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Alphabet’s strategic response to AI-powered search innovations

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

For more than two decades Alphabet, parent company of Google, dominated the search engine market, yet the advent of artificial intelligence (AI) in search processes has seen unprecedented competition from the likes of OpenAI’s ChatGPT and Perplexity.

The rapid evolution of AI is prompting a revaluation of Alphabet's strategy in an industry it once controlled unchallenged. This shift epitomises Clayton Christensen's "Innovator's Dilemma," highlighting how established companies struggle to adapt to disruptive innovations from upstarts.

"The Innovator's Dilemma" posits that leading companies often fail to adopt new technologies that initially cater to niche markets but eventually revolutionise the industry. Established firms, focusing on sustaining innovations that improve existing products, often overlook disruptive innovations that begin with lower performance but cater to emerging customer needs. Over time, these disruptive innovations improve and capture significant market share.

Google, since its inception, epitomised sustaining innovation in search technology. Its algorithms, user interface, and expansive data infrastructure provided unmatched search accuracy and speed. However, the introduction of AI-powered search tools like ChatGPT and Perplexity marks a disruptive shift. These tools offer conversational interfaces and contextual understanding, challenging the traditional keyword-based search model.

ChatGPT and Perplexity represent a new paradigm in search technology. ChatGPT, a language model trained on diverse datasets, engages users in natural conversations, providing nuanced and context-aware responses. Perplexity, leveraging similar AI capabilities, focuses on delivering concise and precise information. These innovations cater to users' evolving preferences for more interactive and accurate information retrieval.

These AI-powered tools address some of the limitations inherent in traditional search engines. Instead of returning a list of links, they provide direct answers and engage users in a dialogue, enhancing the search experience. As these tools rapidly improve, they become viable alternatives to Google's search engine, attracting users seeking more intuitive and efficient information retrieval methods.

Facing this disruptive challenge, Alphabet is at a crossroads. The company's initial response involves integrating AI into its existing search infrastructure, enhancing its capabilities with features such as Google Bard, an AI-powered chatbot designed to compete directly with ChatGPT. According to a recent Morgan Stanley report on Alphabet, new AI features, such as AI Overviews and planning tools within Google Search, are aimed at maintaining engagement and increasing the commercial potential, demonstrating Google's strategic shift towards integrating generative AI into its search functionalities. However, this approach may only partially address the underlying shift in user expectations.

The real challenge for Alphabet lies in balancing and optimising its legacy systems with embracing truly disruptive innovations. Christensen's dilemma suggests that companies must be willing to cannibalise their products and invest in disruptive technologies that may initially seem less profitable. For Alphabet, this means potentially overhauling its search model to focus more on conversational AI and personalised user experiences.

The economic landscape of search technology is transforming. Just as electricity in the early 20th century revolutionised industries, AI is set to redefine information retrieval. The integration of AI into search processes can drive productivity, innovation, and the creation of new business models. For companies like Alphabet, this transformation is fraught with risks, but also opportunities.

Investors must consider the potential for AI-driven search tools to disrupt established revenue streams from traditional search advertising. As users shift to AI-powered platforms, advertising strategies must evolve to maintain relevance. Additionally, the competitive pressure from AI upstarts could lead to a more fragmented market, reducing the dominance of any single player.

Companies that successfully integrate AI into their core operations and adapt to changing user preferences will emerge as the new leaders in the digital information age. Alphabet’s strategic initiatives reflect a comprehensive approach to integrating AI across its ecosystem. The company’s investments in AI models like Gemini and tools for developers underscore its commitment to leading the next era of technological innovation.

Alphabet’s response to the disruptive challenge posed by AI-powered search tools is a critical test of its ability to adapt and lead in a rapidly changing technological landscape. The company's efforts to integrate advanced AI functionalities into its search platform and broader ecosystem highlight its strategic pivot towards embracing disruptive innovation. As Alphabet navigates this complex transition, its success will hinge on its ability to balance legacy systems with groundbreaking advancements, ensuring its continued relevance and leadership in the digital age.

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KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

The Funds managed by the Global Innovation Team:

May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on a Fund's value than if it held a larger number of investments. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income.

The risks detailed above are reflective of the full range of Funds managed by the Global Innovation Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.

Storm Uru
Storm Uru
Storm is a lead fund manager of the Liontrust Global Innovation, Liontrust Global Dividend and Liontrust Global Technology funds. He has 12 years industry experience, including as a fund manager and trader and prior to Liontrust worked at Neptune Investment Management running global funds and covering the global industrials sector. He holds an BBS in finance and MBS in international business from Massey University, an MBA from Oxford University and is a CFA Charterholder. He represented New Zealand in rowing at the 2008 and 2012 Olympic Games, winning bronze in London in 2012.

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