“The strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode,” Google Senior Vice President and Chief Business Officer Philipp Schindler said on Alphabet’s earnings call for the July-September quarter.

AI Mode is Google’s chatbot-style search feature. Google plans to increase its revenue by placing more ads within AI-generated answers. It will expand ads in AI Mode to international markets and launch multi-turn ads in the US, which change as users continue chatting. Google is also scaling ads in AI Overviews, the AI-generated summaries displayed at the top of regular search results.

Download the transcript of Alphabet’s Q3 2026 earnings call here.

Why did AI Mode slow Google’s search revenue?

Revenue from Google Search and other advertising grew 12% to $63.3 billion, slower than in the previous quarter. JP Morgan analyst Douglas Anmuth asked whether the slowdown was because Google had not been “showing as many ads basically in AI Overviews, in AI Mode.” Schindler gave three reasons:

  • Currency: Foreign exchange (FX) movements were “the single largest driver of Search deceleration relative to Q2.”
  • Advertisers: Some Asia-Pacific retail advertisers were affected by the European Union’s decision to end its customs exemption for low-value parcels. Media spending also normalised after a strong FIFA World Cup quarter.
  • AI Mode: More searches shifted to AI Mode, which generated less revenue.

“To be clear, we feel very good about our trajectory here,” Schindler said.

What is Google changing in AI search ads?

“We are now scaling high-quality ads within AI Overviews and AI Mode to more users and queries,” Schindler said. “This includes taking our monetization footprint global for the first time.”

  • More countries: Google will show ads in AI Mode in international markets. It did not specify which markets or when the expansion would take place.
  • Ads that change mid-chat: Multi-turn ads in the US will change as conversations progress.
  • Users’ response: “Our user research shows that people are comfortable with ads on these surfaces,” Schindler said. He added that people clicked on sponsored and organic product listings in AI Mode at similar rates.
  • AI-made ads: Gemini helped advertisers create “over 1.5 billion campaign assets, up over 7x year-over-year,” Schindler said.
  • Pace: “Our approach is deliberate,” Schindler said. He added that Google prioritises “the user experience and engagement first” before scaling the ad formats that work.

Google is also building checkout into search. Its Universal Commerce Protocol (UCP) “enables direct checkout for hundreds of thousands of brands across Google,” Schindler said. Google also launched a Universal Cart this quarter.

Beyond advertising, Google is generating revenue from AI subscriptions. “Google One is our fastest-growing subscription product, driven by demand for AI plans,” Senior Vice President and Chief Financial Officer Anat Ashkenazi said.

How are people using AI search?

“Our year-over-year query growth rate is the highest it’s been in the last five years,” Alphabet and Google Chief Executive Officer (CEO) Sundar Pichai said. AI is changing how people search:

  • Longer queries: “Queries in AI Mode are on average three times longer than traditional searches,” Pichai said.
  • Beyond text: “One in five AI Mode searches globally use voice, images or documents,” he said.
  • New searches: “The majority of AI Mode queries are incremental,” Schindler said. This means users are making searches they would not otherwise have made.
  • Gemini: “The Gemini App is now at one billion users,” Pichai said.

What does this mean for websites that depend on Google?

When AI answers questions directly, fewer people may click through to other websites. Info Edge said in October that billings from its education platform, Shiksha, fell 27% because “AI-driven search increasingly answers user queries directly.” In Europe, publishers have complained to the European Commission that AI Mode sends fewer than 5% of queries to external websites.

More ads within AI-generated answers could add to this pressure, as they would appear in answers that users may never click past. Google did not address traffic to external websites during the call, and no analyst asked about it.

What is Google spending on AI?

  • Spending: Google spent $51.4 billion on capital expenditure (capex) during the quarter. It continues to expect capex of $195 billion to $205 billion for 2026. “We continue to expect our CapEx to increase significantly in 2027,” Ashkenazi said.
  • Cash flow: Free cash flow was negative $9.1 billion for the quarter. This included a $5.2 billion cash payment towards a 2018 European Commission fine, following the conclusion of Google’s appeal.
  • Net income: Net income fell, mainly because of an “unrealized loss from our investment in SpaceX,” Ashkenazi said.
  • Cloud: Google Cloud revenue more than doubled, rising 103% to $30.7 billion.

Alphabet’s total revenue rose 25% to $127.6 billion. Its shares fell about 10% in after-hours trading, according to Investing.com.

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