The search wars are still some way off

Despite reports that Microsoft was coming to eat Google’s highly profitable lunch, its vast search business, recent company releases show the gap between the market leader and the challenger.

Why it matters

Search is the most popular destination for ad dollars globally with a global share of 28.3% (Q1 2023 data from WARC Media). For Google, the undisputed market leader, this is its biggest and most profitable business unit.

Following Microsoft’s unveiling of its ChatGPT-enabled Bing Chat, this reportedly caused a “code red” situation at Google. Google’s Bard chatbot followed soon after. But there’s more to this story: the moat – effectively Google’s verb-sized brand – is in the way, and it’s going to be a while yet before Microsoft’s innovations really start to bite.

What’s going on

This week, both companies reported their results for the three months up to March 2023.

• Google’s search business returned to growth following a 2% dip in the final quarter of 2022, growing by 2% and a significant contributor to the company’s search and advertising revenues of $40.4bn.
• By comparison, Microsoft’s advertising and search revenues might be growing more quickly – at 13% excluding hefty traffic acquisition costs – but from a much lower base to reach $3.04bn in the quarter. For context, this is a few million behind LinkedIn, which Microsoft also owns.

A step back

This is a long game. Even if search/AI chat revenues are small, they are incremental; Google is on the defensive. As Microsoft CEO Satya Nadella told the Verge in February: 

“Very few times in history do opportunities like that show up where you suddenly can start a new race with a base where every day is incremental gross margin for you and someone else has to play to protect it all: every user and all the gross margin.”

Effectively, Google’s business is so large that it captures overall commercial activity and lives and dies by the kind of macro trends that led to declines in search revenue last quarter. Microsoft’s headroom and opportunity is much clearer.

This said, while the double digit growth (if we ignore the potentially massive costs of traffic acquisition that are relatively obscure) stems from higher search volumes and share gains for the Edge web browser, this is an incredibly long road, one in which Microsoft won’t only compete with the market leader but also the host of new entrants to the space, especially in retail media.

For more on the shifting sands of the search landscape, check out the latest Global Ad Trends: Search 3.0, which delves deep into the search wars.

Sourced from Google, Microsoft, Seeking Alpha, WARC