Growth is a mask. On paper, Alphabet’s recent ascent looks like a triumph of engineering, but the underlying mechanics suggest a company desperately defending its borders. RBC Capital Markets analyst Brad Erickson recently maintained an Outperform rating with a $215 price target, yet his focus on the Gemini distribution strategy reveals a precarious dependency. Google is no longer winning on product merit alone. It is winning because it owns the pipes, and those pipes are becoming prohibitively expensive to maintain.
The High Price of Distribution Dominance
The core of the RBC thesis rests on Google’s ability to force Gemini into the pockets of billions. This is not a viral adoption story. It is a brute force integration. Through the Gemini distribution strategy, Alphabet is leveraging its control over the Android ecosystem and the Chrome browser to ensure that AI-generated answers become the default user experience. However, this strategy carries a heavy tax. Per recent Bloomberg reports on infrastructure spending, the capital expenditure required to support these LLM-driven queries is ballooning.
Brad Erickson points to the integration of Gemini Nano on Pixel devices as a key differentiator. While this moves some inference to the edge, the vast majority of high-value queries still hit Google’s data centers. The math is simple and brutal. A standard keyword search costs a fraction of a cent. A Gemini-powered Search Generative Experience (SGE) query can cost ten times that. As Google rolls this out to its entire user base, the margin compression becomes an inevitability, not a risk.
The Twenty Billion Dollar Apple Question
Google’s distribution moat is not entirely its own. The company pays an estimated $20 billion annually to Apple to remain the default search engine on iOS. This arrangement is currently the target of intense Department of Justice scrutiny. If the courts decouple this relationship in 2026, the Gemini distribution strategy collapses. Without the iOS default status, Google loses immediate access to the highest-spending demographic in the mobile market. Erickson’s $215 target assumes this relationship remains intact, but the legal headwinds suggest a 40 percent probability of a forced structural change.
The Efficiency Paradox
Investors are cheering the 2025 revenue beats, but they are ignoring the efficiency paradox. As Google makes Gemini more capable, it encourages more complex queries. These complex queries require more compute. According to data tracked via Yahoo Finance, Alphabet’s operating margins in the search segment have plateaued despite record ad sales. The “catch” in the Gemini strategy is that Google is essentially subsidizing the transition from high-margin search to lower-margin AI synthesis.
Erickson’s optimism hinges on the idea that Google can eventually monetize these AI interactions through new ad formats. Yet, the current reality shows a cannibalization of the traditional blue-link ads that have funded the company for two decades. The table below illustrates the shifting cost structure as of December 2025.
| Metric | Legacy Search (Est.) | Gemini SGE (Est.) |
|---|---|---|
| Cost Per Query | $0.003 | $0.028 |
| Ad Load Capacity | High (4-6 units) | Low (1-2 units) |
| Inference Source | CPU Intensive | GPU/TPU Intensive |
Can Meta and Amazon Break the Cycle
Google is not operating in a vacuum. Meta has successfully integrated Llama into the Instagram and WhatsApp search bars, bypassing the need for a standalone browser. Amazon has transformed into a product search powerhouse, capturing intent before the user even thinks to “Google it.” The Gemini distribution strategy is a defensive play against these incursions. If Google cannot lower the cost of inference faster than Meta can steal search intent, the RBC price target will look like a relic of 2024 optimism.
The skepticism lies in the hardware. While Google’s custom TPU (Tensor Processing Unit) v6 chips are rolling out, they are still struggling to keep pace with the massive demand generated by Gemini 2.0. Every time a user asks Gemini to plan a ten day vacation, the compute cost erodes the profit of fifty standard searches. Alphabet is effectively running to stand still.
The next critical data point arrives on January 27, 2026. This is the scheduled date for Alphabet’s Q4 earnings call. Analysts will be looking for the specific percentage of search queries handled by Gemini and the corresponding impact on the TAC-to-revenue ratio. If TAC exceeds 23 percent of total revenue, the market will likely reassess the sustainability of the current distribution moat.
