The quarter at a glance
Alphabet reported Q3 revenue of $127.6 billion, up 25% from $102.3 billion a year earlier, but slightly below analyst projections of $127.93 billion. Google Services brought in $96.3 billion, an 11% year-over-year increase. Within that, advertising revenue was $82 billion, missing expectations of $83.5 billion.
Google Search growth slowed to 12% in Q3, down from 17% in the second quarter. Earnings per share came in at $2.12 against expectations of $2.99, hit by an unrealized loss on Alphabet’s SpaceX stake. Alphabet shares fell roughly 11% in after-hours trading.
Why AI Mode made investors nervous
Google chief business officer Philipp Schindler attributed the Search slowdown partly to foreign exchange effects and a dip in Asia-Pacific ad spend after the EU removed its de minimis exemption on low-cost imports. But the more structural pressure came from Google’s own AI-powered search experience.
AI Mode queries are growing quickly, yet AI Mode carries fewer ads and monetizes at a lower rate. Schindler said: ‘The strong growth in AI Mode queries had an impact [on decelerating Google Search growth] because of the lower monetization we are seeing in AI Mode.’
Google’s fix: more ads inside AI search
Google is moving to close the monetization gap. The company plans to scale ads in AI Mode and AI Overviews to more users and across a wider set of queries, expand AI Mode ads into international markets for the first time, and launch multi-turn ads in AI Mode in the U.S. Schindler said early ad tests have returned ‘promising results,’ and click-through rates for sponsored and organic product listings in AI Mode are similar.
This is the sharpest signal yet that AI search placements are becoming a real paid surface for advertisers. Here’s what stands out:
- Search ad growth slowed to 12%, from 17% in Q2.
- Google Services revenue rose 11% to $96.3 billion, but ad revenue missed analyst estimates.
- Gemini helped create 1.5 billion ad campaign assets in the quarter, up 7x year over year.
- YouTube ads grew 9% to $11.2 billion, and Amazon is letting U.S. creators tag Amazon products via YouTube Shopping.
Big AI bets, bigger questions
Google’s cloud business is booming: Google Cloud revenue reached $30.7 billion, up 103% year over year, and Alphabet spent $51.4 billion on capex, mainly on AI infrastructure. The company says it has secured $561 billion in future cloud revenue, though a large portion is reportedly tied to Anthropic’s five-year, $200 billion commitment to Google Cloud.
Finance chief Anat Ashkenazi noted that renting third-party computing capacity to meet demand will pressure margins in the short term, and Alphabet still expects capex to ‘increase significantly’ in 2027. The core investor question: can Google’s search ad business monetize AI quickly enough to support this capital-intensive shift?
For marketers, the practical message is to treat AI search as an emerging paid channel. Monitor AI Mode and AI Overview formats, test AI-generated creative assets early, and watch how agentic commerce develops. Google is already pushing Universal Commerce Protocol adoption, with hundreds of thousands of brands, including Nike, Chewy, and Tapestry, able to switch on direct agent-led checkout.
Source: Adweek
