Google Expands AI-Powered Search Ads Amid Slowing Core Ad Growth

Alphabet’s third-quarter earnings call on Wednesday revealed that the company is turning its growing AI-powered search feature, AI Mode, into a new advertising revenue stream. Ads that appear in AI Mode are now live in ten additional markets and will run in follow-up questions in the United States. The move comes as Google’s core search advertising growth has decelerated for two consecutive quarters, with search revenue rising 12% year-over-year in Q3 2026, down from 17% in Q2 and 19% in Q1.

• Alphabet’s search revenue grew 12% YoY to $63.35 billion, but the growth rate has slowed from 19% in Q1.
• Ads in AI Mode are now available in Australia, Canada, India, Kenya, Malaysia, New Zealand, Nigeria, Pakistan, the Philippines, and Singapore, plus multi-turn ads in the U.S.
• Google says click-through rates for sponsored product listings in AI Mode match those of organic listings, indicating early success of the new format.

AI Mode Drives Query Growth but Lowens Monetization

Chief Business Officer Philipp Schindler explained that AI Mode has pushed the year-over-year query growth rate to its highest level in five years. However, the feature’s monetization is weaker than traditional search. “Lower monetization in AI Mode is one of the reasons for the slower growth in search revenue,” Schindler said during the earnings call. He added that many AI Mode queries are upper-funnel and incremental, which he believes will create more monetization opportunities over time.

Expanding Ads to New Markets

Google’s announcement marks the first time the company has made AI Mode ads available outside the United States. The new markets include Australia, Canada, India, Kenya, Malaysia, New Zealand, Nigeria, Pakistan, the Philippines, and Singapore. In the U.S., Google is launching multi-turn ads that allow advertisers to appear in follow-up questions. According to Schindler, early data shows click-through rates for sponsored product listings in AI Mode are comparable to organic listings, and user research indicates that people find the ads relevant.

Impact on Cloud and Infrastructure Spending

Alphabet’s Q3 results also highlighted the company’s heavy investment in infrastructure. $51.4 billion was spent in Q3, roughly two-thirds of which went to servers and networking equipment, with the remainder funding data-center builds. This capex has weighed on profitability, with net income falling to $26.17 billion from $35 billion a year earlier. Google Cloud, the company’s second-largest revenue source, generated $30.7 billion in Q3, up 103% YoY, but it has begun offloading workloads to third parties to meet capacity demands.

What It Means for Advertisers and Website Owners

For advertisers, the expansion of AI Mode ads offers a new inventory that aligns with the longer, more complex queries generated by generative AI. Advertisers can target AI Mode using broad match or AI-Max, but they cannot directly target AI Overviews or AI Mode individually. Negative keywords and brand exclusions remain in effect. For website owners, the comparable click-through rates suggest that ads integrated into AI responses can drive traffic in a way that feels natural to users. However, the current lower monetization of AI Mode means that advertisers may need to adjust expectations for return on ad spend until the format matures.

Next Steps for Google

CEO Sundar Pichai emphasized that AI investments are changing how people use Search, with queries in AI Mode three times longer on average and one in five involving voice, images, or documents. Pichai also noted that Google’s Gemini app has reached 1 billion monthly users, and the company is focusing on agentic AI tools for business customers. Alphabet remains committed to its $195-$205 billion capital-expenditure forecast for 2026 and plans to spend significantly more in 2027. The company will continue to monitor the performance of AI Mode ads and refine targeting and formats to improve monetization.