26 April 2023

    In search of the future: Google navigating the rise of artificial intelligence

    Sam Dickie (CFA)

    Head of International Equities, Property & Infrastructure

    Email Sam
    Sam Dickie (CFA)

    Head of International Equities, Property & Infrastructure

    Email Sam

    In this first of a three-part series on artificial intelligence, we look at the rise of Chat GPT and whether this new breed of AI-enabled search will weaken Google’s dominance.

    Interest in artificial intelligence has been supercharged recently by ChatGPT, an AI-powered chatbot released by OpenAI in late-2022. The simulation of human intelligence by machines has been discussed, researched and theorised about for almost a century, appearing in popular culture since the 1920s in texts such as 2001: A Space Odyssey and Westworld.

    Available computing power (or compute) has been the main hurdle to AI’s widespread commercialisation since its conceptualisation. Large amounts of compute are required to train an artificial intelligence model and then conduct inferencing, which is the process of an AI generating an output. Between 2012 and 2018, the amount of compute used in training AI doubled every 3.5 months, growing by over 300,000 times in this period! With recent developments, it seems that AI is on track to become a considerable part of modern society over the next few years.

    Chat GPT has changed the game

    Chatbots are not new, and voice controlled virtual assistants like Siri and Alexa have been helping us interact with our devices and homes for years. So how did ChatGPT supercharge public interest in AI? The answer lies in its “conversational” ability. ChatGPT allows users to pose questions in natural language (as if having a conversation with another human), then responds in a human-like manner. ChatGPT “understands” the question, provides a succinct answer and remembers the context of the conversation as you converse. Users can choose to further iterate on their original question by asking follow-ups, rather than using a search engine to trawl through hundreds of links brought up by a Google or Bing Search.

    Microsoft is investing more in the search battle with Google

    Google has dominated Search for over two decades, with over 95% of search activity across browsers and mobile. The emergence of ChatGPT, and its developer OpenAI’s partnership with Microsoft, has called this dominance into question. Microsoft is the exclusive provider of compute to OpenAI, with their partnership stretching back to 2019 when they first invested in OpenAI. Earlier this year, Microsoft invested a further US$10bn in an extension of the two companies’ ongoing collaboration. When we met with Microsoft management in Seattle earlier this year, they were excited about their increasing focus on AI technology.

    The ChatGPT we have all been trialling is based on GPT-3.5, which was trained on data up to June 2021, so answers are not real-time. Microsoft’s Bing Search overcomes this limitation with access to real-time internet data, and as of March 2023, is running on the more advanced GPT-4. GPT-4 is the model that passed the Uniform Bar Exam and SAT Math test with flying colours.

    “New Bing”, the GPT-4-powered Bing Search, is making the strongest headway in search relevancy that Microsoft has seen in over two decades. Search is a $300bn advertising revenue-generating business, and Bing currently has just a 3% share of search activity. However, Microsoft CEO Satya Nadella believes GPT-integration gives Bing an edge in search: “We are going to make them dance and we want them to know it was us that made them dance.”

    Google’s reach makes it a hard battle to win

    On the other hand, Microsoft knows its problem in search is rooted in distribution, not product quality or features. And Microsoft, of all companies, is likely keenly aware that competing with an incumbent with significant distribution advantages is unlikely to bear fruit. Being the default in Search matters – and Microsoft is very disadvantaged in this category. Google dominates the desktop and mobile distribution of search, with the default search engine on iPhones, Samsung phones, and the Apple Safari browser is Google. It’s a difficult position to try and usurp, though Microsoft will surely try.

    Though Microsoft is closely tied to OpenAI and GPT, Google is also no stranger to AI in its products - albeit with much less fanfare. If you’ve ever asked Google Search the height of the Eiffel Tower and taken the answer from a snippet that appears at the top of the results, you’ve seen a sample of Google’s AI in action. They also have AI components in their Google Maps, Photos, and other products. Google is also one of the few companies with the resources to spend on AI research and development. Zeta Alpha found that between 2020 to 2022, Google published approximately 9,000 AI research papers, the most out of all corporate and academic institutions. Microsoft published 8,000 AI research papers over that same period.

    This gives us confidence in Google’s longer term value proposition of providing users with faster and more relevant search responses. We think that displacing Google will be much more challenging than many people think.

    While the battle for search engine dominance continues to play out, developments in AI technology may already be having an influence on investment markets. In the last quarter, both Alphabet and Microsoft posted gains of 17%, and while these are largely attributable to gains in the broader tech sector, the public interest in AI fuelled by ChatGPT has certainly generated a lot of press for both companies this year.

    Want to learn more?

    We hope you’ve enjoyed this first article in our series on Artificial Intelligence. Next month, we’ll be looking at other industries and parts of the economy that might be impacted by a growth in AI. Our third article will delve into some of the potential societal impacts of the new technology, looking at possible flow-on effects that could continue impacting the markets.

    If you would like to talk to someone about your investment strategy, the team at Fisher Funds are here to help. Please contact us or get in touch with your adviser.