Ads, cloud, subscriptions: How Google parent plans to monetise its AI offerings

Alphabet CEO Sundar Pichai said that AI transition is a once in a generation kind of an opportunity

Google parent Alphabet's chief executive Sundar Pichai on April 25 said the company has a 'clear path' of monetising its artificial intelligence (AI) technologies and products through ads, cloud and subscriptions.

Pichai's remark comes at a time when investors are closely watching how tech giants are turning their hefty AI investments into profits.

Over the past year or so, tech titans such as Alphabet, Microsoft, and Meta have poured tens of billions of dollars in a fierce battle for dominance in the rapidly growing generative AI space. This comes even as these companies have cut investments in other areas, resorting to large-scale layoffs in some cases.

The heated competition is fueled by a massive surge in interest among consumers and businesses in products and solutions built using the nascent technology.

"I think the AI transition is a once in a generation kind of an opportunity," Pichai said during the company's earnings conference call.

"We have six products with more than 2 billion monthly users, including 3 billion Android devices. Fifteen products have half a billion users, and we operate across 100-plus countries. This gives us a lot of opportunities to bring helpful Gen AI features and multimodal capabilities to people everywhere and improve their experiences," he said.

Also read: YouTube, Google Cloud to hit $100 billion in annual run rate in 2024: Sundar Pichai

Alphabet reported $12 billion in capital expenditures (CapEx) for Q1 2024, nearly doubling from $6.3 billion in Q1 2023. During the earnings call, Alphabet chief financial officer Ruth Porat said the surge in CapEx was 'driven overwhelmingly' by the company's investment in its technical infrastructure with servers accounting for the largest share followed by data centers.

"The significant year-on-year growth in CapEx in recent quarters reflects our confidence in the opportunities offered by AI across our business. Looking ahead, we expect quarterly CapEx throughout the year to be roughly at or above the Q1 level," said Porat, who also serves as the company's president and chief investment officer.

Concerns over AI spending surfaced on April 24 when Facebook parent Meta said it would spend at least $5 billion more than expected on infrastructure to support its AI initiatives. Meta chief executive Mark Zuckerberg, however, mentioned that profitability from these services remains years away.

This resulted in Meta's shares tumbling by as much as 15 percent on that day, erasing more than $200 billion in market cap. This was despite the company's net profit more than doubling to $12.4 billion in Q1 2024.

How Alphabet plans to make money from AI

During the earnings call, Pichai outlined how the company is driving AI monetisation by making its latest generative AI features and products available to advertisers, enterprises and consumers through its flagship advertising, cloud computing and subscription businesses respectively.

Google's cloud unit saw its revenue increase by 28.4 percent to $9.6 billion for the quarter, from $7.45 billion revenue in Q1 2023, attributing the growth to its recent generative AI-powered tools and features. Operating income jumped to $900 million in Q1 2024, from $191 million in Q1 2023.

"More than one million developers are now using our generative AI across tools, including AI Studio and Vertex AI...We also made Gemini 1.5 Pro available to customers, as well as Imagen 2.0 at CloudNext," Pichai said.

"On top of our infrastructure, we offer more than 130 AI models, including our own models, open source models, and third-party models...Today, more than 60 percent of funded Gen AI startups and nearly 90 percent of Gen AI unicorns are Google Cloud customers," Pichai said.

Google also rolled out Gemini models into Performance Max campaigns in February, helping advertisers create more effective campaigns and build creative assets at scale. Earlier this month, the company introduced AI-powered creative features to its Demand Gen campaigns, enabling advertisers to create a range of high-quality image assets in a few steps with a few simple prompts.

Alphabet chief business officer Philipp Schindler said the search giant is also continuing to experiment with new ad formats including search and shopping ads alongside search results in its AI-based search experience called Search Generative Experience (SGE), that is currently being tested in a few markets including India.

Pichai said the company is now slowly bringing AI-powered overviews to the main search results page, after experimenting with SGE for nearly a year.

"We are being measured in how we do this, focusing on areas where Gen AI can improve the Search experience, while also prioritising traffic to websites and merchants," he said.

Pichai said Google has already served billions of queries with the company's generative AI features and it is witnessing an increase in search usage among people who are currently using these features.

In terms of subscriptions, Google introduced a new Google One AI Premium Plan that gives subscribers access to an advanced version of its chatbot Gemini - called Gemini Advanced - designed for highly complex tasks and powered by AI model Gemini Ultra 1.0.

Subscribers will also get access to Gemini's capabilities in the Alphabet's productivity apps such as Gmail, Docs, Slides, Sheets and Meet.

Google's cloud business and YouTube is expected to reach a combined annual run rate of over $100 billion by the end of 2024, Pichai said during the call.

Alphabet's financial performance, along with its first-ever cash dividend and a $70 billion stock buyback pushed the company's shares by nearly 12 percent in pre-market trading on April 25. This lifted Alphabet's market cap past $2 trillion.