Google and Microsoft are embedding ads in AI chatbots, challenging traditional search advertising models. Analysts warn of market fragmentation as revenue shifts toward conversational AI interfaces.
Google confirmed experimental ads in its Gemini chatbot during May’s I/O conference, following Microsoft’s sponsored Bing Copilot responses. This strategic pivot comes as search ad revenue declines 2% YoY (SEC Q1 2024 filings), with eMarketer forecasting AI-driven ads to claim 18% of the digital market by 2026. ‘We’re moving from intent-based to inference-based targeting,’ notes Forrester analyst Kelsey Chickering.
The Conversational Ad Frontier
Google’s Gemini now surfaces product recommendations during travel-planning dialogues, confirmed in a May 14 developer session. Microsoft’s May 20 update added hotel ads in Bing Copilot when users ask about Paris trips. Both use natural language processing to insert sponsored content mid-conversation.
Market Shifts and Revenue Realities
Traditional search ads rely on users typing commercial queries (‘best DSLR cameras’), but chatbots proactively suggest products during broader discussions. eMarketer’s May 2024 report shows 15% of search queries now occur through AI assistants, projected to reach 27% by 2026. Google’s search ad revenue dipped to $40.2B last quarter – its first decline since pandemic-impacted Q2 2020.
Historical Parallels and Future Battles
The shift mirrors the 2010s mobile ad revolution, when Google’s ‘Enhanced Campaigns’ adapted ads for smartphones. However, AI’s conversational nature reduces advertiser control over placement. As Meta automates WhatsApp ads and Amazon tests Alexa product pitches, analysts warn of pricing volatility. Programmatic ads commanded 85% of digital spending in 2023 (IAB), but AI’s contextual approach could disrupt real-time bidding systems.
