Is AI Shattering Google’s Fortress? Plus: Inside Amazon’s Risky Ads Test | Growing Ecommerce

Episode Transcript

00:00:00 - 00:00:33
Mike: Welcome to another episode of Growing Ecommerce. We are your hosts, Mike Ryan, head of eCommerce insights at Smarter Ecommerce, and Christian Scharmüller, chief content officer. Always a pleasure. Thank you. Good to be back. It’s been a minute, but we’re going to get a few episodes together and have fun and take one thing at a time, right?

00:00:33 - 00:00:57
Chris: 100%. I missed your voice. I love the instrument. And your voice—I miss it. By the way, Mike, I want to officially apologize for my rather underwhelming setup today, but we are moving to a new place and I just couldn’t find a fitting suit. Maybe I will still be in the dress next episode, or the next of the next.

00:00:57 - 00:01:19
Mike: I will probably be back again. For listeners and for anyone joining us newly, Chris usually wears a shiny three-piece suit. If you can picture Alicia Silverstone’s closet in the movie Clueless—I think I’ve finally caught up to where you can have it plan your outfit for you.

00:01:19 - 00:01:44
Chris: I’m deeply sorry, Mike. That’s the kind of setup that Chris has at home that he needs to rebuild for special events. I really live by the principle: when in doubt, overdress. Absolutely. I wanted to address that, but I just couldn’t.

00:01:44 - 00:02:02
Mike: Okay. Well, I think we’re going to talk about some market topics and some earnings-related topics. It’s a pity that you don’t look like Mr. Monopoly himself, but we’ll have to make do. Why don’t you bring us in, Chris? The earnings are all in; a lot of retailers have done their earnings, and the platforms had theirs a bit earlier.

00:02:02 - 00:02:20
Chris: Let’s go back and talk about a couple of highlights. Given the fact that we are talking about growing e-commerce, Google and Meta would be two companies to look at a bit more closely because they are probably the biggest e-commerce companies next to Amazon.

00:02:20 - 00:02:44
Chris: What I found very interesting—and why I’m following these earnings call summaries closely, especially in the last 12 months—is because we are in highly disruptive times. Of course, AI plays a big role here. But what’s also very disruptive is that we know a lot of clients are struggling right now, especially e-commerce clients. Why? Paper-thin margins, demand issues, and so forth.

00:02:44 - 00:03:09
Chris: When you look at these big mega-cap companies, I think they are doing better than ever. This consolidation of margin and revenue is in full swing right now. While the general economy might be struggling, if you look at these “Magnificent Seven” companies, it’s crazy what they do.

00:03:09 - 00:03:30
Chris: To talk about Google, for instance, I noted down some numbers. Q2 earnings showed almost $85 billion in revenue. That is a huge number that no one can really cope with.

00:03:30 - 00:03:51
Chris: It’s a 14% year-over-year increase. A 14% increase at this level is just crazy to me. What’s very interesting, Mike, is we talked about how Google might be facing real competition for the first time in history, especially in the field of search, which is their core business.

00:03:51 - 00:04:12
Chris: If you look at the Google Search revenue numbers, they are still growing strongly. The Q2 earnings call showed 12% year-over-year growth, roughly $55 billion in revenue. So wherever the competition might be—and you know my stance, I think Google might face some competition—looking at the numbers currently, there’s no downward trend for Google whatsoever.

00:04:12 - 00:04:36
Chris: Another thing that is absolutely crazy from my perspective: I thought Google was somehow late to the party and that AWS was knocking it out of the park. But if you look at the Google Cloud numbers, it’s red hot with 30% year-over-year growth. Year-to-date, the operating margin almost doubled in the cloud business.

00:04:36 - 00:04:59
Chris: They are hyper-scaling and printing money like no one else. Google is a fortress; it’s amazing what they do. I think they also solved the AI game. This was the big topic: How can they monetize it? Is AI eating the lunch of the core business? I just don’t see it. It’s highly impressive.

00:04:59 - 00:05:19
Mike: I can only agree with you there. It’s a bit of a narrative violation. Everyone is saying Google is threatened here, but the numbers don’t show anything like that. I think in some ways it’s still early to say. AI challengers like OpenAI and Perplexity (who is launching their own browser now) are in their early days.

00:05:19 - 00:05:44
Mike: I have always felt that this is not a zero-sum game. We’ve talked about this before; search is a huge place. You have informational queries that are not easily monetized, and then there is the core commercially relevant area. They are certainly holding their ground in that commercially relevant battleground.

00:05:44 - 00:06:10
Mike: We’ll have to see what comes next, but it’s pretty stunning. A 14% growth for a company that big is insane.

00:06:10 - 00:06:35
Chris: You know how hard it is to grow double digits. As a company, we’re doing quite well, but growing double digits in this economic environment is difficult. They seem to do it quite easily.

00:06:35 - 00:07:11
Chris: The most stunning thing for me—even if search was a zero-sum game—is that Google is fine. The hypothesis was that AI competitors would eat away at Google’s search query land. Something would migrate to ChatGPT, others to Perplexity, and so forth. But the stats are pretty clear: 90% of all global search queries are still with Google.

00:07:11 - 00:07:36
Chris: Google processes roughly 5.9 trillion queries yearly, and 5.3 trillion of those are on Google. That’s 90,000 search queries per second. But the more important thing, Mike, is that 90% of commercially intended search queries still belong to Google.

00:07:36 - 00:07:58
Chris: That isn’t moving. As long as that’s stable and click prices go up a bit, Google is fine in their core business. I think a lot of people overestimated how fast the disruption would happen.

00:07:58 - 00:08:17
Mike: I’ll just say one last word regarding their AI capabilities. Bard was kind of a joke at first, and then Gemini fell flat, and everyone asked, “Where’s Google?” Now they are really firing on all cylinders.

00:08:17 - 00:08:49
Mike: 1.5 Pro and Gemini are awesome. They have a brand new image model which looks to be better than Meta’s. It seems great for backgrounds and putting clothes on models for e-commerce. There are all kinds of use cases. They are right where they belong: at the front.

00:09:10 - 00:09:33
Chris: What Google does so greatly is how seamlessly it is embedded in the way you work. Gemini is just fitting in. A number that was very surprising to me: the Gemini app has roughly 450 to 500 million daily active users. ChatGPT is running at around 750 to 800 million, but they started much earlier. That head start is vanishing.

00:09:53 - 00:10:12
Chris: The AI game has turned into a CapEx game. You have to massively invest to develop your capabilities. Google sits on roughly $70 billion in net cash, they have an operating margin of roughly 30%, and they are printing money. They have a big will to invest and the right strategy. They are in a solid position.

00:10:35 - 00:10:55
Mike: Tell us, Chris, what you made of Meta then.

00:10:55 - 00:11:43
Chris: Meta is an interesting company. On a private note, I thought about investing in Meta in late 2022 because of the big correction, but I didn’t. In late 2022, Meta was at around $90 or $100 a share. Now they are at $500 or more. Even with Reality Labs dragging on the company, the stock is doing fine. It’s a powerhouse—a well-oiled advertising machine.

00:12:06 - 00:12:33
Chris: In the last earnings call, they showed $47 billion in revenue, a 22% increase year-over-year. Operating income was $20 billion, up 38%. It’s a killer. It became more profitable.

00:12:33 - 00:12:53
Chris: Mark Zuckerberg previously said advertising isn’t something he’s interested in, yet it makes up about 97% of their earnings. It is a well-oiled advertising machine. They are in a position to scale and grow without any downward trend in operating margin. Quite the contrary.

00:13:18 - 00:13:47
Mike: If we get back to those themes of AI and this well-oiled machine, Meta is making a compelling position even compared to Google. Google is pushing AI in their ads, but Meta has been very effective in showing how good this is for advertisers.

00:13:47 - 00:14:09
Mike: Meta has been investing heavily in the new Andromeda model. It seems to be very impressive. They are attributing conversion lifts—I think it was 3% on Facebook and 5% on Instagram. For a mature channel, that incrementality is huge.

00:14:39 - 00:15:00
Chris: If you compare Meta to Google, I was concerned a few months ago that AI disruption might hurt Google’s core business more than Meta’s. Google is managing it well, but I still think Meta’s business is more unaffected by negative AI trends.

00:15:00 - 00:15:29
Chris: The utility of Meta is on an emotional basis, while Google is a functional utility. I think AI will disrupt functional utility way more than emotional utility. It will take longer to disrupt the emotions between human beings, and that’s where Meta sits.

00:15:29 - 00:16:07
Chris: If you exclude China, roughly 70% of all daily active internet users are on one of Meta’s family of apps. They have network effects in full swing and high switching costs. I think they understand their customers better than any other platform.

00:16:31 - 00:16:52
Mike: I’d argue that the social part of social media has diminished a bit as feeds have become more about algorithmically recommended posts rather than seeing content from people you know.

00:16:52 - 00:17:14
Mike: I think marketplaces and search engines will come under pressure, but social media seems to be a different category. The question will be what happens if there is synthetic content and synthetic users everywhere. But for now, all signs are positive. On Instagram, they are even testing an automatic scroll feature so you don’t even have to use your thumb.

00:17:55 - 00:18:18
Chris: Meta and its family of apps are too big to fail. There are 5.6 billion daily worldwide internet users and 3.4 billion are active within the Meta family of apps. That is wild. The transformation from a “fancy social platform” to a well-oiled advertising machine happened internally.

00:19:12 - 00:19:32
Mike: To wrap up, Google has become very strong in image generation for e-commerce. Meta’s answer is different. Buying startups is under more scrutiny by regulators now, so companies are doing partnerships instead.

00:19:32 - 00:19:56
Mike: Meta has started a licensing partnership with Midjourney. This will be their answer to Google’s homebrewed image generation for e-commerce. It will likely be Midjourney powering these AI image features. It’s a smart strategy.

00:19:56 - 00:20:40
Chris: Bottom line: Meta and Google are doing fine. Let’s talk about the elephant in the room: Amazon. Specifically, a recent huge blip in their advertising. We previously talked about Temu stopping ads in the US, but Amazon also had a total ad stop. It wasn’t just for Google Shopping and it wasn’t just in the US—it was worldwide. It was totally weird.

00:21:09 - 00:21:39
Chris: What about the reasons, Mike?

00:21:39 - 00:22:02
Mike: It’s hard to understand the reasons without a word from Amazon or Google. To summarize, Amazon seemingly removed their Merchant Center because they stopped appearing on Google Shopping ads and unpaid free listings.

00:22:02 - 00:22:26
Mike: It’s a big move. They are the single biggest spender on Google Shopping. They kept running text ads and ads on other platforms, just not Google Shopping. It lasted for exactly one month, from July 22nd to August 22nd.

00:22:26 - 00:22:51
Mike: The leading theory is that it was a marketing incrementality test—a big “on/off” test to see what would happen to sales volume without Google Shopping. I don’t find that credible because it’s such a brute-force way to test. Amazon has been spending for years; they can run meaningful tests on a small percentage of traffic.

00:23:37 - 00:24:03
Chris: If I were the VP of paid advertising at Amazon and I wanted to do an incrementality test, I would pick one or two representative markets. I would not shut down the biggest acquisition channel in every country. If you pause for a month, Google basically has to learn from scratch again. It doesn’t make sense.

00:24:24 - 00:24:51
Chris: What about it being a brute negotiation tactic?

00:25:11 - 00:25:39
Mike: It’s certainly possible. They are ad tech rivals. In the past, they’ve reduced advertising as a negotiation tactic or when there was too much demand during the pandemic. If it was a negotiation tactic, what would they be negotiating? CPCs should be set by market competition.

00:26:00 - 00:26:30
Mike: We know from DOJ disclosures that Google hasn’t always treated Amazon like other advertisers. They were purposely disadvantaging Amazon in some cases. There has been talk about them manipulating rankings or reaching agreements with players like eBay in the past.

00:26:49 - 00:27:22
Chris: I looked at Amazon’s earnings, and Retail Media (Amazon Ads) takes up almost 10% of their revenue—roughly $16 billion last quarter. Amazon used Google Shopping as a Trojan horse to lure people in, but they have a business model where people then stick to Amazon.

00:27:22 - 00:28:07
Chris: Could it be a strategy to show retailers on Amazon that they should invest more in the Amazon ad system rather than relying on the “free” traffic Amazon buys for them elsewhere?

00:28:07 - 00:28:39
Mike: That’s an interesting idea. Retail media networks often buy ads for their customers to sweeten the pot. Amazon’s own off-site tech has become very mature, and they are challenging The Trade Desk and Criteo.

00:29:36 - 00:29:56
Mike: They are testing multi-pronged approaches, and one of these streams might be in conflict with Google Shopping.

00:29:56 - 00:30:19
Chris: Once they decided to reactivate the campaigns, what happened?

00:30:19 - 00:30:50
Mike: When they turned off the ads, you would expect a big vacuum. You’d expect CPCs to dip and other advertisers to see their impression share and volume go up. Almost none of that happened.

00:31:16 - 00:31:39
Mike: When Temu left the US, we saw that the biggest spenders benefited most. In this case, Temu was a huge beneficiary of Amazon leaving, but it wasn’t as exciting as retailers hoped. I heard feedback directly from advertisers that they weren’t seeing the expected gains.

00:32:04 - 00:32:24
Chris: That’s strange. Google owns the bidding marketplace and it’s all running through their technology. It’s possible their engineers ensured it was seamless.

00:32:24 - 00:33:11
Mike: Fred Vallaeys reported similar findings. Tinuiti reported an 18% reduction in CPCs when Temu left, but with Amazon, it was hard to disentangle. What was stunning was that Amazon was an account-level competitor for 70% of advertisers before they left. When they turned the ads back on, they were immediately competing with 70% again overnight.

00:33:11 - 00:33:54
Mike: This doesn’t align with my experience. If you pause a campaign, it’s disruptive and takes time to scale spend back up. You don’t just turn on that volume instantly. We have clients spending millions, and we know sometimes it’s not even possible to scale back to where you were quickly. Yet Amazon did it seamlessly.

00:34:22 - 00:34:29
Chris: Amazon is not back yet in the US, right?

00:34:29 - 00:34:52
Mike: We don’t know why. If it was an incrementality test, they might have found the spend wasn’t necessary in their home market where penetration is highest. In newer markets like the Netherlands or Sweden, it might be more supportive.

00:35:10 - 00:35:43
Mike: It could also be related to their ad tech strategy. There is a new campaign type from Google called “Google Ads for Commerce Media”. The premise is that in the past, if you drove traffic to an Amazon product page, you couldn’t track the conversion. This new campaign type allows for that integration.

00:37:08 - 00:37:49
Chris: Mike, you have a lot of nicknames. You’re the “Kim Kardashian of Performance Max” and “Mr. Temu.” You know everything related to China. Do we have some China news on the agenda?

00:37:49 - 00:38:13
Mike: There is an “odd couple” scenario playing out between China and Europe—specifically JD, which is a massive conglomerate. They are making plays with two of Europe’s biggest retailers: IKEA and MediaMarkt.

00:38:39 - 00:39:08
Mike: While players like Alibaba, Temu, and Shein have taken a more antagonistic approach, JD is working on partnerships. They are taking a minority stake in the holding company for MediaMarkt (Ceconomy).

00:39:08 - 00:39:32
Mike: I believe the deal was around $6 billion. They have a significant share now, around 23% or so. It’s a win-win. MediaMarkt has a great physical presence and reputation, which gives JD a massive footprint in Europe.

00:40:26 - 00:40:54
Mike: MediaMarkt benefits from JD’s innovative supply chain technology and deep pockets. There are commitments in place for no layoffs or store closures for three years. It’s an interesting partnership to watch.

00:41:53 - 00:42:18
Mike: The other mention is IKEA. IKEA is opening an online store inside JD’s ecosystem in China. This opens up hundreds of cities that IKEA doesn’t have access to otherwise.

00:42:51 - 00:43:01
Chris: So, Mike, this is a wrap. I enjoyed it.

00:43:01 - 00:43:22
Mike: Me too, Chris. It’s good catching up, even if you look a little shabby, mate. Stay tuned for next episode when his Clueless-inspired wardrobe is back.

00:43:22 - 00:43:48
Chris: Thanks for listening.

00:43:48 - 00:43:52
Mike: This has been another episode of Growing Ecommerce, brought to you by Smarter Ecommerce. You can learn more over at smarter-ecommerce.com. Please recommend the podcast to friends and coworkers if you enjoyed it.