Behind the Numbers: GenAI Search Ads vs. GenAI Search Subscriptions | Dec 12, 2024

Podcast Information:

• Title: Behind the Numbers: an EMARKETER Podcast
• Host/Author: eMarketer
• Episode: The Daily: GenAI Search Ads or GenAI Search Subscriptions?
• Release Date: December 12, 2024

Introduction

In the December 12, 2024 episode of Behind the Numbers: an EMARKETER Podcast, host Marcus engages in an insightful discussion with Daniel Konstantinovich, Senior Editor of the Marketing and Advertising Briefing based in New York, and Jacob Bourne, a Technology Analyst from California. The episode delves deep into the evolving landscape of generative AI (GenAI) in search advertising, specifically contrasting GenAI search ads with GenAI search subscriptions.

The Emergence of GenAI in Search Advertising

Marcus opens the discussion by highlighting recent developments in the GenAI space, particularly focusing on OpenAI's exploration of advertising as a potential revenue stream. Referencing an article by Jeremy Goldman, Marcus notes:

“OpenAI is exploring advertising as a potential revenue stream... continues to chart its path to profitability.” (00:19)

However, Sarah Friar, OpenAI's CFO, clarified that there are no immediate plans to implement ads, indicating that the company is carefully considering the right timing and placement for advertising within its offerings.

OpenAI's Strategic Moves and Future Projections

Daniel Konstantinovich predicts that ads will likely be integrated into OpenAI's ChatGPT by 2025, supported by strategic hires like OpenAI's new Chief Marketing Officer, Kate Rouch, whose background at Meta and Coinbase underscores a strong inclination towards robust brand marketing and potential ad integration.

“I would be surprised if it doesn't launch by the end of the year... signals a effort to not just market OpenAI and ChatGPT in a more meaningful way, but also potentially to bring advertising features to its products.”
(03:40)

Jacob Bourne adds that OpenAI's shift towards a for-profit model and the high costs associated with deploying GenAI necessitate additional revenue streams beyond subscriptions and API licensing. He emphasizes that generative AI search costs 10 times more than traditional search deployments, making ad revenue crucial.

“...the $20 per month subscription model is just not quite cutting it. The $200 per month subscription I think is just people are just not pay for that intro I think is the take home there.”
(06:24)

Current Revenue Streams and Financial Outlook

Despite generating nearly $4 billion in revenue through subscriptions, licensing, and APIs, OpenAI is projected to post a $5 billion loss this year. However, a significant revenue jump to $12 billion is expected next year, primarily driven by anticipated ad revenue.

“OpenAI expected to post a $5 billion loss this year on nearly $4 billion in revenue. Ms. Friar was also noting though that revenue is expected to jump to 12 billion next year.”
(07:28)

Industry Trends: Integrating Ads into GenAI Platforms

Several companies are already experimenting with integrating ads into their GenAI platforms:

• Perplexity: Introduced sponsored follow-up questions, such as suggesting job search enhancements via Indeed after a user query like "help me find a job."

• Amazon: Integrated sponsored ads into its GenAI-powered chatbot, offering product recommendations like Patagonia jackets when users inquire about camping gear.

• Meta: Launched a free AI assistant integrated into its ecosystem, leveraging existing advertising frameworks on its social media platforms to monetize indirectly.

Jacob Bourne observes that established players like Google and Meta have an advantage due to their existing advertising infrastructures and brand trust, enabling smoother integration of GenAI ads compared to newer entrants like Perplexity and OpenAI.

“Players like Google and Meta are really going to have an advantage out the gate in terms of integrating ads into generative AI just because they already have that advertising framework well established.”
(13:47)

Challenges and Considerations for Advertisers

The integration of ads into GenAI platforms presents both opportunities and challenges:

• Consumer Perception: While advertiser interest in AI-generated ad placements has increased from 33% to 57%, only 35% of US adults are comfortable with AI-generated content in advertising. This discrepancy highlights the need for careful execution to avoid consumer frustration.

  “...only 35% of US adults are comfortable with AI generated content in advertising.”
  (17:11)

• Transparency and Regulation: There's a lack of clear regulations governing AI in advertising. Consumers often cannot distinguish between AI-generated ads and organic content, raising concerns about transparency and ethical advertising practices.

  “There is a real lack of rules and regulations around AI and advertising... raises some questions.”
  (18:34)

• Ad Format and Relevance: Success hinges on creating ads that are relevant, well-labeled, and non-intrusive. Sponsored follow-up questions, like those used by Perplexity, demonstrate a balance between user engagement and ad visibility without disrupting the primary user experience.

  “...ads that are well labeled, well integrated and relevant are more likely to drive strong results and avoid blowback.”
  (20:22)

Subscription Models vs. Ad Revenue

While ad revenue is poised to become a significant income source, subscription models will likely continue to play a crucial role, especially for niche markets like academia and enterprise users who prefer premium, ad-free experiences.

Jacob Bourne suggests that subscription-based platforms will cater to specialized use cases, whereas ad-supported models will provide broader accessibility for individual consumers seeking cost-effective solutions.

“...subscription-based platforms and models... gravitate towards the more, you know, the subscription based platforms and models.”
(21:11)

Conclusion

The podcast episode underscores the inevitable convergence of advertising and generative AI in search platforms. As companies like OpenAI navigate the complexities of integrating ads, balancing revenue generation with user experience remains paramount. Transparency, relevance, and ethical advertising practices will be critical in ensuring consumer acceptance and sustained growth in this burgeoning landscape.

Notable Quotes:

• Daniel Konstantinovich:
  “...I think that OpenAI is synonymous with AI.”
  (05:23)

• Jacob Bourne:
  “Wall street is just really looking for clearer evidence of monetization of generative AI.”
  (10:43)

• Marcus:
  “...a chatbot turned salesman could be both lucrative and annoying.”
  (16:31)

Key Takeaways

1. Ad Integration Timeline: Ads in GenAI platforms like ChatGPT are expected by 2025, driven by financial pressures and strategic hires.
2. Revenue Streams: While subscriptions and APIs provide income, ad revenue is essential for profitability due to high GenAI deployment costs.
3. Industry Leaders' Advantage: Established companies with existing ad frameworks (e.g., Google, Meta) are better positioned to integrate GenAI ads effectively.
4. Consumer and Advertiser Dynamics: Balancing relevant, non-intrusive ads with consumer comfort is crucial, amidst evolving perceptions and regulatory landscapes.
5. Future Prospects: Both ad-supported and subscription models will coexist, catering to different market segments and user preferences.

This comprehensive analysis provides marketers, retailers, and advertisers with valuable insights into the strategic interplay between generative AI and advertising, paving the way for informed decision-making in the digital media landscape.