TL;DR: Alphabet’s 1Q23 Earnings – Does GPT Bing Eat Into Google’s Search Ad Sales Already? Maybe.

Alphabet’s overall results came in better than expected, and the stock price was up more than 4% in after-hours trading.

The results were good – but not because of Google’s main business – advertising.

Google’s search advertising sales were up only 1.7% year-on-year, or about $740 million. Meanwhile, Microsoft’s “search and news advertising” revenue (most of which is search) was up 10%. We don’t know the exact size of the Bing business, but it’s assumed to have been around $9 billion in 2022. So Bing must have gained about $900 million in sales, compared to Google Search’s $740 million. What this shows is that Microsoft is gaining as many or more sales in search than Google. This could indicate an early impact of adding a GPT-based chatbot to the Bing product. Of course, there will be almost no ad sales in the chatbot portion of Bing yet, if any, but we could see the impact of a curiosity effect that drives both users and advertisers to Bing.

It is too early to tell whether there is a real commercial impact of adding GPT to Bing or whether we only see a honeymoon of large-language model (LLM) exuberance, shortly to be followed by a serious LLM hangover. Let’s give it a couple more quarters.

On YouTube, ad sales were down 2.4% or about $200 million. This is in line with the overall weak advertising market. Performance advertisers continue to spend because their return on advertising spend is still positive. But in brand advertising, where the CMO has a harder time pointing to results, people pull back on spending. And of course, as we all know, in an economic crisis, the first budget to be cut is the marketing department.

No, what made Google’s numbers shine was not advertising – it was the cloud business, about as big as YouTube, but a lot smaller than search. It grew by about 28% year-on-year, or more than $1.6 billion. It was also profitable for the first time.

Add to that ongoing cost-cutting measures and the announcement of a stock buy-back program – that’s why Alphabet’s stock is up in after-hours trading.