C (2:23)

Casual multi Grammy winner.

B (2:25)

I knew him as an actor.

C (2:26)

I saw him in Bullets Superstar.

B (2:29)

He also does music, apparently. Anyway, today's real topic, the three big questions surrounding Google. All right, we set the table. First, what happened? Last year, Google made over $400 billion for the first time in 2025, growing 15% more than the year before. And then nearly 300 billion of that 400 was from advertising. That's up 11.4%. A fraction above 2024. Q4 would it look like ad revenue was up nearly 14%. That's very, very fast. It's the fastest growth in nearly four years, three and a half years. So very good. Q4 for ad revenue Network was down year over year. No surprises there. It's the 14th consecutive quarter that that's been down but still made $8 billion. So it's not nothing. YouTube that grew 9% in Q4 year over year, down 14% from 14%, I should say. So there's some of the numbers, the backdrop for Google at the moment, but we're talking about the three big questions surrounding this company. Nate, I'll start with you. What's one of the big questions you think Google is asking themselves or analysts, journalists are asking of Google?

C (3:41)

I think that folks want to know whether Google wants AI search to replace traditional search. They've got lots of, well, they've got lots of different, you know, tools available to people who want to use AI to find information online, including AI Overviews, AI Mode, Google, Gemini, and a variety of other tools as well. And you've seen them pushing some of those AI tools into the general search experience. And really the question is one of how far down that path does Google want to go? Do they want to get to the point where every search result that's served up by google.com or the other services where people search for information on Google is responded to with an AI response? And if so, what would that look like? Does that mean an AI overview on every search result page? Does it mean just defaulting people into Gemini or AI mode as a result of every search? It's a balance that they need to get right. I'm not sure they have an answer to it, but as someone who watches them pretty closely, it's one of the things I'd love to know.

A (4:55)

I mean, the great thing, Nate, as you know, is they have such an insane install base, which I think gives them a lot of like, let's say, if they say the answer to that question is yes, we want to push people in that direct, well, then great, they start to do it. And if they notice that that's creating more friction, then they start to pull that back. They obviously are going to do that in the way of light experimentation with their user base. And also I think that, as we all know, time spent with various platforms really does matter. If you can keep people on platform more and serve them up more ads, that's generally a good thing. So, I mean, my thinking is they're going to be leaning into that, and then they're going to just see how far they can le. And does that tick off some users? And if so, is that just part of the cost of doing business? Because I do think their whole entire mode of making money is in a really transformative spot right now.

C (5:51)

Yeah, I mean, I don't want to get too far into my next question that I have for Google, but the point you make about ads, Jeremy, is a really good one. Yes, their model is selling ads, and Most of that $400 billion that Marcus mentioned was advertising revenue. And the thing is, if people kept using traditional search the way they have been for a quarter century, Google knows how to make money from that. They're very, very good at making money from that. What they don't know yet, because no one knows the answer to this yet, is how do we make reliable, repeatable, and enormous advertising revenue off of AI search or AI interactions in general? We're just at a point where OpenAI is starting to test ads. In ChatGPT, we've seen GOOG move very slowly in introducing ads into AI overviews and AI mode, and there are no ads in Gemini just yet. So, you know, there's a question of which version of a search Response, whether it's 10 blue links or map search or product search or AI overview or AI mode or Gemini, which version of all of those options is actually going to best serve the people who are looking for information? And also, how can Google move people to the thing that best serves their users while also not endangering that $400 billion that Markus just mentioned?

B (7:17)

Yeah, yeah, they're in no rush, are they, to turn their back on on search the search line item, as you mentioned, Nate, three quarters of the ad business coming from search, it grew faster in 2025 than it did in 2024. And in Q4, it grew faster than it had in three and a half years. So a line item they don't want to. I thought Jason of Ink had a nice line. He said that the question of the last few years has been what happens to search when AI gets good enough to replace it? Turns out search isn't losing to AI, it's funding it. I think that's a good one. That's a good one to start with. What else do we have, Nate? Did you have something to follow on and something else to throw in that's kind of related to this?

C (7:55)

Yeah, I mean, the ads question and Jeremy brought us into, which is how quickly and how in terms of mechanism, format and everything else, is Google going to start introducing ads in into their AI products.

B (8:09)

Yeah, that's a good one. Jeremy, what do you think's top of their mind?

A (8:15)

I think that the question about so we talked a lot about ads there, but I mean I think in terms of can Google monetize AI commerce indirectly while others try to chase direct checkout, there's a lot of different approaches of how people are going to be making money and whether or not they can make enough money to fund all of this AI expenditure, that's a whole nother story. But I think that in terms of how people want to shop in the future and how much of an opportunity agenda commerce might wind up being, I don't think anybody really has the answer to that right now. And I'm curious what you both think, but I kind of believe that there are some categories where this could be really, really great, where it's just you're doing research on something and you want to auto replenish something that you have a high degree of familiarity with. And then there are some things where you're going to do a ton of research and you will never necessarily ever check out through like an AI search mode, let's say. So I mean I think that Google has a strong POV here, but I think that we really have to be looking to see like how do the consumers of today react to these newfangled opportunities to check out. And I don't think anybody has a clear answer to that yet.

C (9:30)

Jeremy, we have the answer to that because we just published our E Marketer a commerce forecast a few weeks ago. But before I get into that, I mean, isn't this just an advertising conversation as well? I mean you talked about indirectly monetizing AI driven commerce and you know, OpenAI has planted their flag on this one. And they're charging a 4% service fee on Shopify transactions to the merchant, which is actually more than Shopify itself charges those merchants. So they're trying to make money from instant checkout by just charging a relatively large and odious fee to the merchants. Whereas Google, when it launched UCP has said, least at this point, they're not planning on charging anything for transactions through the universal commerce protocol. So the only way I can see them making money from that is either finding other ways to charge merchants or by selling ads into those interactions.

A (10:29)

The very fact that they're going to be charging people through view based pricing, you know, essentially not conversion based for ads, I think what that tells me is that a lot of people really believe that AI has a strong ability to influence and to do research a lot more so than like this is going to be the way that people check out and engage in commerce in the future, or at least in like the very near term future. I know we have the forecast.

B (10:55)

What were some of the takeaways from that?

C (10:57)

Well, I mean, two big takeaways. One is that this is going to grow very quickly, but on a very small base, as you would imagine. So that, you know, even at the end of the forecast period, which I think is 2029, less than 9% of US online retail commerce will be driven by AI engines like ChatGPT and Gemini. And the other part of that is throughout the forecast period, the vast majority of AI driven US online retail commerce sales say that 5 times fast will happen when people click a link in an AI chatbot and complete the transaction on a retailer site or app, as opposed to happening inside ChatGPT or Gemini. 95% of the AI driven transactions this year will happen on retailer sites and apps. Only 5% will happen inside the chatbots. Even at the end of the forecast. I think we're forecasting an 80, 20 split. 80% of those transactions will be on retailer sites and apps and only 20% will be inside the AI engines.

B (12:06)

Okay, interesting. I think it's a good one. What else? Do we have any other main questions for that? I've got one here about this one. Just seemed to be the headline of most articles written about Google in the last week or two, which is are they planning to spend too much on CapEx? Which I think seems to be a big question for a lot of folks, especially investors. So this year Alphabet expects CapEx spending on data center servers, AI infrastructure, things like that, in the range of 175 to $185 billion, about 30% higher than the street was expecting. Jasonation of Inc. Thinks that spending 185 billion that you made selling search ads in order to make sure you stay in the lead seems like a reasonable move. Dan Gallagher of the Wall Street Journal though, says spending what could be 40% of annual revenue on AI chips and related infrastructure is still a sizable gamble. And Shannon Carroll of Quartz thinks there could be two outcomes here, kind of leaning into what Jason's saying and then also what Dan's saying here. There's a version of this story that ends in triumph. Cloud keeps compounding. AI products become default habits and spend looks prescient. The price of buying the future before someone else does says there's also a version where the returns arrive slower than depreciation. And Wall Street Starts treating AI like a lifestyle choice with bad unit economics. Nate, what do you think about this being a big question for them?

C (13:30)

I think all of those takes are correct. It is an almost absurd amount of money to spend chasing this one thing. And also Google, uniquely, perhaps can afford to. I mean, we just talked about their enormous and still growing revenues. They're not spending $175 billion of investors venture capital. They're spending $175 billion of the money that they have earned through other parts of their business. And so they can make it make sense in a way that say, OpenAI is struggling right now to make it make sense. OpenAI is trying to make money from subscriptions and ads. They don't have a technology business per se. And Google, you know, is spending similar amounts to OpenAI per year on AI related CAPEX. But they actually have two distinct ways of making money from artificial intelligence. The first is subscriptions and advertising, and the second is they sell chips, they sell enterprise services, and not just the LLM as an enterprise service, but they sell, sell the technology that powers other companies. LLMs, they have a lot of ways of making money from that capital expenditure.

A (14:44)

I think that part of the whole entire thing here is that it's not just Google, it's a lot of other companies here, particularly Meta and Amazon, I would say that are spending quite a lot in this area. Maybe you could say Apple as well and Microsoft. If it leads to efficiencies in your existing businesses like advertising, great. But also it might create new lines of business and new sources of revenue. And if that happens, then that's kind of almost what you need to justify this. It is worth noting that some of these companies, like Google and Meta, their overall share of the digital advertising ecosystem was quite big before these major expenditures. This has helped them continue to be very dominant. But I still think that essentially at some point Wall street might look at it and say, hey, was this all worth it considering the fact that you had a major lead on a lot of the, you know, second and third tier players, you know, before you were spending this amount. And so was it really necessarily entirely justified?

C (15:49)

I mean, and we talk about the different ways of making money from AI. OpenAI is panning for gold, Meta is panning for gold, Google's panning for gold. And it's also selling shovels, right? It's also selling the equipment you need to go pan for gold. And by the way, in case that doesn't work out, they've got a diamond mine out back. So they're in a pretty good position.

A (16:13)

All of the cloud businesses, I mean, have been growing. Like when we're thinking about like the major cloud providers. I know it's like a little nerdy, but they've all benefited from like this AI quote unquote revolution. They were growing at a pretty great rate for years. And I would say that this has kind of propped up those businesses and will also for the foreseeable future. So that's also pretty nice. It puts less pressure on like Google's ad revenues, let's say.

B (16:40)

Yeah, I thought that was one of the questions. Potentially cloud fast becoming the golden child. Shannon Carroll, of course, again was writing, Google's cloud revenue jumped by nearly 50% to around 18 billion. The kind of acceleration that stops being a segment update and starts being a plot twist. Better, even better than that, cloud operating income surge past the over 5 billion mark. That's up. Well, that is 45% higher than Wall Street's targets. More than double last Q4, pushing operating margin to just over 30%, saying that Alphabet is now comfortable framing cloud in Milestone language, a $70 billion plus annual run rate exiting in 2025. That's what investors have been begging Big Tech to deliver. Proof that the AI build out isn't just a bonfire of GPUs, but something that can throw off real profit whilst it scales.

C (17:29)

A bonfire. The fan of these, perhaps.

B (17:34)

I thought, though, maybe this number, this CapEx going circle back to the CapEx number. Maybe it's high because Meta said we're going to spend115,235 and compared to that, it looks like a lot. And maybe it's high because you can take the net income that Google made in the last year and a half and say they're basically spending that much, all of their net income for the last six quarters on AI infrastructure this year. And then the big concern, I guess here is this everything Evercore senior MD Mark Mahaney had said. Could this be. Could there be another deep seek moment coming? Could there be another moment where a company says, look, we did a similar thing with way, way less, which is probably the big concern historically.

A (18:16)

Probably.

C (18:18)

Yeah, I mean, I can see that happening, but. But to your point, Marcus, why does it seem like a lot? It seems like a lot because it is a lot a lot. If you go back, you know, five or seven years, you will struggle to find an example of any individual company spending more than what, $25 billion in capex in any individual year. And now everyone's spending between 100 and $200 billion on capex every year. This is not a financial analyst, but this certainly looks in my experience like an unprecedented moment of investment. I mean the stakes, and we've talked about this internally, you know, Jeremy and I across the desk in our office, you know, the stakes for this are on the upside, you control how everything in the world works and on the downside, you lose your investors money. That's a very big reward and a relatively small risk for the heads of a lot of these companies to be making. And that's why they're placing some of the biggest bets in history. But yeah, these are actually unprecedented amounts of money.

B (19:20)

Anything else, gents? Big questions right now.

C (19:23)

I've got a hundred and I'm sure Jeremy has a bunch that aren't AI related, but I'm the AI analyst and so I've got a hammer and everything looks like a nail. And I want, want to know, actually know the answer to why, but I want to know what they're going to do about it. Why does Google have two separately branded full fledged LLM chatbot models in Gemini and in AI mode? And what the heck are they going to do about it? And the answer to why is because they have two different teams running these models.

A (19:54)

Right.

C (19:54)

The, the AI mode piece is run by the search team and Gemini is run by the AI organization at Google. And that, that's why there are two different things. But it's almost nonsensical from a branding perspective, from a product perspective, from a product development and decisioning perspective. Somehow we've gotten to the point where Microsoft is better at branding its AI tools than Google is. And in an ideal world, Google wouldn't have AI overviews in AI Mode, it would have Gemini overviews in Gemini Mode and they'd have one organization in charge of all of this. But because of the way that they're structured, that's not the case. And I want to know if they're ever going to get around to making life easier for consumers and analysts and oh yeah, maybe stop duplicating efforts by having two completely separate full fledged tools.

A (20:45)

Yeah, and I want to know when Gemini is going to have ads. And I actually think that on one hand they could do it tomorrow, even though they said they won't. But I actually think that Google's dream would be to not monetize it for as long as possible and for ChatGPT to be so incredibly desperate for revenue that there's a ton of ads on it. And Google just sucks up a whole lot of user data and Queries because everybody uses Gemini because it has no ads and they can afford to do that versus ChatGPT cannot, given the lack of any real major revenue streams.

B (21:19)

How.

C (21:20)

How desperate do you think OpenAI is right now, Jeremy?

A (21:24)

Eight. Is that eight? What would you say?

C (21:28)

14 out of 10? I don't know. In one 10 day window in January, they announced ads. They quoted $60 CPMs, which is outrageous, and $200,000 minimum spends for an ads trial, which is pretty high. They claimed that they would be taking a share of the profits that enterprises generated by using ChatGPT. They slapped a 4% service charge on Shopify transactions. I'm missing a couple of things. Oh, they said they were going to sovereign wealth funds to try to attract hundreds of billions of dollars of additional venture capital. I mean, it was just a shocking number of announcements, all of which pointed to one thing, which is we're in desperate need of more money over here.

A (22:16)

That's a code drop. That's a code red. A code red for you right there.

C (22:19)

Yeah, that's a code red on top of a code red, I think.

B (22:23)

So I've got a question for each of you based on what we just talked about and then we'll come to a consensus. Top three. So, Nate, my question for you based on what you've just been saying, I think it's a fantastic question. My question is how soon do you think they need to figure that out? How long do you think they can keep going with Gemini and AI Overviews separate?

C (22:39)

I mean, they could do it indefinitely. If you play out the thinking that Jeremy just talked about, it's credible to think that maybe they want there to be separate tools because AI Mode and AI Overviews living inside of Google Search, well, this is an environment where they already have an ads business where people are accustomed to seeing ads. You know, it's interesting that AI Overviews got ads about a year ago and still ads within AI Overviews are exceedingly rare at this point. Now that doesn't matter so much because of where AI Overviews show up on the search results page. There are already ads nearby, so who cares if they're inside the AI overview or next to the AI overview. But, you know, it highlights this point that people are used to seeing ads in search results. And if they can default people into AI Overviews and AI Mode from the traditional search experience, then there might be less resistance to seeing ads in that environment. And maybe they want to keep Gemini completely separate and they want to keep it ad free. Maybe they like having them separate But I still think it's a misbranding opportunity. It's confusing to consumers. And even if they run the product separately, I would like to think that they might rationalize the brands at some point.

B (23:57)

Yeah, Jamie, this leads me really nicely to the question I had for you because we've talked about should these products have ads, not have ads? When's the right time? You wrote a piece talking about Anthropic committing to keeping Claude free of advertising, you say, arguing that ads inside AI conversations would undermine trust in a tool built for work reasoning and sensitive problem solving. What are your thoughts a bit more on that story?

A (24:22)

Yeah, I mean, I think one thing that's really important is that if you're anthropic, you're kind of like the David versus Goliath and you have to figure out some kind of way to differentiate yourself. So while it's true that, oh, you're giving a lot of sensitive information to a chatbot, you kind of did that with Google for years and everywhere else around the Internet. So I think for Anthropic they do need to have that level of differentiation. And obviously I think that it might just be that they did the calculus and said it would be kind of difficult for us to create an ads business right now and we make our money in a few other ways. So let's just kind of stay along that route. I would definitely say that generally speaking, the history of the Internet is we have spaces that don't have ads. And then somebody says we're going to start showing ads there. And people are like, I can't believe that that might not work. And then it does over time and we get used to it. And like Markus, we're getting to the point if you have like a tattooed ad on your forehead, you know, during actually sponsors, if you're listening to this, Marcus is open to this.

C (25:28)

We can do that.

B (25:29)

Yeah, Stuart, what do you mean we can do that? One second. Stuart, don't listen to me.

A (25:34)

Even like some kind of like 3D thing that we put on and we shifted every single, like that might be 20 years from now, that might be a thing that everybody does, you know, like you don't know. So I think that people do get used to seeing things in new surfaces and Anthropic just kind of had to lean into this differentiation for now, but their circumstances could very well change. And then they'll quickly delete the press release that they put on their website saying that we're basically ad free forever.

B (26:01)

So I move around a lot, so I Have a capsule wardrobe. And so if you want sponsors, if you want me to wear a T shirt, I'd do that because then I'd have more clothing.

C (26:09)

No henna tattoo right on the. Look at that forehead. It's dying for a henna tattoo.

B (26:15)

Maybe for the right price. Just kidding. Please don't make me. All right, I think this is a good group of questions, gents. I'm just going to recap some of them and we'll figure out what we think the top three should be. So, Jeremy, quickly give me your comments question again. What do you think the headline there is?

A (26:29)

How can Google monetize AI commerce indirectly, while some others might chase direct checkout.

B (26:37)

Okay, we also have. Do Google want to replace Nate, you said traditional search with AI search. You also said, when and how will they monetize AI search? We talked about. About planning to spend too much on capex. And then you also had. Why the two? Why do they have two fully fledged AI chatbots? And when would they reconcile these tools? What do you think?

A (27:02)

Oh, and are they now too big to fail? That was kind of like my other one. Or too important to break up.

B (27:09)

Okay, what are we dropping? What are we keeping? What needs to be. Nate, what's your top, top question?

C (27:14)

It's got to be monetizing. I mean, at some point it ties everything together, right? The capex, the transition from tradition, AI search, It's all tied together by this question of can you actually make money from these investments and from this change in consumer behavior?

A (27:28)

Okay, I agree. I think that's number one.

B (27:31)

Okay. Jeremy, you're number two.

A (27:33)

I think the commerce might be number two because it's like an ancillary. It really gets at the same question but from a different Lens.

C (27:42)

I mean, $144 billion in U.S. online retail commerce in 2029 will be driven by AI tools. So it's, you know, like I said before, it's less than 10% of the total spend in that category, but it's $144 billion. That's not nothing.

B (27:59)

Yeah. All right. And then I like the chat box. You have two separately branded. Like, what are you going to do about this? I really like that question. So we'll go number one, when and how will they monetize AI search? And number two, how can Google make money from commerce? What that looks like. And then number three is the. The two separate AI chat bots maybe becoming one. Maybe one takes over and they sunset sunset the other. Maybe they keep both.

C (28:25)

Yeah, it's weird. Marcus, you you invited an AI analyst and an AI focused briefings director today and we ended up with three AI questions.

B (28:36)

How did that happen? But these are good lists so we'll keep it. Thank you so much to my guests for hanging out with me today. Thank you. First to Jeremy.

A (28:43)

Thank you. And also happy birthday to Millie Bobby Brown who turns 21 today.

B (28:48)

21, the Stranger Things person.

A (28:51)

Yeah.

B (28:52)

Oh crying out loud, I didn't need that. And also Nate, thanks for being here.

C (28:57)

I don't have any idea whose birthday it is today, but thank you for having me.

B (29:01)

That's why I invite you and nearly don't invite Joseph. Thanks so much to the whole production crew and to everyone for listening in to behind the Numbers New Market video podcast. Subscribe Follow Leave a rating review if you can. We're back tomorrow talking about the three big questions surrounding Amazon.