"We reiterate our view that subscriptions are a sub-optimal monetization vector as the vast majority of global users simply do not wish to part with USD 20 per month for AI tools. We believe that, like search, we will see ads emerge as the optimal monetization strategy for GenAI chatbots. The bottom line: We retain our USD 340 fair value estimate for wide-moat Alphabet."
"Google Search has an average revenue per user, or ARPU of USD 44. Put another way, Alphabet sells ads worth USD 44 per user. While subscription offers much more upside per paying user, the paid to total user ratio is incredibly low, with ChatGPT's ratio of paid users at roughly 5%. As a result, we think introducing ads would be Alphabet pursuing what we view to be the optimal strategy, one that includes both an unpaid, ad-supported tier and a subscription-based, no-ad tier."
Alphabet plans to roll out ads on Gemini in 2026 while maintaining a subscription, no-ad tier. Gemini has over 650 million monthly users, creating a sizable distribution for AI-driven ad products. Investors reacted negatively, sending shares down over 2% amid concern that ads could harm product momentum. Ads could be value-additive if Alphabet delivers powerful AI tools in exchange for ad-supported access and achieves strong ROAS. Subscriptions are unlikely to scale because most global users will not pay USD 20 per month; ChatGPT paid ratio is roughly 5%. Google Search ARPU is USD 44, suggesting ads can provide substantial revenue per user.
Read at global.morningstar.com
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