Alphabet's (GOOG +1.31%) (GOOGL +1.45%) stock price plunged last week as the market started to sense that the Google empire isn't as strong as it once was.
Rival Microsoft last week announced a new version of its Bing search engine that is powered by OpenAI's ChatGPT technology. Alphabet responded with its own presentation for its Bard AI tool, but flubbed the announcement as Bard gave an incorrect answer to a question in the video the company showed.
As the buzz around generative artificial intelligence (AI) like ChatGPT has grown, Alphabet has become a battleground stock, with some on social media and elsewhere arguing that ChatGPT will be a fleeting phenomenon or that the brand and habit built around Google Search are simply too powerful to disrupt.
However, if you're feeling confident about Alphabet's chances in its new battle with Microsoft, you might want to look to history for a lesson. Several monopolies and near monopolies have been disrupted by new technology, and one, in particular, bears a number of similarities to Alphabet today.
Image source: Getty Images.
When Kodak was king
These days, the smartphone is the predominant tool for taking pictures, but not long ago, you needed a camera and film if you wanted to capture those memories, and Kodak was the company you trusted them with.
Kodak, which went bankrupt in 2012, once held more than 80% market share of the photographic film market, selling rolls of film as well as the machinery and photo paper needed to develop film and print pictures. At its peak in 1997, the company's market cap was more than $30 billion, and it was a longtime Dow Jones Industrial Average component with more than 140,000 employees. "A Kodak Moment" was as recognizable as any other advertising tagline.
The popularization of digital cameras and smartphones unraveled the company's empire, and film cameras have since become a novelty, fully disrupted by digital technology. Though Kodak would have been challenged due to that transition no matter what it had done, the company made some key tactical mistakes.
For example, a Kodak engineer, Steve Sasson, actually invented an early version of a digital camera in 1975, but said upper management reacted negatively to it, sensing the threat such a device would pose to its film business. Kodak made other decisions to prioritize film over digital as well in its leadership and in other ways.
In 2001, when it was clear the market was shifting toward digital cameras, the company acquired digital photo-sharing site Ofoto, but instead of using it to transform its business around digital photo-sharing and positioning itself to be something like an early form of Meta Platform's Facebook or Instagram, the company instead just used it to try sell printers, a strategic failure to capitalize on what may have been its best opportunity to remain relevant. It ended up selling Ofoto to Shutterfly in 2012 for a fraction of what it paid for it.
Kodak wasn't the only such company to suffer this kind of downfall. The Sony Walkman was once ubiquitous, and its name was synonymous with its product category. That didn't matter after the MP3 player was invented -- the Walkman was left in the dust by the iPod. Similarly, digital media has crushed legacy industries like newspapers and broadcasting as consumers turn to online sources for news and streaming for entertainment. There have been plenty of bankruptcies across legacy media outlets, including once-admired brands like The Village Voice and top companies like McClatchy, which was the country's second-largest newspaper owner.
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Key Data Points
The similarities with Google
There are no perfect analogies in business, but there are a surprising number of things in common between Kodak in its heyday and Google today.
Like Kodak's was, Google's near monopoly is in a form of media, and the way people consume media has changed frequently over the last century. Though Google Search may be thought of as a technology, to the user, it's fundamentally a form of media, used to get information just like television, print, or audio.
Additionally, there are signs that Alphabet, like Kodak, has been reluctant to fully deploy its AI tools for the public because doing so might disrupt its search empire. CEO Sundar Pichai recently said that Alphabet pivoted to being an AI-first company six years ago, but to the outside observer, the evidence of any meaningful innovation from that switch is minimal. And it's noteworthy that OpenAI, the company that sparked the new "race" in generative AI and chat-led search, is a start-up with nothing to lose.
Alphabet has taken a cautious stance about deploying new AI technology to the public, and it's beginning to look like that was a strategic blunder. Monopoly naturally breeds inertia and resistance to change, and it seems like Alphabet could be falling into the same trap as Kodak.
What it means for investors
Kodak's collapse took several years, even as the switch from film to digital cameras happened rather quickly. It's unclear at the moment where chat-driven search is headed, but what is clear is that a better search tool than the classic Google Search is possible, and one will likely be deployed widely in the next few years, if not sooner.
ChatGPT has the power to answer follow-up questions, provide nuance, and synthesize multiple responses in a way that a typical Google Search can't. The most-frequent knock on generative AI tools like ChatGPT is that they can be inaccurate, but Google Search is often wrong as well.
In the screenshot below, I asked Google a simple question to which it gave me a wrong answer.
Image source: Author
The St. Patrick's Day parade in Boston this year will actually be on Sunday, March 19, which you would learn if you scrolled down to the websites listed below, but that's beside the point.
Based on the answer in the snippet box, it seems that Google can't tell the difference between the question "when is St. Patrick's Day" and a question about when a St. Patrick's Day parade will be.
At its best, a chat-powered search would be able to scan the internet and neatly package the answer you're looking for, which would be a significant improvement over what Google offers today.
Whether Alphabet goes the way of Kodak will depend on how it responds to this new challenge, but the disruptive technology is here, and denying its potential is a losing strategy for both the company and its investors. If Alphabet fails to meet the moment, the downside risk is substantial, as more than half of its profits come from search.
