Why AI is boosting Meta’s ad business while hurting Google search

Google and Facebook have dominated the internet for the past two decades, turning billions of eyeballs into trillions in advertising dollars over that stretch. But with the ChatGPT era altering how consumers engage online, the companies are diverging.

In the third quarter, Meta’s ad business grew more than twice as quickly as Google’s Search and other unit, backing up Mark Zuckerberg’s claim that his company’s investments in artificial intelligence are leading to better targeting tools for brands to promote goods and services across Facebook and Instagram.

Google’s problem is that chatbots are becoming an alternative to search, leading consumers to click far fewer blue links and hurting Google’s ad revenue. Anthropic’s Claude chatbot and Meta’s recently launched Muse assistant are adding to the mix. Meanwhile, users are spending more time scrolling on Instagram, giving Meta more advertising opportunities.

“It’s a double-edged sword, because as AI revolutionizes discovery, people might come across tools they like better than Google,” Nate Elliott, an analyst covering AI at Emarketer, told CNBC in an email. “If ChatGPT or Claude or Muse is better at helping them find what they’re looking for, people’s search habits might change for the first time in a generation. That’s potentially catastrophic for Google’s ad business.”

Meta’s ad revenue rose 26% in the quarter to $63.1 billion, up from $ 50.1 billion a year earlier, compared with 12% growth for Google’s search division, which brought in $63.4 billion. That 14-point growth gap is the widest in Meta’s favor since 2021, and it puts the two businesses neck and neck by size, though Google got an additional $11 billion in third-quarter revenue from YouTube.

Following its disappointing third-quarter earnings report on Wednesday, Alphabet had its worst day ever on the stock market, plunging more than 12% and wiping out about $500 billion in market cap. Meta isn’t exactly a Wall Street darling at the moment either, as the stock fell 14% in October for its worst month since October 2022. That followed a 27% surge in September, which was its best month since November of that year.

Investors’ reactions reflected market jitters surrounding the companies’ AI buildouts, which have pushed both businesses into negative free cash flow territory. Questions are swirling about whether their historic spending on AI infrastructure will generate enough revenue.

Meanwhile, both Meta and Google are aggressively trying to diversify their revenue streams. Meta, which still relies on ads for nearly all its revenue, is pouring money into AI models and agents to build a subscription business. Google already has a great and rapidly expanding cloud computing division that just reported over 100% growth to $31 billion in quarterly revenue, driven by demand for…