This week, Microsoft announced the inclusion of ChatGPT to its Bing search engine as well as an assistant to its Edge browser. On the same day that they announced all these changes, Satya Nadella declared war against Google. He pointed out that search business is the biggest software business with the highest margins.
The revenue generated by search for Microsoft in the search business is incremental and not essential for its survival, contrary to Google. Therefore, Microsoft had a great opportunity to gain market share and earn money, and Google can only lose in this market.
Behind the announcement, Microsoft partnered with OpenAI in an intricate deal. It seems that OpenAI is already a R&D lab inside Microsoft. Microsoft is not only using the technology as an assistant inside Edge and Bing, but Satya Nadella stated that they had the best gain inside their core ranking algorithm for Bing, which could be important for Microsoft.
Microsoft is using all the partnership with OpenAI fully. It is launching new products with ChatGPT, building the Azure AI platform, helping building up the infrastructure for training these neural networks, with GPUs, and helping Bing perform better. Satya Nadella has a history of partnering with companies and has made great acquisitions from Github to LinkedIn.
On the other hand, Google has announced Bard and they had a botched product release. Google stock suffered the same day. Though, the stock drop may be an overreaction at the short-term, I think that Google is at crossroads right now.
The rise of neural networks for creating chat bots or improving recommendation algorithms, including improving search engines, will affect Google's core business.
Either by changing the way queries are done, using a conversational interface, or by changing the way the search engine works behind the scenes. The consequences of either changes are not good for Google's finances for the next few years.
For one, if Satya Nadella follows through his announcement, we will see Microsoft go to war against Google. Google hasn't seen significant competition from a big player in the past 2 decades. If Microsoft eats some of the market share, or if it forces Google to reduce its earnings, then we will see the bottom line be affected by these changes. I really can't tell if that will affect Google's search dominance, as we haven't seen much change in market share in the past few years. That may force Google to pay a higher price to Apple, and it already pays around 12 billion per year according to reports.
What is clear is that the future of recommendation algorithms will be done by neural networks. That means that Google will have to invest even more in compute. This is equivalent of what Meta is doing for short videos and their investment there. If Google doesn't invest in the hardware, then they risk losing market share. Either will probably result in a degradation of their earnings.
Google might be finally seeing some headwinds. It will be interesting to watch if there will be any response from the company. To me the only clear winners are AI hardware companies, with the most prominent being NVIDIA. It will be interesting to watch the future unfold!