The Strategy Perplexity Exploited to Expose Google’s Gap And Revolutionize Search In The Age Of AI

How a startup worth 1% of Google's value challenged the search giant's dominance and changed the face of search forever

Perplexity’s challenging but Google’s not ready to bow out yet. Mashup image. Perplexity ad courtesy of Perplexity.

Are you out of your freaking mind? Take on Google in search???

Most would call that straight-up business suicide, an irresponsible waste of investor money, especially for a fledgling startup.

Google revolutionized search at the end of the last century by asking one key question: 

“How can we help people quickly and accurately find what they were looking for so they could accomplish whatever they’re trying to achieve?”

Two decades later, Google got distracted from its mission to help users seamlessly go from question to action, opening a tiny crack for the right company to exploit.

Perplexity has seized that opportunity to take on Google, forcing it to rethink the crown jewel of its Alphabet empire and riding that momentum to an $18 billion valuation as of this writing.

Luck? The Perplexity team didn’t rely on luck.

Perplexity pinpointed exactly where Google had grown vulnerable, and made a very specific set of strategic choices we’ll break down here to create a product that put Google in an unwinnable bind: Google couldn't copy it without destroying its core business model.

But it had to respond quickly or risk falling behind in the AI search race.

The Audacity to Take on Google

In two charts, I’ll lay out just how much of a David vs. Goliath story we’re talking about here.

Let’s start with an overview of Google’s dominance of global search by numbers - (+90% of global web search).

Google’s 91.5% dominance of search relative to Perplexity’s .01% slice. Author image.

And here’s how Google’s relative Market Cap ($1.96 trillion) looks compared to OpenAI ($80 billion) and Perplexity’s ($18 billion) valuation:

As Google approaches a $2 trillion market cap, OpenAI is pegged at $80 billion while Perplexity has just hit an $18 billion valuation. Author image.

The. Best. Business. Model. Ever.

Once Google had created the first truly useful search engine that just “worked,” its next biggest, and perhaps far more financially significant breakthrough, was to design the best business model ever to sit on top of that search experience.

Google’s “AdWords” product allowed them to “sell” words to advertisers looking to monetize people looking to accomplish something on the Web.

Google went one step further to use this breakthrough advertising technology as the hub of a dominant ecosystem of free and ubiquitous products.

Monetizing Traffic

Gmail, the Chrome browser, GoogleMaps, GoogleDocs, and the free Android operating system were all products that were another brick in the wall of Google's vast empire.

These products worked together to reinforce each other and produce “network effects” and scale that Google exploited to monetize the nearly endless streams of traffic and attention.

Google's success came from creating unprecedented customer value at an unbeatable price.

But as their business model increasingly optimized for ever-greater ad revenue streams, the delivery of “value” increasingly drifted from users to advertisers.

Google’s Achilles Heel

Perplexity was founded in 2022, just three years ago, as a promising but unknown database startup by long-time Machine Learning (ML) and AI experts.

Perplexity founders Johnny Ho, Aravind Srinivas, and Denis Yarats. Image via Perplexity.

Perplexity pivoted soon after to become a conversational AI search “answer engine,” going straight at Google’s original mission of empowering users to rapidly go from question to action.

The User Experience Gap

The Perplexity team felt Google’s dominant search model of link-based ad units would never end up benefiting customers. 

Why? Because all search results are some form of prioritized sets of links.

The invasive presence of advertiser links ultimately diminishes the value of the results for several reasons. For starters, Google’s search algorithm is a black box that doesn’t always seem optimized for search quality. 

Secondly, Google indexes on its ad business model in ways that favor advertisers and hurt the user experience. 

For example because 60-65% of its revenue comes from mobile device traffic, Google optimizes for mobile search, causing the desktop search experience to degrade over time.

The Advertiser Experience Gap

User experience concerns may not be your highest priority when your sole focus is advertiser satisfaction.

But bad user experiences ultimately affect how often ad links get clicked, driving down the value of Google’s “cash cow” keyword advertising. As a result, the advertiser experience also suffers, further driving down traffic quality leading to sub-par paid results.

With the gap between user value and Google's strategy widening each year, a tiny opening appeared, like the single scale missing in Smaug’s armor, for anyone brave enough to target that weakness.

Operating Over Innovating

Google spends almost $238 billion yearly to operate its portfolio of businesses and invests almost $50 billion, almost one-fifth of that in R&D. 

But the end user Google search experience remained largely unchanged for over 20 years.

But given AI’s accelerating boost, any company not continually releasing innovative new features aligned to a cohesive strategy isn’t standing still– it means it’s going backwards, FAST.

These strategic vulnerabilities created the perfect opening for Perplexity, but identifying the gap was only the beginning. 

Its true strategic genius lies in how they’re exploiting it.

I'll walk you through the complete Strategy Choice Cascade powering Perplexity's approach, revealing the precise set of strategic choices that enable a startup worth just 1% of its value to put Google in an impossible position: either copy Perplexity outright and risk undermining its core business model, or ignore the threat and watch users migrate to a superior, updated experience that fulfilled its original mission in a far more elegant way.

This breakdown will deepen your understanding of a tested strategy framework and give concrete takeaways you can apply to similar opportunities in your own space.

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Reverse-Engineering Perplexity’s Strategy with the “Playing to Win” Framework Strategy Choice Cascade

Perplexity breaks with Google by solving search’s original problem– We’re drowning in data but dying of thirst for a single, concise answer we need when we need it most.

With its “answer engine” approach, Perplexity’s conversational AI search tool delivers to-the-point, cited answers to user questions from verified sources, rather than traditional lists of links, eliminating the black box influence of sources and a ranking algorithm.

We’ll use Roger L. Martin’s “Playing to Win” framework’s “Strategy Choice Cascade” to understand the full range of strategic choices Perplexity uses to take on Google.