Google revenue rises in the first quarter amidst industry slowdown

Alphabet announced its Q1 2023 financials yesterday (April 25th, 2023). 

The revenue for Alphabet for Q1 2023 was at USD 69.78 billion a 3% growth over Q1 2022, largely driven by the growth in the cloud business. This exceeds the analyst's predictions of USD 68.9 billion, seeing a declining market given the global economic sentiments.

Focusing on the advertising revenues of the product lines.

The revenue numbers reported tells us that the advertising business for Google has been flat throughout 2022 and the first quarter of 2023.  Considering a seasonal upswing in Q4 2022 being the festive season.  This is reflective of the overall market environment where advertising spending across the globe is under pressure and in many places, advertisers are pulling back their advertising spending.  

During the call, Google’s executive called out that Travel and Retail were two industries which have grown their ad spending in Q1 2023, while Finance and Media & Entertainment were industries which pulled back their ad spending in the same period.  

Search

Search contributes 74% of Google’s advertising revenue, and hence a significant part of its business. The search business at Google is being challenged by a number of players, namely Retail Media, Social Discovery and Generative AI, more on this on my blog

Despite these challenges, Google executives are positive about Search’s performance. CEO Sundar Pichai stated that Search is “performing well”

Recognising these trends Google at its ends is also taken initiatives in its search offerings, some of the initiatives as mentioned by Phillip Schindler, Chief Business Officer at Google during the earning call.  

1. Use of AI

Building search keyword relevance using natural language processing. The increase the relevance led to higher performance by identifying multiple overlapping keywords that become eligible for bidding for one to give efficiency to one's campaigns.

Enable smart bidding activated based on the ad format being used. This enables one to bid more effectively based on how the advertiser wants to engage with the user.

The Automatic Creative Assets (ACA) beta was opened out to all advertisers in English. ACA generates text which is displayed alongside responsive ads. This will reduce the use of manual intervention to keep the ads fresh and relevant to the user query, context, and the advertiser's business.

The Performance Max solution has been able to maximise conversion while keeping the cost of acquisition (CPA) constant. This has been one of the main contributors to why there has been an increase in spending in the Travel and Retail sectors in the quarter.

2.    Retail

Efforts continue to make Google a core part of one’s shopping journey and for merchants to connect with their users.  Performance Max for store goals reporting and bidding is helping retailers to go just beyond optimising to online conversions to also optimise for their in-store sales, by identifying and bidding on customers who are likely to spend in-store.   This is done by effectively using first-party data and data on high-value customers.

YouTube

You Tube advertising revenues has been feeling the pressure due to the adverse market conditions and with the advent of some serious competition. Focused towards majorly towards advertising focused towards brand building, the first part of the marketing spend to be pulled back in tough times. Major competitors being TikTok, the production houses starting and aggressively pushing their own streaming apps in 2020 onwards (Disney+, HBO Max etc) and finally Netflix rolling out their ad supported offering.

Even at this market scenario, the growth in the usage of YT shorts was one of the highlights for Youtube in the quarter. Without quoting any number Google’s representative mentioned that there was a high watch time, engagement, and conversion on ads.

Another highlight was the use of YouTube on CTV and the higher engagement compared to linear TV. The Nielsen Compass through its Marketing Mix Modelling study was quoted to show that the ROI on YouTube is 40% higher than linear TV and 34% higher than other online video platforms.

Google Network

The network business has been on the decline in 2022 and continues in 2023. Though no reasoning for the decline was given in the call, one understands largely driven by the drop in the network’s ability to drive efficiency because of the privacy-related changes in the market, like Apple’s App Tracking Transparency.