Alphabet posted a 27% annual drop in profit in Q3 as the tech behemoth became the latest to be hit by a global advertising slowdown that led to lower ad revenues for the company’s platforms like YouTube.
YouTube’s advertising revenue in the third quarter came in at $7.07 billion, down by 1.9% from $7.21 billion a year earlier, according to Alphabet’s quarterly results released Tuesday (October 25).
That missed analysts’ average forecast of $7.42 billion, according to estimates compiled by FactSet. But while the drop was only marginal, it marked the first time that YouTube’s ad revenue fell on a YoY basis since Alphabet started reporting its division’s results in 2019.
“This shift in user behavior also created downward pressure on our advertising revenues, with lower revenues from ad promo spend on YouTube, Network and Play Ads in Search and other.”
Philipp Schindler, Alphabet
Philipp Schindler, Alphabet’s SVP and Chief Business Officer told analysts during an earnings call the same day that aside from YouTube, revenue at Google Play also shrank on a YOY basis, citing “a decline in user engagement in gaming from the elevated levels seen earlier in the pandemic”.
“This shift in user behavior also created downward pressure on our advertising revenues, with lower revenues from ad promo spend on YouTube, Network and Play Ads in Search and other,” Schindler added.
Alphabet CEO Sundar Pichai, meanwhile, attributed the decline in ad revenues to the high base last year.
“The growth in our advertising revenues was also impacted by lapping last year’s elevated growth levels and the challenging macro climate,” Pichai said.
However, an analysis of Alphabet’s results in the third quarter of 2021 showed that YouTube’s advertising revenue in fact rise 43% from a year prior.
Alphabet CFO Ruth Porat most recently noted that YouTube and Network suffered a pullback in spending by some advertisers, as was first noted in the previous quarter.
These pullbacks in ad spend increased in the third quarter, Schindler said.
However, Alphabet’s Q3 report showed that overall revenue from Google’s ad business climbed 2.5% YOY to $54.48 billion as the decline in ads from YouTube and from Google Network were offset by a 4% increase in ad revenue from Google Search and other services, which according to Schindler was due to searches related to travel and retail.
Meanwhile, Pichai told analysts on Tuesday that Alphabet is sharpening its focus on a clear set of product and business priorities, including “new ways to monetize YouTube Shorts, which will support the creator ecosystem.”
“We’ll introduce revenue sharing on Shorts early next year. This update makes YouTube the only platform where creators can monetize their content across short, long and live formats at scale.”
Sundar Pichai, Alphabet
“This is a big deal for creators and for our business. We’ll introduce revenue sharing on Shorts early next year. This update makes YouTube the only platform where creators can monetize their content across short, long and live formats at scale,” Pichai said.
Schindler added: “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.”
The executive added that advertisers are turning to YouTube “to convert intent into action.”
The decline in YouTube’s ad revenue suggests that even internet giants are not susceptible to the global slowdown in advertising post-pandemic.
“Google’s earnings miss this quarter proves it’s not immune to the challenges facing the digital advertising industry at large,” Jesse Cohen, senior analyst at Investing.com, was quoted as saying by Reuters.
While Alphabet’s overall revenue rose 6% YOY and 11% in constant currency to $69.09 billion, the group’s net income shrank 27% to $13.91 billion, or $1.06 per diluted share.
Analysts on average expected revenue to hit $70.58 billion, while net income was predicted to reach $1.25 per share, Reuters said, citing Refinitiv data.
Last week, Snap also issued lower-than-expected earnings results, while Facebook parent Meta, set to release its earnings later today (October 26), is also predicted to report a second straight quarter of declining revenue.
Spotify, meanwhile, said on Tuesday it suffered some “softness” in advertising in Q3, squeezing its profit margins.Music Business Worldwide