Perplexity, an AI-powered search engine, is engaging with top brands like Nike and Marriott to develop a new advertising model aimed at challenging Google's dominance in the $300 billion digital ads industry. The start-up plans to redesign the auction-based ad system, allowing brands to bid for "sponsored" questions that feature AI-generated answers approved by advertisers. This system is expected to launch by the end of the year, targeting premium brands.

New Advertising Model

• Current System: Perplexity's AI chatbot provides comprehensive answers to user questions, citing sources and suggesting follow-up queries.
• Proposed System: Brands can bid for a "sponsored" question, with an AI-generated answer approved by the advertiser.
• Pricing: Marketers will be charged on a CPM basis, paying over $50 for every 1,000 impressions, compared to Google's estimated $1,100 for the same number of impressions.

Market Context

• Competition: Perplexity's initiative comes amid increasing competition for Google, with other players like OpenAI's ChatGPT offering quick, comprehensive answers that could disrupt traditional search engines.
• Google's Response: Google has invested heavily in generative AI and is experimenting with AI search functions and a potential subscription AI search service.
• Microsoft's Role: Microsoft, through its alliance with OpenAI, aims to enhance its Bing search engine and challenge Google's profit margins. However, it has only recently started gaining more share in search advertising.

Financial Performance

• Perplexity's Growth: The company reported 250 million queries in July, up from 500 million for the entire previous year.
• Revenue Model: Perplexity earns through subscriptions, charging $20 per month for its Pro service. Annualized revenues have grown from $5 million in January to $35 million in August.

Industry Analysis

• Google's Position: Despite new competition, Google remains strong due to its extensive AI capabilities, user trust, and control over key platforms like Android and Chrome.
• Market Dynamics: Analysts suggest that while generative AI could disrupt Google's existing search offering, the company is well-positioned to adapt and maintain its dominance.

Perplexity's new ad model represents a significant effort to break into the lucrative digital ads market dominated by Google. The success of this initiative will depend on its ability to scale and attract premium brands.