Alphabet has admitted that AI-generated searches earn less than ad-supported results in traditional Search. Chief business officer Philipp Schindler attributed the slowdown in Search revenue to "lower monetization we were seeing in AI Mode." On the day of the results, the parent company's shares fell almost 10%.

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The quarter's numbers

Search revenue rose 12% year over year to $63.25 billion, down from 14.5% growth a year earlier. Search query growth is the highest in five years, and part of it comes from users adopting AI Mode, the language-model-based search system. Total revenue was $125.8 billion, just under half of it from Search.

Net income was $26.17 billion, down from $35 billion a year earlier, when revenue was $102.35 billion. Google spent $51.4 billion on infrastructure in the quarter, about two-thirds on servers and networking equipment, the rest on data centers. The company confirmed its $195-205 billion capital expenditure plan for the year and expects to spend "significantly" more in 2027.

Ads now appear in AI answers

Schindler argued that AI search will pay off. Many AI Mode queries are upper-funnel, he said, capturing new, high-value commercial intent, and most are incremental. To seize that opportunity Google began showing ads alongside AI Mode searches worldwide, after a US-only test.

Google Cloud remains the second-largest earner at $24.75 billion, but capacity is tight: Google has started offloading some customer workloads to third parties, which it warned will dent future margins. Thomas Kurian said over 100 companies use its TPU chips and that all TPU inventory is tied to committed contracts.

Pichai's bet

Sundar Pichai pointed to the Gemini app reaching a billion users faster than any product in company history. Google is building agentic AI tools, starting with business customers, "because the bar for security, safety, and governance is extremely high." He did not say when agentic AI would reach Search or whether it would avoid the monetization problems AI Mode has already caused.