Google saw 2 out of the 3 pillars of its $135 billion ad business get slammed by the coronavirus. Here's what we know about the winners and losers of Google's main moneymaker.
*Google's ad business has been hit hard by the pandemic, as was finally made clear in the company's Q1 earnings.
*But it's not as simple as advertisers spending less money. While some parts of the business are hurt, others are faring better.
*For example, there's been a huge boost in search traffic, but not for things that makes Google's ad business money.
*Google's ad business is feeling the heat of the pandemic, and although the company's Q1 earnings beat Wall Street expectations, its ad business showed sluggish year-on-year growth as the quarter was partly-devoured by COVID-19.
In a conference call following the earnings, CEO Sundar Pichai said the company experienced a "significant and sudden" slowdown in ad revenue that correlated with the locations and sectors impacted by the virus.
In 2019, 84% of Google's revenue came from its ad business, so it's no wonder that analysts are all looking to the company as something of a bellwether for the larger market.
In its earnings report Tuesday, Google revealed some of the ways its ads business is being affected by the pandemic right now, but also offered a few areas in which it's still going strong.
Here's what we now know:
Search is up, but not for things that make Google money
Here's the problem with Google's search business right now: while overall search activity has actually increased, searches on "commercial" topics – for example, people doing research before buying a car or a new pair of headphones – have decreased. And it's those commercial searches that marketers like to pay Google the most money to run their ads alongside.
So long as people are searching for things like health information, and less for things they want to buy or places they want to go on vacation, Google's ad business will suffer for it. Search advertising revenue in the last few weeks of March was down by more than ten percentage points from the year earlier period, according to the company.
Porat said that Google had seen some recovery in commercial search behavior by users towards the end of the quarter, but stressed that "it is not clear how durable or monetizable this behavior will be."
YouTube's ad business is seeing a surprising divergence
This was only the second time that Google has spun out its YouTube earnings separately, and showed us that its video business raked in $4.04 billion of ad revenue in the first quarter, up 33% year on year.
Google CFO Ruth Porat said that there had been an interesting divergence between YouTube's advertising streams. Its direct response advertising, which compels users to take an immediate action like clicking a website had substantial growth "throughout the entire quarter," according to Porat.
The strength in YouTube's direct response ad business echoes recent comments from Snapchat, when it reported Q1 stronger-than-expected Q1 revenue. Google execs cited ads for app installs and video games as some of the types of direct response ads that are doing well at the moment.
But YouTube also relies on brand advertising — splashy banners and video ads for clothing, footwear, movies and more. And this is section of YouTube's business is feeling the effects of the pandemic. Brand advertising on accelerated in the first two months of the quarter but then dropped off "in mid-March."
By the end of March, Google said that YouTube's total ads revenue growth had decelerated into the high single digits, year on year.
The travel segment is feeling the burn
Something Pichai alluded to during the call but didn't elaborate on was the impact on the travel industry on Google's business.
Google gets about 10%-15% of its revenue from travel and hospitality vertical, and CNBC reports that Booking Holdings, the parent company of Booking.com and Priceline, could slash its Google ad spend by as much as $3 billion this year. RBC Capital analyst Mark Mahaney told Business Insider in March that he estimates Booking Holdings generates around 3% of Google's ad revenue.
All told, the tourism and travel industry is being ravaged by the virus, and it's an area Google leans on heavily. Worse still, it's one sector that is likely to take longer to recover.
But... there are some promising signs
It's far too early to count Google's chickens, but Ruth Porat did offer a faint glimmer of hope that things were not getting worse in April.
"Based on our estimates from the end of March through last week for Search, we haven't seen further deterioration in the percentage of year-on-year revenue declines," said Porat.
Furthermore, Pichai pointed to the 2008 recession as an example of how Google's search business should recover quickly. "And so we have always seen in these orders in 2008 as well, people respond in the short-term but the recovery is also fast when it comes back," he said.
Source: https://www.businessinsider.com/the-winners-and-losers-of-google-ad-business-coronavirus-2020-4 |
