YouTube’s ad revenue decline continued into Q1

YouTube’s advertising revenue fell for the third consecutive quarter in Q1, dragging parent company Google’s ad revenue into the red once again. However, executives assured investors on Tuesday that “signs of stabilisation” in ad spend have begun to emerge.

The video streaming giant generated $6.7 billion in ad revenue in the first three months of 2023, down 3% from the same period last year and a 16% decline from Q4’s $7.9 billion, according to the company’s unaudited results.

Executives at parent company Alphabet told investors that they were making progress in monetising YouTube’s short-form video offering, which has been cannibalising revenue from its main app, and that ad spend was stabilising from more severe pullbacks in prior quarters.

The departure of YouTube’s long-running leader Susan Wojcicki in February brought more uncertainty to the platform. Alphabet and Google CEO Sundar Pichai thanked Wojcicki for her “terrific leadership of YouTube for nine years” in his opening remarks on Tuesday’s investor call. However, the task of turning around YouTube’s fortunes now lies with Neal Mohan, previously chief product officer.

According to Google chief business officer Philipp Schindler, the company’s long-term growth strategy for YouTube involves bolstering Shorts, connected TV and subscriptions, and making YouTube more shoppable.

YouTube grew subscriptions across its YouTube Music Premium and YouTube TV offerings, which helped lift Google’s non-advertising revenues up 9% to $7.4 billion.

Elsewhere, Google’s Network division—revenue Google generates from selling ads outside of its own properties—also continued to retract in Q1, with revenue falling 8% year-on-year to $7.5 billion.

Google’s flagship search engine reversed its fortunes on an annual basis, posting 2% YoY ad revenue growth to $40.4 billion after slipping into a decline in Q4. However, this is down from the $42.6 billion it generated in the prior quarter. The company said travel and retail brands grew search spend in Q1, partially offset by declines from finance, media and entertainment verticals.

Google’s total advertising revenue of $54.5 billion in Q1 was $113 million lower than the prior year.

Google’s cloud business continued to be a bright spot for the company, with revenue up 28% to $7.5 billion while turning a profit for the first time — a significant milestone.

This helped boost Alphabet’s revenue up 3% annually to $69.8 billion while narrowing net income losses, which fell 8% to $15.1 billion. 

Alphabet’s net income decline and growing costs and expenses in the quarter, totaling $52.4 billion, were impacted by cost-saving exercises initiated at the beginning of the year.

Layoffs and office space reductions cost Alphabet $2.6 billion in Q1. That said, the company reduced expenses related to its servers and network equipment by $988 million. 

All in on AI

As is expected of all the major technology companies reporting this week, Alphabet spent much of its investor call discussing its investments in artificial intelligence.

Following the roaring success of OpenAI’s ChatGPT since November last year, Google swiftly launched a rival chatbot called Bard in March. It added coding capabilities to the chatbot on Friday.

To accelerate its AI developments, Pichai announced the company was merging two AI research units, Brain and DeepMind.

“Combining all this talent into one focused team backed by the pooled computational resources of Google will help accelerate our progress and develop the most capable AI systems safely and responsibly,” Pichai told investors on Tuesday.

Investors pressed Alphabet on its confidence in competing with Microsoft, which has emerged as a strong rival in AI-powered search thanks to its investments in OpenAI.

Pichai pointed to Google’s reputation for delivering a strong user experience as a competitive advantage.

“We've always been in a competitive environment for these deals, and while I can’t comment on the specifics of any of our partnership agreements, what has served us well is always, first of all, building the best product possible focused on giving value to users,” he said. “Ultimately, partners end up choosing us because that's what their users want.”

Pichai added that Alphabet was focused on investing in generative AI “in a thoughtful and deliberate way.”

“As we continue to bring AI to our products, our AI principles and the highest standards of information integrity remain at the core of all our work,” he said. “As one example, our Perspective API helps to identify and reduce the amount of toxic text that language models train on with significant benefits for information quality. This is designed to help ensure the safety of generative AI applications before they are released to the public.”