Alphabet reported earnings yesterday: the company’s entire advertising business shrank sequentially, from $56BN in Q2 2022 to $54BN in Q3 2022, but Search revenue was up for the year while YouTube and Google Network decreased by roughly 2% each. Alphabet missed analyst expectations for the quarter on both the top and bottom lines, with YouTube revenue falling short by around $400MM. The company’s stock traded down nearly 7% following the earnings release.
In the analyst call following the release, Ruth Porat, Alphabet’s CFO, pointed to the high bar set in Q3 2021 with respect to increased levels of advertiser spend and user engagement during the COVID pandemic as explaining the difficult year-over-year comparison for Search. But Porat did point to advertiser pullback as playing a role in weak performance for YouTube and Google Network:
The sequential deceleration in Search in the third quarter versus the second quarter was again primarily driven by lapping, and just I want to make sure that that was clear. There was some pullback from advertiser spend in some areas so I’ve noted that in opening comments. And then, in YouTube and Network, the sequential deceleration of year-on-year growth in both the second quarter — the third quarter versus the second quarter was really further pullbacks in advertiser spend.
Philipp Schindler, Alphabet’s Chief Business Officer, expanded on this point in response to two different questions (emphasis mine):
Yes. And from my side, Eric, in the third quarter, as I mentioned, there was a further pullback in spend by some advertisers across both brand and direct response. But overall, I feel YouTube remains in a really good position to continue to benefit from the streaming boom. In direct response, we think there’s a lot of room to run to make really YouTube more shoppable, more actionable from video action campaigns to product feeds, app campaigns, live commerce features.
And we also noted a pullback in spend by some advertisers on YouTube and Network. And these pullbacks in spend increased in the third quarter. And we also noted lower revenues from app promo spend on YouTube and Network.
YouTube is generally characterized as a “brand channel” that primarily services brand advertising spend. And while that may be true in terms of revenue mix, it’s not true in absolute terms. Alphabet doesn’t break out the brand vs. direct response composition of advertising revenue for any of its channels. But my sense is that direct response advertising revenue comprises, while not a majority, a meaningful plurality of advertising revenue for YouTube. Google’s UAC app advertising product traffics impressions in YouTube, for instance.
I’ve spoken repeatedly about the three forces that, in combination, have engendered the adverse advertising environment that I’ve dubbed the mobile marketing winter:
- A weak and potentially worsening macroeconomic environment globally;
- A reversion to pre-COVID engagement norms for consumer technology products;
- Apple’s App Tracking Transparency (ATT) privacy policy.
I am increasingly convinced that ATT is a larger and more pernicious obstacle than many advertising-dependent companies appreciate or care to admit. I’ve made this case using the example of Spotify and Netflix, but I believe the divergence in outcomes between Search and YouTube also supports this argument. Alphabet’s Search revenue grew by 44% on a year-over-year basis in Q3 2021, so of course macro factors have influenced growth, given that Search revenue for Q3 2022 only grew by 4% on the same timeline.
But YouTube revenues grew by 43% on a year-over-year basis in Q3 2021; why did YouTube revenue shrink on the same timeline this past quarter? Put another way: what explains the difference in performance between YouTube and Search in Q3 2022 when both businesses grew by roughly the same rate in Q3 2021? Why did Search merely grow anemically on a year-over-year basis in Q3 2022 while YouTube revenue actually shrank?
I would argue that ATT explains this difference: that the COVID reset and macroeconomic frictions related to a strong dollar and inflation (especially in Europe) resolve the modest growth in Search relative to the same quarter last year but that ATT is responsible for sharply worse performance on YouTube and network (again: Schindler speaks to a pullback in direct response advertising, and especially app advertising, on both of these channels). Keep in mind: ATT only reached a majority share of iOS devices in Q3 2021.
Photo by Sara Kurfeß on Unsplash
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