SETH

By Bill Peters

'The internet as we've known it for the past 20-plus years is going away and it's going to completely change,' one CEO says

With each passing month, it's becoming increasingly clear that artificial intelligence is taking over the internet, sucking up online searches and smashing the businesses of household-name companies.

Chatbots like ChatGPT and Claude are fielding more and more questions that once poured into search engines. Google's AI overviews at the top of its search results are intercepting online traffic and keeping more people from clicking through to the sites being mined by the AI for information.

"That is forcing content companies and media companies to entirely rethink their business models, their relationships with search engines and AI tools," said Nate Elliott, an analyst at eMarketer. "It's an existential change for these businesses."

On Monday, some analysts said Apple (AAPL) had become the latest to feel the pressure.

The iPhone maker said it expected slower December-quarter sales growth in its services segment - albeit from record levels in the prior quarter. Along with popular businesses like its App Store and Apple Pay, Apple's services segment includes revenue from third-party licensing arrangements with companies like Google, which has paid Apple billions to be the default search engine on Apple's platforms. Apple said challenges in "third-party licensing" were among the factors weighing on growth.

UBS analyst David Vogt, in a research note on Monday breaking down Apple's earnings results, said AI tools appeared "to cannibalize Google search activity."

Steve Huffman, Reddit's (RDDT) co-founder and CEO, said on the company's earnings call last week that through October, search traffic had fallen by more than 1 million referrals on average per week. Huffman also said that Alphabet's Google appeared to be expanding its AI Overviews aggressively in both the U.S. and the rest of the world.

"What started as a feature is now the full search experience," Huffman said. "And at a minimum, it pushes everyone down the search page. And then on top of that, the experiences themselves are not traffic drivers."

"People still want Reddit," he added. "It's just Google is not sending them to Reddit the way they used to."

Reddit's quarterly results and forecast sent its stock some 29% lower on Friday, marking its worst percentage drop on record. The company also said it would require users to log in for access, in an effort to keep AI bots from scraping the site.

Google itself has faced questions about what might become of its traditional search-engine business if more people feed their questions into AI. Last week, Alphabet's shares (GOOG) (GOOGL) sank by 10% after the company disclosed that revenue growth from its mighty search-advertising business had slowed to 12% in the third quarter, down from 19% growth in the first quarter. Google now expects search-revenue growth will face further pressure in the fourth quarter.

AI is an 'earthquake' shaking up the internet

The impact of AI eating traditional internet search has flowed downstream.

Last week, Micha Kaufman, CEO of freelance-work platform Fiverr (FVRR), likened that impact to an "earthquake" across the internet. Organic clicks across the web were falling. More people were using AI assistants to find what they needed, Kaufman said.

"The internet as we've known it for the past 20-plus years is going away and it's going to completely change," he said. "It's dying."

Fiverr's third-quarter revenue fell 15.8% year over year. Its shareholder letter noted the impact on search-engine optimization, saying "AI-related disruption to traditional SEO efforts" had hit "both low-value and high-end work on the platform."

In August, legal-advice platform LegalZoom (LZ) reported its fifth straight quarter of double-digit subscription sales growth. But it still called out the impact of Google's AI overviews, noting "lower customer acquisition through our traditional search channels," as AI-generated search answers kept people from clicking through to websites.

"I think these websites that quote-unquote hold answers to things are at least for now the most vulnerable, because AI just gives you the more accessible version," Jake Teeny, an associate professor of marketing at Northwestern University, told MarketWatch.

"As long as people don't really want to check the sources and look more in-depth into it, they don't need to go to that backing source," he said.

Media companies, which are often those backing sources, have also had to recalibrate.

Neil Vogel, the CEO of People (PPLI), which along with its namesake magazine publishes InStyle and Food & Wine, said at a conference in September that five years ago, more than 70% of its audience came from Google searches, but that now, the "Google risk is out of the business," and now accounted for just 20% of its web audience. The company last week said it would lay off about 6% of its staff, amid "rapid changes in media," according to reports.

'It's going to hurt small businesses'

According to eMarketer estimates, slightly more than half of U.S. internet users prompt an AI tool for a response at least once a month. But eMarketer's Elliott said that while people use AI to look for information, they tend to use it on top of traditional online searches and other tools, rather than replacing those searches outright.

Even before AI summaries took over the first page of search-engine results, those results weren't exactly getting a ton of click-throughs. Only about half of all searches led to a click outside the search engine, Elliott said. However, AI overviews are driving down that click-through rate even more - to as little as around one-third, depending on the estimates, he said.

A study published this year by researchers at the New Jersey Institute of Technology and other universities found that as of late last year, Google returned AI overviews for 51.5% of queries. That study found that traditional Google search results were likelier to return popular websites or those associated with government or educational institutions, while AI searches tended to return content owned by Google and niche websites. Sites that blocked Google's AI crawler were much less likely to appear in those AI summaries.

Yi Chen, a professor of business data science at the New Jersey Institute of Technology and one of the researchers behind the study, said that if AI summaries starve out the high-quality publishers, the models will be left with lower-quality outlets to work with.

"It's going to be garbage in, garbage out," she said.

Other companies are also citing changes to the way people search for things online as a risk. Campbell's (CPB), in its annual report in September, said that the rise of AI shopping agents was changing how people found out about their products and shopped for them, and warned that it might not get its marketing efforts right. Flower-delivery service 1-800-Flowers (FLWS), in its own annal report in September, warned that greater use of AI-driven search could lead to lower traffic at its own websites.

The company also cited the risk of AI's not-infrequent struggles with the facts.

"These tools may display inaccurate or incomplete information about our products, prices, availability, delivery terms or promotions, and we may have limited ability to correct or influence that content," the company added.

Tinglong Dai, a business professor at Johns Hopkins University, said that it's gotten harder for websites to keep up with rapid changes in how AI searches the internet for information. He also pointed to implications for consumers and smaller retailers.

AI overviews tend to narrow choices down to a handful of options, he said, often from older, established brands. Some research has already shown that AI chatbots tend to recommend shopping at Walmart (WMT) over other retailers.

"I think it's going to hurt small businesses, new businesses, in a way that we haven't seen before," he said.

-Bill Peters

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(END) Dow Jones Newswires

11-03-26 1546ET