Google went from “disrupted by ChatGPT” to taking real market share. Gemini grew from 5% to 20% of AI traffic in a year. ChatGPT dropped from 87% to 65%. That sounds like a huge success and a signal that Google might even win this war. But this war existing is already a catastrophe for them.
Google’s biggest problem is this: Search is a hell of a business. A query costs a penny to serve and makes 1.6 cents at 35% margins. Gemini queries cost 5x more. Even if revenue per query held (it doesn’t), the margin compression is painful.
But it’s not just margins, it’s also volume.
AI gives comprehensive answers, which is great for users because they need to search less. Data shows that CTR drops 35% when AI Overviews appear, and other forecasts project organic search traffic could fall 50% by 2026.
It’s true that inference costs are falling 10x per year. So the margin situation is likely to become less bad over time. But still, there’s no guarantee this will keep dropping for frontier reasoning models.
Google is trading at 33x earnings (vs. a typical 23x they normally trade at). The market is clearly pricing in a continued run of the Search business. But if AI queries remain structurally less profitable, even if Google wins this war, that multiple will need to compress.