Unpacking Alphabet’s Q1 2022 earnings (but mostly: YouTube)

Alphabet reported its Q1 2022 earnings yesterday: its results were mostly mediocre, with the only meaningful bright spot being above-expected revenue in the Google Cloud business unit. The company missed expectations for top-line revenue at $68.01BN (vs. $68.2BN expected) and EPS at $24.62 (vs. $25.65 expected). Year-over-year revenue growth was 23%, versus 34% from Q1 2021. Although as Ruth Porat, Alphabet’s CFO, mentioned several times in the call, Q1 2021 is a difficult comparison given that Q1 2020 represented the height of COVID weakness.

One particularly dim area of growth in Q1 was YouTube: advertising revenues for the service grew by just 16% year-over-year, which was described on the call as, “reflecting ongoing strong growth in brand and more modest growth in direct response.” By way of comparison: YouTube revenues increased by 25% year-over-year in Q4 2021 and by 49% year-over-year in Q1 2021, again attributable to weak performance at the height of COVID.

Ruth Porat placed the culpability of soft YouTube growth for the quarter on three factors:

The unfavorable comparison against the flaming-tire-tracks of Q1 2021 growth is understandable. The invocation of the war in Ukraine is less so, simply because Ruth Porat noted specifically that the war catalyzed a “related reduction in spend primarily by brand advertisers in Europe,” which wouldn’t explain enervation in direct response advertising spend.

So what about ATT?

Back in 2020, on Twitter, I hypothesized that YouTube’s direct response revenue was equally susceptible to the data deprivation of ATT as Facebook, simply because Google’s mobile app install product, UAC, functions with the same hub-and-spoke optimization model. One difference, though, is that YouTube could claim a disproportionate number of view-through attributions relative to other networks given the format of YouTube ads (all video) and the user engagement model. Since UAC is a so-called “self-attributing network,” it could claim any conversions following a (sufficiently long) ad view as being resultant from that view (without a corresponding click). Google could charge for these conversions even if other networks generated ad clicks that were given credit for that install by an MMP.

In terms of total revenue impact, Google overall was less susceptible than Facebook to the frictions of ATT because its core business, search, is for the most part exempted from it. Further, brand advertising revenue is immune from ATT, and the proportion of brand spend on YouTube is generally considered to be higher than on Facebook. But ATT creates friction for YouTube’s direct response revenues for two reasons:

  • SKAdNetwork doesn’t allow for the kinds of conversion-claim collisions that existed prior to ATT, with SANs claiming conversions where subsequent clicks were attributed to other channels. SKAdNetwork issues one postback per install, covering all networks, attributed on a last-click (or last-view, as SKAdNetwork began supporting view-through attribution in version 3.0) basis. For this reason, the number of conversions claimed by YouTube — via its own attribution prior to ATT but through SKAdNetwork now — would necessarily decrease. It should be noted here, though, that Google’s reported conversions to app advertisers are modeled;
  • ATT generally degraded advertising performance and forced advertisers to scale down ad spend, as I have described and bemoaned on this blog since June 2020.

So YouTube is not invulnerable to the challenges of ATT. And as this quarter proved, direct response advertising spend is sensitive to policy changes like ATT, even for the largest and most ubiquitous channels.

Photo by Mitchell Luo on Unsplash