Alphabet shares fall sharply after Google’s AI chatbot debut stumbles

Shares of Google parent Alphabet closed almost 8 per cent lower on Wednesday, wiping billions of dollars off its market value, as Wall Street digested the potential damage to its search dominance and profits from a new artificial intelligence battle with Microsoft.

The knock to its stock price came as a result of a glitch in a Google AI demonstration, highlighting the challenges the company faces in bringing a new style of chat-based search to a mass market.

It came the day after Microsoft unveiled a new version of its Bing search engine that incorporated AI advances including summarising answers to search queries and generating emails and lists. In an interview with the Financial Times, Microsoft chief executive Satya Nadella made clear his company was prepared to use the new technology to drive down profits in search and that gross margin was “going to drop forever”.

“There is such margin in search, which for us is incremental. For Google it’s not, they have to defend it all,” he added, referring to the competition against Google as “asymmetric”.

On Monday Google said it would launch its own chatbot named Bard in an attempt to make up ground lost to rival ChatGPT, though it has not said when the service will be made public.

Experts pointed out that Bard had made a factual error in the first video demo of the product online. An animation shared by Google showed Bard answering a question about new discoveries made through the James Webb Space Telescope, saying it “took the very first pictures of a planet outside of our own solar system”.

Astronomers said this was incorrect, highlighting a larger issue with search powered by AI known as large language models: that they can confidently make factual mistakes and spread misinformation. One astronomer pointed out the problem could stem from AI misinterpreting “ambiguous Nasa press releases that underplayed past history”.

The glitch highlighted a common flaw with so-called generative AI systems such as Bard, which do not “understand” the information they regurgitate but make guesses based on probability. Microsoft admitted to similar challenges with its chat-based service.

During an event in Paris on Wednesday, Google senior vice-president Prabhakar Raghavan announced new search features that represented minor updates to the group’s search engine, in contrast to the sweeping changes it had said would come within “weeks”. The changes included new image-based search and interactive 3D models of some cities including London and Los Angeles.

Google has been scrambling to catch up with embedding AI technologies into its consumer products since the recent launch of ChatGPT, which provides text answers to complex questions directly rather than requiring the use of a traditional search engine.

Google reported that its advertising revenue dropped 4 per cent in the final quarter of last year, marking only the second quarterly contraction in its history.