By Sheila Dang

(Reuters) – Microsoft has started discussing with ad agencies how it plans to make money from its revamped Bing search engine powered by generative artificial intelligence as the tech company seeks to battle Google’s dominance.

In a meeting with a major ad agency this week, Microsoft showed off a demo of the new Bing and said it plans to allow paid links within responses to search results, said an ad executive, who spoke about the private meeting on the condition of anonymity.

Generative AI, which can produce original answers in a human voice in response to open-ended questions or requests, has recently captivated the world. Last week, Microsoft and Alphabet’s Google announced new generative AI chatbots a day apart from the other. Those bots, which have not yet rolled out widely to users, will be able to synthesize material on the web for complex search queries.

Early search results and conversations with Microsoft’s Bing and Google’s chatbot called Bard have shown they can be unpredictable. Alphabet lost $100 billion in market value on the day when it released a promotional video for Bard that showed the chatbot sharing inaccurate information.

Microsoft expects the more human responses from the Bing AI chatbot will generate more users for its search function and therefore more advertisers. Advertisements within the Bing chatbot may also enjoy more prominence on the page compared to traditional search ads.

Microsoft is already testing ads in its early version of the Bing chatbot, which is available to a limited number of users, according to the ad executive and ads seen by Reuters this week.

The company said it is taking traditional search ads, in which brands pay to have their websites or products appear on search results for keywords related to their business, and inserting them into responses generated by the Bing chatbot, the ad executive said.

Microsoft declined to comment on the specifics of its plans.

Microsoft is also planning another ad format within the chatbot that will be geared toward advertisers in specific industries. For example, when a user asks the new AI-powered Bing “what are the best hotels in Mexico?”, hotel ads could pop up, according to the ad executive.

Integrating ads into the Bing chatbot, which can be expanded to fill the top of the search page, could help ensure that ads are not pushed further down the page below the chatbot.

Omnicom, a major ad group that works with brands like AT&T and Unilever, has told clients that search ads could generate lower revenue in the short term if the chatbots take up the top of search pages without including any ads, according to a note to clients last week, which was reviewed by Reuters.

The new Bing, which has a waitlist of millions of people for access, is a potentially lucrative opportunity for Microsoft. The company said during an investor and press presentation last week that every percentage point of market share it gains in the search advertising market could bring in another $2 billion of ad revenue.

Microsoft’s Edge web browser, which uses the Bing search engine, has a market share under 5% worldwide, according to one estimate from web analytics firm StatCounter.

Michael Cohen, executive vice president of performance media at media agency Horizon Media, who received a demo of Bing during a separate meeting with Microsoft representatives, said the company indicated that links at the bottom of Bing’s AI-generated search responses could be places for ads.

They seem intent on starting off immediately with paid ads integrated,” Cohen said, adding that Microsoft said more information about the strategy could come in early March.

This week, when a Reuters reporter asked the new version of Bing outfitted with AI for the price of car air filters, Bing included advertisements for filters sold by auto parts website Parts Geek.

Parts Geek did not immediately respond to questions about whether it was aware of its ads appearing in the new Bing chatbot.

Microsoft, when asked about the Parts Geek ads, said the potential of the new AI technology in advertising is only beginning to be explored and it aims to work with its partners and the ad industry.

Despite the early tests, Microsoft has not provided a timeline for when brands will be able to directly purchase ads within the chatbot, Cohen and the ad executive said.

In the long term, conversational AI is likely to become the dominant way consumers search on the internet, Omnicom said in its letter to clients.

It is not an exaggeration to say that (Microsoft and Google’s) announcements signal the biggest change to search in 20 years,” Omnicom said.

(Reporting by Sheila Dang in Dallas and Jeffrey Dastin in Palo Alto; editing by Kenneth Li and Anna Driver)