YouTube faces ‘obvious math’ problem as pandemic revenue declines

Susan Wojcicki, CEO of YouTube, speaks at 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 engines, capitalizing on growth in video consumption from people stuck at home trying to have fun.

All that growth has turned into a problem for Google as the company now faces tough year-to-year comparisons at the very moment that advertisers are cutting back on spending due to economic concerns.

Alphabet reported a weaker-than-expected second quarter earnings on Tuesday, and the most egregious disappointment came from YouTube. Revenue increased just 4.8% year-over-year to $7.34 billion, according to StreetAccount, below analysts’ forecasts of $7.52 billion.

This is YouTube’s slowest growth rate since Alphabet started boosting sales of its video division in fourth quarter 2019. Revenue jumped 84% a year ago, and the only previous quarter to see single-digit growth was the second quarter of 2020, when sales rose just 5.8% as marketers put spending on hold in the first weeks of the pandemic.

In Tuesday’s earnings report, Alphabet executives highlighted a year-old massive earnings. Seven times they used the word “lapping” or “grinding in” to describe what they’re up against in 2021 to try and assuage investors’ concerns about long-term trends.

“The modest year-on-year growth primarily reflects the uniquely strong performance in the second quarter of 2021,” said Chief Financial Officer Ruth Porat. She later said that “time will get us through the lapping.”

But there are other difficulties for YouTube. As it became clear when Click reported terrible quarterly results Last week, economic uncertainty forced brands to be more careful about how they allocate their advertising dollars.

Google executives partially shared this opinion.

“The reduction in spending by some advertisers in the second quarter reflects uncertainty over a number of factors that are difficult to separate,” Porat said.

The specific challenges companies are facing are related to their supply chains and inventory, Porat said. And while Google executives didn’t mention competition, they’ve seen short video formats like TikTok rise in popularity in recent months.

Prabhakar Raghavan, Senior Vice President, Google said earlier this month, company research showed that nearly 40% of young people are increasingly turning to TikTok or Facebook Instagram for search.

YouTube ad revenue in the first quarter failed or analysts’ estimates, growth was 14% instead of the expected 25%. Porat said at a time when “a small barrier to revenue growth” was changing consumer behavior, and that YouTube Shorts, a competitor to TikTok, saw an increase in views “as a percentage of total time on YouTube”.

The problem for YouTube is that short film monetization is at an early stage, so viewers are moving away from products that generate more ad revenue to a format that hasn’t been tested for the company. Last quarter, YouTube announced that it was testing the monetization of YouTube shorts.

Philip Schindler, Google’s chief commercial officer, said on Tuesday that the company is “enthusiastic about the results so far” when it comes to this ad. More broadly, he outlined a “full funnel strategy” that “more and more advertisers are adopting”, allowing them to run different campaigns to target audiences.

Regardless of the macro picture or any other issues, Porat kept reminding investors that the company would get through the downturn simply by having simpler comparisons going forward.

“Time will get us through the grinding,” Porat said. “So, that’s the obvious math.”

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