YouTube’s declining ad revenue, coupled with weak search revenue growth, has caused investors to question Alphabet’s position (NASDAQ:GOOG) (NASDAQ:GOOGLE) safe haven status. The deteriorating economic outlook and intensifying competition were the main culprits for YouTube’s advertising problems. in the middle of these headwinds, YouTube is taking initiatives to maintain its effectiveness as an advertising platform.
Difficult comparisons, worsening macroeconomic environment and intensifying competition
It’s understandable why investors would worry about YouTube’s first revenue decline since it began releasing the numbers in 2019. However, this revenue decline is due to explosive revenue growth fueled by a pandemic (when advertisers were online were forced to use digital advertising), so it’s only natural to see advertisers reduce spending on digital advertising in the post-pandemic era.
More importantly, however, growing fears of a recession on the horizon have also led to declining ad spend on YouTube; “There was a further pullback in spending by some advertisers on both brand and direct response.” This is especially concerning given that a rising ad rival, Amazon (AMZN), saw ad revenue grow. 25% year in the same period.
Amazon’s appeal to advertisers as a website capable of attracting visitors interested in buying is proving to be a formidable competitive threat to YouTube (and Alphabet in general), and this plight has become more apparent amid the divergence in advertising trends between the two platforms throughout the last quarter.
While there is a possibility that ad revenue will decline on YouTube as economic conditions deteriorate and competition intensifies, all hope is not lost for YouTube. E-commerce advertising is used primarily by product retailers, while YouTube advertising is used for more than just selling products, including promoting services (eg educational courses, financial advice, etc.) and awareness campaigns. that can continue to function well despite difficult economic conditions. YouTube’s more diversified source of advertisers should support the resilience of your ad business relative to other ad platforms.
Additionally, YouTube has been taking its own initiatives to attract more shopping-minded web visitors, primarily through the launch of YouTube Shopping in 2021, which allows content creators to promote and sell products live. In fact, YouTube doubled down on this initiative earlier this year through a partnership with Shopify (SHOP), a rising e-commerce platform, to more effectively compete against Amazon. According to a company study conducted with Publicis and TalkShoppe, “89% of viewers agree that YouTube creators give recommendations they can trust.” Thus, YouTube certainly has great potential to become an effective challenger to Amazon in attracting purchase-minded web visitors in How successful these initiatives will be in getting ad revenue from Amazon However, the company’s initiatives to challenge TikTok through ‘YouTube Shorts’ are showing signs of success.
Another factor that influenced the decline of YouTube advertising is the shift in video content consumption trends towards short-form videos. Last year, as part of an effort to take on TikTok, YouTube launched YouTube Shorts around the world, as well as a $100 million fund to reward creators of popular shorts (instead of sharing ad revenue). This initiative has been successful in optimizing user engagement, with the company proclaiming “1.5 billion users every month, 30 billion visits daily.”
Philipp Schindler (Senior Vice President and Chief Commercial Officer) shared that:
We continued to experience a slight hitch in revenue as Shorts’ audience grew as a percentage of total YouTube watch time. And as I mentioned earlier, the initial progress in monetizing Shorts has been encouraging. And we’re focused on closing the monetization gap between short and long-form content on YouTube over time.
Therefore, YouTube’s underperformance of ad revenue related to changing content consumption trends is not a concern as long as users continue to engage with YouTube content. Importantly, the introduction of Shorts has reduced the risk of content consumption shifting away from YouTube and toward TikTok entirely. They have been successful in promoting user engagement with YouTube Shorts, and now it’s about adjusting their advertising model towards more effective short-form video monetization. Alphabet revealed that they will “introduce revenue sharing to Shorts early next year”, reflecting the fact that YouTube has successfully managed to build a strong enough ad revenue stream around Shorts after just one year of launch. worldwide, and should offer a more sustainable way to attract more short-form content creators, building more audience and ultimately better advertising potential.
This development is testament to Alphabet’s prowess in countering competitive threats. Were it not for its ability to allocate a $100 million compensation fund to the creators of Shorts, the company would not have been able to build a formidable competitive service for TikTok so quickly. Alphabet’s strong balance sheet and strong cash flow enable the company to counter new competitive threats effectively, thus enhancing the stock’s attractiveness for long-term advertising market exposure.
However, while YouTube Shorts has been effective in countering TikTok, increasing competition will undermine YouTube’s ad revenue growth in the future as advertisers now have another alternative channel to run video campaigns, putting pressure on YouTube. the low on auction bids for the various YouTube advertising solutions. That said, rising US-China tensions and lingering trust issues could lead to a potential tiktok ban, which would be positive for YouTube. Additionally, growing data privacy concerns could also lead to possible TikTok bans in other major global markets, such as the European Union.
Tik Tok is done banned in india, a significant market for YouTube, undermining TikTok’s ability to continue to challenge YouTube in key global markets. In fact, India was the first market in which YouTube initially launched its YouTube Shorts beta offering in September 2020, prior to its worldwide launch, reflecting the importance of the Indian market.
In the short term, YouTube’s ad challenges will remain a hurdle amid a worsening economic outlook causing ad budget contractions and an increase in competitors entering the ad market. As a result, the stock could remain under pressure until investors regain confidence in YouTube’s advertising competitiveness. However, YouTube’s recent success in encouraging users to engage with Shorts to competently challenge TikTok instills confidence that YouTube will be able to continue to innovate effectively to counter new competitive threats like Amazon advertising and maintain YouTube’s strong position. YouTube in the advertising market. Given the near-term challenges, however, Alphabet is rated ‘hold’.