [it’s] still early and we are going to be measured and put user experience in front, but we are positive about what this transition means.”

And yet, there was also a mysterious omission from Alphabet’s earnings call. There was no mention from executives or analysts about the company’s mid-week update to delay third-party cookie deprecation until next year. Was the elephant in the room just too taboo, or only overshadowed by the shiny glimmer of AI? There was also no mention of the ongoing antitrust cases Google faces on multiple fronts including an ongoing search trial with the U.S. Justice Department.

Forrester senior analyst Nikhil Lai noted that Alphabet’s bottom line last quarter isn’t being affected by uncertainty around how to monetize conversational search and other brand measurement challenges.

“In all cases, it’s mathematically obvious to adopt Google’s AI-integrated advertising tools,” Lai said. “They perform — but performance comes at the expense of advertisers’ control and transparency.”

Snap shows an uptick

The first quarter was also strong for Snap Inc., which reported 422 million daily active users, a 10% increase over last year. Meanwhile, revenue grew 21%, driven in part by direct response ads.

Snap also continues to invest in generative AI and machine learning. While machine learning and AI automation helped drive total Snapchat views of AI and ML lenses by more than 50% year over year, Snap also integrated a new AI assistant into its Lens Studio.

When an analyst on Thursay’s earnings call for Snap asked if the company’s My AI chatbot can help turn intent data into revenue, CEO Evan Spiegel said user chats with My AI can be “another input into our model to help deliver more relevant and engaging advertising.” Snap also has found ways to cut costs by routing complex queries to other models. Spiegel also noted that its Snapchat+ subscriber base surpassed 7 million in the fourth quarter of 2023, adding that it could be a way to monetize AI images and video.

“Our generative AI efforts have been much more focused on image and video models, and helping people edit their Snaps or generate Snaps in new and entertaining ways, and really using that as an on-ramp to Snapchat+,” Spiegel said.

Agencies and brands also aim to monetize AI

Given the ubiquity of generative AI, tech platforms aren’t the only advertising players touting the tech in their quarterly earnings. Agency holding companies like IPG and WPP also mentioned AI, if not to the same extent as their social and search counterparts. IPG said it’s “progressing” in its generative AI integrations of marketing services and with partners like Adobe. Meanwhile, WPP said its WPP Open platform — which has AI model partners like OpenAI, Bria and Google —  is now being used by 50,000 employees.

Rather than having their own AI platforms compete with social and search companies, some think agencies might find new ways to benefit from them. James Borow, founder of Market AI — who’s a former Snap employee and current investor — said companies not building their own AI models should be able to find ways to be more efficient than last year. He also thinks agencies can decrease operating expenses while also having their own AI tech platforms benefit from AI growth.

“The agencies have a really important role to play in all this,” he said. “They can they be kind of the wrangler of walled garden and walled garden AIs. … There’s a demand aggregation that they represent. There’s a lot of value that they have. They’re not going to fight this stuff. They’re gonna have to embrace it.”

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