Member Mailing: Youtube's Earnings & Little Green Shoots Among The Ad Market's Bear Signals
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In Q4 2022, PARQOR will be focusing on four trends: this essay is on the theme, "There is no such thing as a CTV household, what happens next?”
Also, my newest monthly opinion piece on The Information is now live: “YouTube and TikTok Creators Are Tearing Up Netflix’s Streaming Rulebook”. I argue as Netflix readies its Basic with Ads tier, it’s staring down an existential threat from the likes of TikTok and YouTube, whose “premium” creator content competes for the same advertiser demand.
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I have previously described the video advertising marketplace as “four-dimensional chess” because an executive at the IAB Video Leadership Summit described it to me that way back in June, and it makes sense. I’ve also previously highlighted the Interactive Advertising Bureau’s framework of 200 “retail cartel” advertisers (brick-and-mortar retailers who have historically bought from linear networks) and 10MM e-commerce advertisers (new direct-to-consumer (DTC) brands that leveraged the Internet as the primary channel of reaching consumers) competing for the same inventory in connected TV advertising.
YouTube’s surprising earnings miss captures this dynamic well. It saw its ad revenues decline for the first time since Alphabet began reporting the unit’s financial performance in 2020. But, at the same time, Alphabet shared users are shifting towards YouTube on Connected TVs: in addition to highlighting Nielsen’s most recent The Gauge — where YouTube captured 8% of TV viewing in September compared to Netflix’s 7.3%, after having tied at 7.6% in August — Schindler also shared that on average, global viewers are watching 700 million-plus hours of YouTube content on TV daily.
Google Chief Business Officer Philippe Schindler summed up the dynamic perfectly on the earnings call: “There’s no question we’re operating in an uncertain environment, and that businesses big and small continue to get tested in new and different ways, depending on where they are in the world.” YouTube is capturing both brand spend (the 200) and direct response spend (the 10MM), so why is it losing money?
Key Takeaway
Even as bearish macro headwinds (a strong dollar and inflation) continue and certain major advertisers pull back spend, the advertising marketplace may be sprouting green shoots of growth.
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I think there’s a more positive story lurking behind the scenes, and that story has been teased out in various ways in three takes from the past week:
An argument posed by Brian Wieser, Global President of Business Intelligence for GroupM in a recent This Week Next Week podcast that evidence continues to emerge reflecting a disconnect between the growth of the general economy and advertising.
MobileDevMemo’s Eric Seufert offered a slightly different take that Apple’s Anti-Tracking Transparency (ATT) initiative “is a larger and more pernicious obstacle than many advertising-dependent companies appreciate or care to admit”.
Simulmedia CEO Dave Morgan argued “too much of the market is trying to buy and sell TV and streaming ads like it’s 2012, not 2022”.
All three suggest that even as bearish macro headwinds (a strong dollar and inflation) continue and certain major advertisers pull back spend — Procter & Gamble announced it is cutting spend as an austerity move — the advertising marketplace may be sprouting green shoots of growth. So, the bear signals we’re witnessing more reflect micro disconnects in the marketplace sorting themselves out in real time, but not a certain outcome of a recessionary demise for the broader advertising marketplace.
Not-so-bad and not-so-good
Wieser’s co-host Kate Scott-Dawkins — VP, Thought Leadership & Innovation for Essence Global — described the current economy on the recent This Week Next Week podcast as “We’re still in this period of it’s good, but it’s bad. But it’s not-so-bad, but it’s not-so-good.”
Meaning, there are signals that some advertisers are pulling back spend, but there are also positive signals: GroupM has not been seeing signs of big advertisers cutting back materially in ad spending (which contradicts with something Snap management said), and Nestlé’s chief executive Mark Schneider said this week that it would be increasing consumer marketing expenditure in the second half of the year. Also, three of the world’s largest advertising groups - Interpublic, Omnicon and Publicis - have raised annual financial targets as they seek to persuade clients to keep spending on promoting brands in the face of economic turbulence.
But Wieser and Scott-Dawkins also conceded that Google, Facebook and Amazon — “about half the industry” — will be the best signals for what’s going on in the advertising industry. Google’s earnings were the first signal, and they were bearish for YouTube but not all of Google. Meta — most vulnerable to ATT — and Amazon — most vulnerable to decreased brand spend — will help to fill in the picture later today.
Scott-Dawkins made an important counterpoint to the bearish narrative when she highlights her research about “digital endemics” rising among the top 100 AdAge U.S. advertisers over the past 20 years. A “digital endemic” is a company whose business is oriented online (websites, apps): Airbnb, Google, Booking.com. Effectively she is describing the 10MM DTC companies, and her data suggests these upstarts are taking the most away from the Consumer Goods and Retail advertising category. That suggests less of a bearish signal for the broader economy, and more of bearish signal for the likes of P&G, specifically.
Wieser concluded with a bullish take: “It’s the reason why there can be a disconnect – or a meaningful disconnect – between economic growth and advertising growth…. if an economy produces brands that are disproportionately likely to spend money on advertising to replace brands or companies that were proportionately less likely to spend on advertising, you get growth.”
He is making an important point here: focusing on bearish macro trends may be mistaking the forest for the trees.
Seufert & ATT
If Google is indeed one of the best signals for what’s going on in the advertising industry, Eric Seufert reaches a similar conclusion to Wieser and Scott-Dawkins in his summary of YouTube earnings call. Seufert focuses on an interesting data point: YouTube and Search revenue growth diverged from each other in Q3 2022 after both segments grew at around the same rate in Q3 2021. He asks, “Why did Search merely grow anemically on a year-over-year basis in Q3 2022 while YouTube revenue actually shrank?”
Part of it was lower spend from the 10MM: “lower revenues from app promo spend on YouTube and Network.” Seufert added “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.”
His argument is that “ATT is responsible for sharply worse performance on YouTube and network”. ATT is a change to Apple’s privacy policy announced last April that requires apps to ask users if they want to be tracked. In 2021 16% of users opted in, but has since grown to 25% year-over-year. He believes “the COVID reset and macroeconomic frictions related to a strong dollar and inflation (especially in Europe)” explain the modest growth of Search revenues year-over-year but ATT is why YouTube’s revenues declined.
Google management conceded last Q3 2021 that ATT had a “modest impact” on YouTube results, but it has not discussed it since. The Financial Times had a good summary last year from advertising technology company Lotame showing 70% of YouTube’s revenues comes from mobile apps. Seufert believes that the struggles of other companies impacted by ATT - especially Snap, which still is struggling to solve for ATT - reflect how ATT is a significant headwind for YouTube, Snap and Meta playing out more broadly in the digital advertising marketplace.
So, ATT is having an impact on direct response advertising, but it is not killing brand spend overall. We will probably see more of ATT impact in Meta’s earnings but less so from Amazon’s (which, like Google’s search ecosystem, is an ecosystem insulated from ATT).
Fragmentation, fit & fluency
Last, Dave Morgan’s essay elegantly summarizes three smaller disconnects between supply and demand playing out behind the scenes in TV and streaming ad sales. They are fragmentation, fit and fluency; and, together, they also suggest a focus on macro bearish trends may be missing the bigger picture.
Fragmentation reflects how “122 million U.S. households watch well over 250 different linear and streaming networks, and viewing is fragmenting across those channels at an accelerating rate. It takes 330% more TV ratings today to generate the same reach as could be achieved only six years ago.” His point is that fragmentation creates friction in the ability of marketers and agencies to plan, reaggregate, activate and measure audiences across hundreds of different channels and companies.
The implication is 700MM hours of YouTube consumed on CTVs is not enough to capture advertiser demand because it’s only a part of the audience behavior that advertisers will need to aggregate across platforms. That may be another, wonkier reason why YouTube is underperforming.
Fit reflects a technological problem: “The vast majority of today’s programmatic ad tech was built on 2012 models for banners, not TV. Audience inferences from cookies and mobile identifiers are worthless in accurate CTV ad targeting”. It’s an interesting point suggesting that ATT is actually a positive for the TV and streaming marketplace. Meaning, cookies and mobile identifiers are indeed worthless. So, the sooner the market evolves past them, the better ad targeting will perform on CTVs.
The implication for YouTube is that its fortunes may change quickly as soon the post-ATT marketplace figures itself out.
Fluency is a problem of business terminology, reflecting how the cross-platform TV ad buying industry “will be held back if our ad buyers and sellers aren’t fluent in both the language of TV (gross rating points, households and demographics) and the digital language of CTV (uniques, impressions and first-party-data targets).” Morgan argues “Linear TV isn’t going away any time soon, and will be a big part of the video buy for the next decade at least. Without fluency, we won’t advance the market.”
This supports a point I made about CTV spend at upfronts back in August:
“the reality is that some of that linear ad spend is in package deals that go to digital video and CTV inventory. Disney Hulu XP is a video ad management platform built for precisely this: it enables advertisers "to buy once and deliver to audiences across streaming, sports, entertainment and news content in one single deal". So that ad spend may be booked as linear according to how eMarketer accounts for it, but in practice it’s actually allocated across multiple channels, including websites.”
Morgan’s point is that package deals will be a market reality going forward, and the market is still in the early days of figuring out the most efficient and effective ad buys. That also may be reflected in YouTube’s underperformance.
Conclusion
The macro bear signals of recession and inflation can’t be discounted. On top of that, according a perceived slowdown in the scatter market (the inventory available for purchase outside of annual upfront commitments) is real. Eric Seufert has also separately highlighted that the data from the pandemic has half-life: “Because the COVID pandemic was so protracted and globally pervasive, advertisers’ [Return on Ad Spend] models and general engagement behavioral models are seeded with years worth of data that is no longer relevant as COVID norms dissipate”.
I think Seufert is a bit more bearish simply because he also weighs ATT and the declining relevance of COVID data as factors, and I think that’s a fair argument. But I also think it’s worth considering that even if supply and demand in advertising are misaligned in key ways (Morgan), there is a generation of 10MM e-commerce advertisers emerging and disrupting the 200 “retail cartel” to force a realignment of those pieces.
So, there are little bull signals lying within all those bear signals. It’s all still four-dimensional chess, but recent trends suggest the disruptors seem to be the ones seeking to make it work simpler.