Google is in a fight with Microsoft for AI supremacy. These factors are key
MrIncredible/iStock Editorial via Getty Images

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) have taken the majority of mindshare for investors in the battle for generative artificial intelligence capabilities, as both tech titans make changes to search and utilize chatbots into their respective products.
While Google (GOOG) (GOOGL) is not wanting for number of users or market share, a deeper-than-expected integration of AI could wind up costing the company significantly in the near-term, according to analyst Brian Nowak, of Morgan Stanley said.
Nowak, who has an overweight rating and price target of $135 a share on Google's (GOOG) (GOOGL) stock, noted if 10% of searches were moved to language models, it could add as much as $1.2B in operating costs for the Sundar Pichai-led company.
Microsoft (MSFT) disclosed this week it sees roughly 10B search queries per day, which Nowak said would suggest Google (GOOG) (GOOGL) sees around 3.3T per day, and gives Microsoft's roughly a 3% market share, according to StatCounter.
While 3.3T queries is far lower than estimated, it means Google (GOOG) (GOOGL) is spending roughly one-fifth of a cent on a search query. Nowak estimates natural language queries could cost five times as much as traditional queries, given the high levels of compute intensity for natural language models.
Nowak went so far as to say that if Google (GOOG) (GOOGL) wound up seeing half of its queries using natural language integration, it could raise the company's costs as much as $6B and cut earnings before interest and taxes by up to 6%. 
As such, Nowak suggests that there are four factors to keep an eye on, including how fast Google rolls out its consumer tools, and the quality of those tools.
Nowak said that for now, monthly trackers comparing ChatGPT, Bing and Google show "no material signs" of weakness from Google. According to Nowak, that situation "speaks to the likely high incrementality of these [natural language] search queries," and that the quality, accuracy and trust of results will be important to drive "consistent" traction. 
That may be an issue in the near-term for Google (GOOG) (GOOGL), as Bard provided an inaccurate result in a recent company ad, when it said the James Webb Telescope took the first pictures of planets outside the solar system, known as exoplanets. 
The first exoplanet was discovered in 1992 and more than 5,000 have been discovered to date. The James Webb Telescope launched on December 25, 2021.
Despite the early slip up, Nowak said that Google's (GOOG) (GOOGL) scale and faster feedback loops are likely to be a "positive" for it.
Other key factors to watch include developer adoption, given the nascent state of generative AI. It's likely that more AI tools will be used in next-generation products, but it's still early for them and given the buzz surrounding ChatGPT, it's possible there may be fits and starts when it comes to the developer community.
Nowak said there's also the potential AI could result in more shopping transactions happening in less steps. Such a change could lead to transactions taking place on Google (GOOG) (GOOGL), resulting in "incremental revenue" for the tech giant while cutting out of third-parties such as small e-commerce companies, local companies like Yelp (YELP) and online travel agencies.
Earlier this week, Google (GOOG) (GOOGL) showed off a new multi-search feature in Google Lens that lets people look for items using text and images and is useful for shopping. The feature, previously available in the U.S. and India, is now available to mobile users around the world, Google said.
Lastly, with Google (GOOG) (GOOGL) likely to switch a portion (perhaps significant) of its search queries to natural language models, the company's cost efficiencies are "more important" than ever, especially as any of the search changes are not likely to provide benefits until at least 2024 and the company's free cash flow picture comes into question.