YouTube ‘obvious math’ problem as revenue slows from pandemic highs

YouTube CEO Susan Wojcicki speaks during the Atlantic Festival in Washington, DC on September 25, 2019.

Nicholas Kamm | AFP | Getty Images

Throughout the pandemic, YouTube has been one of Google’s main economic drivers, benefiting from a surge in video consumption of people stuck at home trying to entertain themselves.

All of this growth has turned into a challenge for Google, as the company now faces tough year-over-year comparisons just as advertisers are cutting spending due to economic concerns.

Alphabet reported weaker-than-expected second-quarter results on Tuesday, and the most glaring disappointment came from YouTube. Revenue rose just 4.8% from a year earlier to $7.34 billion, after analysts’ estimates of $7.52 billion, according to StreetAccount.

It’s the slowest expansion rate for YouTube since Alphabet began breaking down sales of the video unit in the fourth quarter of 2019. A year ago, revenue jumped 84%, and the only previous quarter that saw single-digit growth was the second period of 2020, when sales grew just 5.8% as marketers halted spending in the early weeks of the pandemic .

During Tuesday’s earnings call, Alphabet executives pointed to heavy comps from a year ago. Seven times they have used the word “running in” or “running in” to describe what they face looking ahead to 2021, to try to allay investor concerns about longer-term trends.

“The modest year-over-year growth rate primarily reflects the exceptionally strong performance in the second quarter of 2021,” Chief Financial Officer Ruth Porat said on the call. She later said that “weather will get us through the chop”.

But there are other difficulties for YouTube. As became clear when Snap released appalling quarterly results last week, economic uncertainty is leading brands to be more careful about how they allocate their advertising dollars.

Google executives echoed some of that sentiment.

“The decline in spending by some advertisers in the second quarter reflects uncertainty around a number of hard-to-disaggregate factors,” Porat said.

The specific issues companies face, Porat said, relate to their supply chain and inventory. And while Google executives didn’t mention the competition on the call, they have noted the rise of short-form video formats like TikTok in recent months.

Prabhakar Raghavan, senior vice president of Google, said earlier this month, corporate studies showed nearly 40% of young people are increasingly turning to TikTok or Facebook’s Instagram for research.

In the first quarter, YouTube’s advertising revenue fell very short analysts’ estimates, up 14% instead of 25% as expected. Porat said at the time that “a slight headwind to revenue growth” was a shift in consumer behavior and that YouTube Shorts, a TikTok rival, was seeing an increase in viewership “as a percentage of the time. total on YouTube”.

The problem for YouTube is that it’s only in the early stages of monetization efforts for shorts, so viewers are moving away from products that generate more ad revenue to a format that hasn’t. its proven track record for the business. Last quarter, YouTube announced that it was testing monetization on YouTube Shorts.

Philipp Schindler, chief commercial officer of Google, said on Tuesday that the company was “encouraged by the results achieved so far” regarding the ad. More generally, he highlighted a “full funnel strategy” that “more and more advertisers are adopting”, allowing them to run different types of campaigns with the audiences they want to reach.

Regardless of the macroeconomic situation or any other challenges, Porat continued to remind investors that the company would ride out the downturn simply by having easier comparisons going forward.

“Time will get us through the break-in,” Porat said. “So it’s an obvious calculation.”

LOOK: With recession looming, ad spend will drop

Comments are closed.