"A brand-new way of searching will begin today," said Satya Nadella, Chairman and CEO of Microsoft, when announcing Bing and Edge + AI last February. Since then, the anxiety about AI reshaping the current search market has been looming over traditional search engine companies.

In fact, over the past year or so, traditional search engine companies, including Baidu, have been stepping up their efforts in the AI search race. Recently, Baidu officially announced the upgrade of its Wenxin Yiyan app to Wenxiaoyan, aiming to break the boundaries of traditional search products by creating a new engine that satisfies users' search, creation, and chat needs simultaneously.

Meanwhile, 360 has embraced a fully open AI ecosystem strategy, opening up four major AI application scenarios: security guard, secure browser, search, and smart hardware. It has also partnered with 15 major model vendors to integrate these mainstream models into its newly launched "AI Assistant."

So, do these traditional search engine companies have what it takes to win this offensive and defensive battle? What are their advantages? Is the anxiety of traditional search engines solely caused by AI?

The "Chat GPT Hurricane" is driving significant changes in the search engine landscape

In the entire To C internet industry, the search engine sector was once one of the best-performing sub-sectors in terms of market structure. The typical oligopoly scenario saw Baidu accounting for 66.87% and Sogou for 24.5% of the domestic search engine market in 2020.

Thanks to this favorable market structure and the advent of the 5G era, Baidu maintained high growth in revenue and profitability from 2018 to 2021. During this period, the domestic search engine user base expanded from 680 million in 2018 to 827 million in 2023.

However, by May of this year, while the head-concentrated nature of the search engine industry remained strong, significant changes occurred overall. On mobile devices, Baidu's market share dropped significantly to 53.31%, while Microsoft's Bing surged to 26.26%. Sogou, 360, and others were lumped together under "Others," sharing the remaining nearly 20% of the market with numerous new and established companies.

Meanwhile, on PC, Bing surpassed Baidu in the Chinese desktop search market for the first time in April last year with a 37.4% share. According to StatCounter, Bing's market share further increased to 53.43% in July this year, while Baidu dropped to 24.52%. It is evident that domestic traditional search engines led by Baidu have faced significant challenges.

The reason behind Bing's rapid growth, as evidenced by its recent layout, lies heavily in the empowerment of AI. On February 7, 2023, Microsoft launched New Bing, integrating Chat GPT, and announced to the world that "this is a new day in search."

Indeed, the AI-powered New Bing experienced a surge in downloads upon its launch. According to Data.ai, global downloads of New Bing soared tenfold just one day after its debut, and its daily active user count surpassed 100 million the following month.

According to StatCounter, Bing gained the most share in global searches in May 2024, approaching one percentage point. While Google still holds an absolute monopoly with a 91.05% share, this figure decreased by more than two percentage points compared to the same period in 2023. Despite the small decline, the potential of AI search should not be underestimated.

Currently, multiple AI players are fiercely competing in the search engine race. This includes native AI search tools like Perplexity AI, YOU, and Mitata, which are still in the process of user acquisition, as well as chatbots like Kimi from Moon's Dark Side, Zhipu Qingyan from Zhipu AI, Baixiaoying from Baichuan Intelligence, and Tiangong AI, which are attempting to integrate web search functionality into AI search tools. All are striving to secure a slice of the search market.

Amidst this trend, traditional search engines like Baidu, 360, and Google are also enhancing their AI capabilities. Following the official launch of its Wenxin Yiyan app a year ago, Baidu recently rolled out an upgraded version and renamed it Wenxiaoyan, positioning it as a new intelligent search assistant under the Baidu umbrella. Simultaneously, Baidu's AI Innovation Business Department has emerged.

However, how likely are traditional search engines to emerge victorious in this intense competition?

Can Traditional Search Engines Win?

Indeed, the emergence of AI search has reignited the stagnant search market, making it a lucrative business once again. According to QYResearch, the global search engine market exceeded $200 billion in 2023 and is projected to reach $388.7 billion by 2029.

This is because the market monopoly and profit model of traditional search engines have hindered innovation in search formats for a long time. The intervention of AI technology is driving search engines towards greater specialization, causing traffic to gradually shift from traditional search engines to more high-quality search providers.

However, it's important to note that development is a process. Currently, from a technological perspective, AI search is a trend and a growth opportunity. Nonetheless, this technology is still in its early stages of exploring commercialization paths and is not yet easily monetized.

Firstly, AI search products need further refinement. Unlike traditional search, which retrieves information based on the query itself, AI search leverages underlying large-scale model algorithms to summarize search results and provide direct answers, reducing the need for users to click through multiple links. This Give unique value to search 。

However, in the process of collecting and analyzing information for users, AI search does not fully empower users to choose materials or provide sufficient tools for screening and summarizing information on their own. This means that users can hardly guarantee the accuracy and effectiveness of the final results presented by these AI search engines. Achieving high precision control would undoubtedly require AI search engines to be trained on vast and high-quality knowledge bases.

It is evident that traditional search engines still dominate the general search market with their vast data resources. Therefore, for AI search products to revolutionize the game and truly disrupt the market landscape, they must provide larger-scale knowledge bases and seamless, high-quality user experiences. They need to earn consumers' trust to exert significant influence in the market. Currently, many technical and accuracy issues remain to be addressed.

Secondly, compared to traditional search engines that once enjoyed lucrative profits with minimal effort, most AI search products in the current market environment have yet to establish viable business models.

On the one hand, highly accurate AI search products often require large models for reasoning, which consumes significant resources and incurs high costs. On the other hand, unlike most overseas AI products that adopt a subscription model, domestic products are mostly free.

High production costs and unsuccessful monetization on the consumer side indicate that current AI search products are still in the process of disrupting the industry. Conversely, these challenges also represent significant barriers for traditional search engines with vast general search data sources.

Thanks to these barriers, despite the accelerated development of various AI search products like Mitata and Moon's Dark Side, Google, the world's largest search engine company, continues to expand its search business revenue. According to Tianyancha, Google's advertising revenue grew by 13% year-on-year in Q1 2024, with its core search business recording a 14% increase.

As the largest domestic search product, Baidu has maintained relatively stable search revenue over the past two years. Although its advertising business faced dual pressures from external factors and AI-driven search transformations in Q1 2024, 18% of search results on Baidu Search were generated by AI.

Given the current trend, the wave of AI is bound to bring significant changes to the entire search landscape. However, for at least the next five years, AI search engines and traditional search engines are likely to coexist. At this juncture, traditional search engine companies must seize the crucial moment to leverage their vast general databases, brand advantages, and other strengths. Those who dare to pioneer the commercialization path of AI search will emerge victorious.

As Robin Li stated, competition in the AI field will be fierce in the next two to three years. Ultimately, the winner will be the one who can generate profits and survive.

Vertical Search: A Disruptor in the Search Market

It's important to note that while AI has significantly boosted Bing's performance in the domestic search market, this does not solely explain the decline of traditional search engines' appeal. The two are not necessarily causally related.

The declining usage frequency of traditional search engines is inherently due to the impact of diversified intelligent search scenarios. In the intelligent era, as internet content platforms become more diverse and fragmented, and built-in intelligent search and personalized recommendation functions continue to advance, more search activities are gradually shifting within various applications. This has given rise to new search scenarios such as interest-based search, search while watching, and heuristic search.

These new scenarios further enhance the pivotal value of search engines while decentralizing operations. This trend marks the beginning of the decline of traditional search engines. For instance, the internet advertising revenue of Sogou and 360, two traditional search engine companies, peaked in 2019 and has since declined. Data shows that by 2023, 360's internet advertising business revenue reached 4.521 billion yuan, a significant drop from 9.725 billion yuan in 2019.

In contrast, the search engine industry, which intersects with various elements and strategies such as technology, products, marketing, content, and platforms, holds immense economic value in the internet economy. These elements are highly compatible with the business layouts of vertical internet companies. Therefore, as content and e-commerce platforms become increasingly competitive, the search engine industry has become a must-fight battleground for these platforms.

In comparison, the emergence of AI search technology has presented these vertical internet platforms with an opportunity to break the monopoly of traditional search engines.

ByteDance has deployed search services within its platforms four times, starting with "Toutiao Search," "Wukong Search," "Lightning Search," and most recently, the independent search app "Douyin Search." Little Red Book, initially known for its "seeding" culture, has had search functionality integrated since its inception. According to its COO Conan, nearly 70% of its monthly active users conduct searches on the platform. According to iResearch data, the number of vertical search users in China reached 450 million in 2022, an 8.4% year-on-year increase.

In a sense, platforms like Douyin and Little Red Book, which have deployed vertical search, and AI search tools like Kimi from Moon's Dark Side and Baixiaoying from Baichuan Intelligence, can be seen as analogues to Pinduoduo and Douyin in the e-commerce industry. Whether Baidu can maintain its position akin to Taobao and JD.com, or how much impact the new "Pinduoduos" and "Douyins" of search will make, remains to be seen by time.

Following the glory of the e-commerce era, the search engine market is emerging as the next highly competitive internet sector, with a new era of growth imminent. AI is clearly the central catalyst.

Source: Pinecone Finance