Google's Kodak Moment: Can Search Giant Survive the AI Revolution?

Google’s Existential AI Challenge: A Historic Turning Point?

In what could mark a watershed moment for one of tech’s most dominant players, Alphabet’s recent earnings report has sparked renewed concerns about the company’s ability to navigate the AI revolution that threatens its core search business.

“It could be that day,” says Ben Reitzes, head of technology research at Melius Research, drawing a stark comparison between Google’s current predicament and Eastman Kodak’s infamous failure to adapt to digital photography. “We compared it to Kodak in terms of the innovator’s dilemma, where your eyes saw digital cameras coming and the digital revolution. It didn’t matter if it was really ready for prime time that exact second, but you knew it was coming and then eventually it caught up with you.”

While Reitzes, who maintains a hold rating on Alphabet, doesn’t predict a complete collapse—noting that “they could break up and they have a lot of great assets”—he sees clear evidence that Google’s traditional search model faces significant disruption from AI-powered alternatives.

The core issue is straightforward: AI-powered search experiences fundamentally change user behavior in ways that threaten Google’s advertising model. “You put an AI summary in even and it demotes links,” Reitzes explained on CNBC’s “Fast Money.” When users receive comprehensive AI-generated answers, they no longer click through to websites or engage with sponsored content—the very foundation of Google’s revenue stream.

Recent financial disclosures appear to validate these concerns. “I put in my estimates, them getting really hit from search next year and the year after, but then a day later or something, the paid clicks came out in the 10-Q and we saw that paid clicks are already decelerating at alphabet,” Reitzes noted. While Google reported strong financial results overall, a closer examination reveals potential warning signs.

According to Reitzes, Google attempted to mask this deceleration by increasing its cost-per-click rates. “On their conference call they said everything was great, and then you realized they increased the cost, the click charge, which we don’t think is going to happen forever. If the rate of return on your ads are going down, you’re not going to be able to charge more all the time to make up for the weakness in clicks.”

To counter this existential threat, Reitzes suggests Google needs to make a decisive strategic pivot. “They need to say, ‘hey, this is the new way of search,'” similar to how “Apple does when they put out the iPhone” even though it cannibalized their successful iPod business. His recommendation includes creating a cleaner, AI-first “Google Now” experience alongside a “Google Classic” option that maintains the traditional search interface and ad platform.

The pace of change in AI presents a particular challenge. “Things in this AI age are happening fast. They happen the fastest we’ve ever seen,” Reitzes warned. This accelerated timeline means Google may have less runway to adapt than previous tech giants that faced disruptive innovations.

For investors and industry observers, the question remains whether Google can overcome what Reitzes describes as a “classic innovator’s dilemma”—the paradox where successful companies struggle to innovate precisely because they’re protecting their existing business models. As Alphabet navigates this critical juncture, the market will be watching closely to see if this indeed marks a historic turning point in the company’s trajectory.