San Francisco - Google parent Alphabet on July 23 reported quarterly earnings that topped expectations, saying artificial intelligence (AI) has boosted every part of its business.

But Alphabet also said it will spend US$85 billion (S$108 billion), or US$10 billion more than it previously planned, in 2025 on capital expenditures - heightening pressure on the tech giant to justify the cost of keeping up in the AI race.

Although Alphabet’s second-quarter revenue of US$96.4 billion and profit of US$28.2 billion beat forecasts, its stock initially sank in after-hours trading, then rebounded after chief executive officer Sundar Pichai explained that the investments are necessary in order to keep up with customer needs.

“Our AI infrastructure investments are crucial to meeting the growth in demand from cloud customers,” he said on a call following the report.

As Microsoft, ChatGPT maker OpenAI, Facebook parent Meta Platforms and others continue to pour money into AI, Alphabet has little choice but to follow suit, analysts said. The race is particularly urgent for Google: competitors are building chatbots that may eventually appeal to consumers more than its flagship search product.

“Google’s hand is forced by OpenAI to spend tremendously on AI’s infrastructure and applications,” said Nikhil Lai, an analyst at Forrester.

Alphabet is counting on its core search advertising juggernaut and growing cloud computing business to support its spiraling spending on AI. Employees are under pressure to bring AI products to market faster, from new modes of search to tools for cloud customers. “We are seeing significant demand for our comprehensive AI product portfolio,” Mr Pichai said. 

The strain of the AI race could be spotted elsewhere in the Alphabet’s results. It attributed the company’s 16 per cent jump in spending on research and development to increases in pay packages for key employees. Meta has been making unprecedented compensation offers as it seeks to woo researchers for its superintelligence lab, driving up the price for key employees across the industry.

Google’s cloud-computing unit reported quarterly revenue ofUS $13.6 billion and operating income of US$2.83 billion, topping analysts’ projections. Google remains in third place in this market, after Microsoft and Amazon.com, but the company’s prowess in AI has helped it score client wins. The unit is widely viewed as Alphabet’s strongest source of growth as the main search business matures.

The centrepiece of the cloud offensive is Gemini, the AI model that Google is rapidly weaving across its vast product portfolio, and pushing to enterprise clients. Many AI experts were impressed by the release of a new version of the Gemini model earlier this year, but it still trails OpenAI’s ChatGPT in adoption by most estimates.

As Google faces mounting competition, it’s also facing penalties for being dominant. Google’s primary businesses are under threat of a breakup after US federal judges ruled that the company is maintaining illegal monopolies in search and some ad technology. In August, Judge Amit Mehta is expected to deliver an order on the measures Google must take to restore competition in online search, though Google has said it plans to appeal the ruling. BLOOMBERG

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