The Whys And Hows Of Google’s Ad Growth Rate Slowdown

Google surprised investors on its quarterly earnings last week when it reported roughly $1 billion less revenue than expected and a significant deceleration of its advertising growth rate.

On the one hand, Google is still immensely profitable and its business is so large that a smaller growth rate is still huge. Google’s raw ad revenue growth exceeded the combined advertising growth for Facebook and Amazon, its two closest rivals, even though their growth rates were higher.

But the slowdown in Google’s ad growth is still troubling. CEO Sundar Pichai attributed the deceleration in part to unspecified product policy changes, which are made after extensive testing and without regard to quarterly earnings schedules.

For instance, in the first half of 2018, Google adopted a policy blocking third-party ad serving and pixels on YouTube, which it had been testing since the year before. And Ads Data Hub, which had been in beta since 2016, started enforcing tough new identity data restrictions in Europe, with plans to expand the policy worldwide at an unspecified date.

Google’s slow test-and-learn process means the revenue impacts are spread over a longer plateau, instead of spiking after an announcement. Consider policy changes like Google’s transition to first-price auctions or its long-awaited cookie policy update, which have been in the works for months or years and could take even longer to finalize.

Here’s a look at some of the parts of Google’s business that could have contributed to its revenue deceleration, and how.

Search

Investors on Alphabet’s earnings call last week hypothesized that desktop search may have slowed, since the company touted channels like mobile and video as strong growth areas.

Search was a “modest contributor” to growth, according to CFO Ruth Porat on the call.

But there are signs of deceleration in the value of Google’s core search business.

For instance, the volume of Google’s overall search-based clicks was up 39% year over year, but the cost per click was down by almost a fifth. That could be an indicator that there are fewer advertisers vying for certain terms, said Chris Apostle, media chief and US head of search for iCrossing, the digital agency owned by Hearst.

And Amazon could be siphoning even more of Google’s search revenue.

A year ago, Amazon’s search business drew mostly from retail shopper marketing, not from Google’s search market, Apostle said. But Amazon’s growth has made it more competitive with Google, especially for valuable product searches and reviews that show high shopping intent.

GDPR and identity

Google’s market share with advertisers and publishers is higher in the EU than the United States – and the General Data Protection Regulation (GDPR) influences the entire region.

“On the large scale, GDPR is probably one of the more likely reasons (for a deceleration) because this has impacted virtually everyone,” said Jakob Bak, Adform’s co-founder and CTO.

Publishers and advertisers have less data to use in online campaigns in Europe. And Google’s strict interpretation of consent and legitimate interest means many publishers serve non-personalized ads with lower yield.

Last May, Google also announced a policy pulling its ad server IDs in Europe, which is expected to apply globally next year. That policy change precipitated many large brands with first-party data strategies to find alternative ad servers, where the brand can keep the identity data.

On the Alphabet investor call, CEO Sundar Pichai said ad product policy testing can be extensive and decisions aren’t made with regard to earnings, so blips in spend can be misleading if you just analyze quarterly revenue and annual growth rates.

Over the past year and a half, Google has become much more focused on privacy regulations, Apostle said. Weekly meetings about media spending trends have turned to more forward-looking policies to address GDPR or the California Consumer Privacy Act, he said, and are less about live campaign optimization.

YouTube

Another likely culprit for the downshift is YouTube, an area where Google’s long beta testing turned into hardened policy. Last May, Google began blocking third-party ad serving in Europe. It also officially started blocking third-party pixel tracking in Europe, a policy it had been slow-rolling since January 2017.

Google doesn’t break out YouTube’s revenue figures, and restrictions on third-party measurement or ad serving on YouTube mean there aren’t reliable annual benchmarks for the channel.

While lack of measurement or transparency could devalue YouTube with some marketers, there aren’t other options for scaled digital video, Bak said.

“It would not be a surprise if agencies and advertisers start backing up their rhetoric with change in spend,” he said.

But brand safety concerns are another animal altogether.

Marketers pulling campaigns from YouTube over brand safety issues create large revenue misses for Google, compared to ad server business losses. Google’s ad server only takes a few cents on the CPM, and brands that switch servers still spend on search, YouTube and the Google Display Network. But the whole buy disappears if brands halt campaigns for an owned media channel like YouTube.

When a few top brands halted YouTube campaigns for a month last year over content moderation concerns, about $15 million in Google ad spend went with it, said one agency source under nondisclosure agreements. When that happens across agencies and Fortune 500 brands, it can add up very quickly.

The browser business

Safari’s Intelligent Tracking Prevention (ITP), which restricts tracking and targeting on the Apple browser, directly impacts Google, even though it isn’t a Google ad policy change. And those Safari changes may be playing out across the industry.

Criteo has battled ITP-related losses for a year. And Amazon also surprised investors with a deceleration of its ad business in the beginning of 2019.

“Ad targeting-related headwinds will be more pronounced in the second half of 2019,” said Facebook CFO David Wehner on the company’s earnings report last month.

“My theory is that Safari is causing a massive decline in advertising across the platforms,” said Beeswax CEO Ari Paparo.

More important than Safari are the potential changes to Chrome, Apostle said.

The Google browser announced new user privacy controls on Tuesday, as well as browser tech to disrupt fingerprinting, when vendors circumvent cookie policies to track users. Google has balanced Chrome policy updates with the ad tech ecosystem, but this change should undercut cookie use more than the built-in ad blocker Chrome introduced last year.

A year from now, Apostle said, the industry will likely be looking back at changes to Chrome’s cookie and identity data policy as one of things that decelerated targeted ad spend.

 

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