Exclusive: Will Perplexity’s new Ad model shake up digital advertising?

Perplexity AI, the San Francisco-based conversational search engine, has announced a bold advertising model that can shake up the digital ad industry. The company is reportedly in talks with major brands like Nike and Marriott to launch a revolutionary AI-driven advertising model that could challenge Google’s long-standing dominance. By allowing brands to sponsor AI-generated answers to specific questions, Perplexity is offering a fresh approach to targeted advertising that could disrupt the $300 billion digital advertising industry.

“Our advertising is being fundamentally designed not to corrupt the answer quality. People love Perplexity because people are tired of seeing sponsored links... They just don’t wanna see them anymore,” said Perplexity CEO and Co-Founder Aravind Srinivas during a live CNBC TV news programme. 

The CEO, a former Google intern, added that Perplexity decided to “keep answers accurate and truthful, and to “incetivise users to learn more about brands through suggested sponsored questions.”

The AI start-up, whose investors include Amazon founder Jeff Bezos, plans an initial US rollout with a number of “brands joining as a test case.”

Brands can bid for “sponsored” questions with AI-generated answers approved by advertisers.

How it works:

1. Brands identify relevant questions related to their products/ services.
2. Brands bid to have their sponsored question displayed.
3. Perplexity’s AI generates an answer to the question.
4. Advertisers approve the AI-generated answer.
5. Sponsored question and answer are displayed below search results.

Picture this:

A user poses this query: “What are the best running shoes for marathon training?”

Sponsored answer (approved by Nike): “Nike’s Air Zoom Alphafly NEXT% provides optimal support and cushioning for marathon runners.”

The Benefits:

1. Relevant advertising: Brands reach users searching for related topics.
2. High-quality answers: AI-generated responses provide accurate information.
3. Increased engagement: Users interact with sponsored content.

Key aspects:

1. Brands control the messaging.
2. AI-generated answers ensure accuracy, attracting users.
3. Sponsored content is clearly labelled.

This model combines the power of AI-driven search with targeted advertising, offering brands a new way to reach their audience. One thing is clear: It is important for Perplexity to achieve major scale in order for its AI ad system to be successful.

Will it upend the Google model?

The pertinent questions that beg answers are: Will this model challenge Google’s dominance in the digital advertising space? What key differences might attract brands?

Perplexity’s AI-driven ad model challenges Google by aligning with the shift in search behaviour, says Saket Vaidya, CEO, Korra India.

“As AI provides direct answers instead of multiple options, advertising is becoming more conversational and integrated into these AI responses. This model allows brands to offer detailed, contextual information about their products within the natural flow of user queries. The key difference is that ads become part of the AI-assisted decision-making process, rather than separate, disruptive elements. Brands can provide rich, relevant information that directly addresses user needs, potentially leading to higher engagement. This approach feels more helpful and less intrusive, catering to users' expectations for instant, pertinent answers,” Vaidya adds.

By participating in this AI-driven, conversational advertising space, brands can position themselves as innovative and customer-centric. He asserts that this alignment with new search behaviours and the ability to provide in-depth, conversational product information could significantly challenge Google's current advertising dominance.

One of the remarkable features of AI-driven ad models would be personalization at scale.

The advertising industry is witnessing a significant shift as AI-driven models push the boundaries of what's possible, opines Russhabh R Thakkar, Founder and CEO, Frodoh World.

“These advanced systems are moving beyond simple keyword matching to understand user intent in ways we’ve never seen before. It’s not just about showing an ad; it’s about creating a relevant, timely interaction. The key difference lies in personalization at scale. AI allows for real-time adjustment of ad content, format, and placement based on a myriad of factors – from user behaviour to contextual relevance. This means every ad can potentially be a unique experience tailored to the individual user, a feat simply not possible with traditional approaches,” says Thakkar.

Benefits and drawbacks

While AI advertising models have the unmatched possibilities in delivering personalized ads to end users, there could be concerns around privacy, user trust, etc. The best part is that AI-fuelled ads can seamlessly integrate into user experience without being seen as intrusive.

Saket Vaidya feels that this new AI-driven ad format has great potential to enhance the user experience by providing more relevant and informative content. The key is in the execution – how well we integrate ads with AI responses. When done right, users get a more efficient, personalised search experience with ads that actually add value to their query, Vaidya adds.

According to him, the challenge isn’t in the format itself, but in maintaining user trust. “We need to ensure ads complement AI responses without overwhelming them. If users feel they’re only getting ads, we risk losing their trust. But with thoughtful implementation, this format could make online experiences more informative and personalised, turning advertising from an interruption into a helpful part of the user’s journey.”

The primary benefit for users is increased relevance, points out Russhabh R Thakkar. In an ideal scenario, he adds, AI-driven ads feel less like interruptions and more like useful suggestions.

“Imagine planning a vacation and seeing ads that genuinely help you make decisions about destinations, accommodations, or activities. That’s the potential we’re looking at. However, this level of personalization raises valid concerns about privacy and data usage. There’s a fine line between helpful and intrusive, and AI sometimes treads close to it. The industry’s challenge is to strike a balance – leveraging AI to improve user experience without overstepping boundaries. Transparency in data usage and easy-to-use privacy controls are becoming not just regulatory requirements, but essential elements of user trust,” Thakkar says.

Ethical concerns

In the days ahead, we can expect AI-generated content playing a central role; but it is essential to take potential ethical concerns into account. We already know one of the serious risks AI poses: bias. Then there are other concerns regarding accuracy, user trust, and the potential misuse.

Saket Vaidya warns that the main ethical concern here is the risk of misinformation. “We can’t just trust everything AI generates. It’s crucial to maintain a clear distinction between ads and original content, even as AI blurs these lines. Advertisers must take ownership of their AI-generated content and be held accountable for its accuracy. We need to ensure consumers don’t fall for false promises or incorrect information. Balancing innovation with ethical responsibility is key to building and maintaining user trust in this new advertising landscape,” Vaidya adds.

Concurring with Vaidya on this, Russhabh R Thakkar asserts that the ethical implications of AI in advertising are profound and multifaceted.

“One of the most pressing concerns is the potential for bias in AI systems. These biases can stem from skewed training data or flawed algorithms, leading to unfair targeting or exclusion of certain demographic groups. Accuracy is another critical issue. AI-generated content, while often convincing, can sometimes produce misleading or incorrect information,” Thakkar adds.

Then there is the question of transparency. He stresses that users should know when they're interacting with AI-generated content or AI-driven systems. Without this transparency, we risk eroding trust in digital advertising as a whole.

“The potential for misuse is perhaps the most concerning aspect. Advanced AI could be used to create highly persuasive content that exploits psychological vulnerabilities. As an industry, we must establish robust ethical guidelines and perhaps even consider third-party audits of AI systems used in advertising,” says Thakkar.

Sky is not the limit!

Experts feel that AI-driven ads can evolve with innovative applications and models in the near future with unmatched personalization as one of the key components.

“We’re witnessing a revolutionary shift in advertising. We’ve moved from a ‘one-size-fits-all’ approach to increasingly targeted and personalised ads with digitization. Now, AI is taking this to an entirely new level,” says Saket Vaidya.

“The future of advertising with AI is about infinite personalization. We’re going from finite to infinite in terms of audience cohorts and creative combinations. AI will enable hyper-personalization at a scale we’ve never seen before, with rich media ads being generated on the fly for each individual user. This evolution will likely attract more players into the space. Search engines, social platforms, and e-commerce sites will all be looking to leverage AI for more effective advertising. The key challenge will be balancing this incredible capability for personalization with user privacy and ethical considerations,” he concludes.

The evolution of AI in advertising is moving at a breakneck pace, quips Russhabh R Thakkar. He reckons that one of the most exciting developments is in the realm of predictive analytics. We’re seeing early-stage AI models that can forecast consumer trends and behaviours with remarkable accuracy, allowing for proactive rather than reactive advertising strategies.

Another area of innovation, according to Thakkar, is in cross-channel attribution. AI is becoming increasingly adept at tracking and attributing conversions across multiple touchpoints, providing a more holistic view of the customer journey. This could revolutionize how we measure ad effectiveness and allocate budgets.

“We’re also on the cusp of more immersive, interactive ad experiences powered by AI. Think augmented reality ads that adapt in real-time to user engagement, or voice-activated ads that can hold natural language conversations with users. In the near future, we might see AI playing a larger role in creative processes. While AI won’t replace human creativity, it could augment it significantly, perhaps generating initial concepts that human creatives then refine and perfect,” he adds.

As for industry adoption, he adds, it’s clear that AI is no longer just for tech giants.

“We’re seeing a democratization of AI tools in adtech, with solutions becoming more accessible to agencies and brands of all sizes. This wider adoption will likely accelerate innovation and could potentially level the playing field in digital advertising. The key to success in this AI-driven future will be balancing technological capability with human insight and creativity. The most successful players will be those who use AI not just as a tool for efficiency, but as a means to enhance the human elements of advertising – storytelling, emotional connection, and brand building,” Russhabh concludes.