How big a threat is ChatGPT to Google? Morgan Stanley breaks it down
Innovation is almost always welcomed in the ever-changing tech world. But the latest artificial intelligence trend taking the industry by storm could spell trouble for Google-parent Alphabet ‘s profitability near term, according to Morgan Stanley. This emerging threat, known as ChatGPT, went viral when it debuted in November, amassing a million users within days of its launch. Developed by San Francisco-based OpenAI and backed by Microsoft and LinkedIn co-founder Reid Hoffman, the chatbot can generate detailed responses, hold a conversation and answer questions just like a human. And some big technology giants are only ramping up their bets in the platform. Semafor reported this week that Microsoft plans to invest $10 billion in OpenAI as part of a funding funding round that would value the company at $29 billion. The tech giant will reportedly initially obtain a 75% share of OpenAI’s profits until it makes back the money on its investment, followed by a 49% stake. While the problems ChatGPT poses to Google and its search business have yet to materialize, the platform could pressure the tech behemoth to roll out its own competition like “Language Model for Dialogue Applications,” or LaMDA, quicker-than-expected, analyst Brian Nowak wrote in a note Tuesday. That could weigh on profitability and hit forward operating margins, he said. “While we don’t see ChatGPT as a threat to GOOGL Search’s position as the starting point for online behavior, ChatGPT’s ~7X higher cost per query than paid search (due to AI/natural language/compute intensity) speaks to GOOGL’s margin risk of higher natural language tool adoption,” Nowak wrote. Some of these concerns already loiter among Google employees, with executives warning in a December meeting that moving too fast on artificial intelligence tools, or providing inaccurate information, could hit the company’s reputation. CEO Sundar Pichai also hinted at chat products in the works for the new year. Nowak estimates that every 10% of Google searches that shift to artificial intelligence, or natural language queries, could increase costs by $6 billion in 2025 for the tech company. That would also impact its GAAP operating margins by roughly 150 basis points. To be sure, Google could overcome the challenges posited by ChatGPT and surprise analysts by creating a more efficient tool. However, risks linger over whether these queries can even monetize at the same rate as Google’s search business, or whether they will cost more. “This, to us, speaks to GOOGL’s challenge and the profit disruption threat as it looks to continue to innovate/lead while also protecting/delivering FCF for investors through a weakening macro environment with slowing ad growth,” Nowak wrote. — CNBC’s Michael Bloom contributed reporting
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