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Google ad spend does better than expected, rebounding from pandemic impact

Google parent Alphabet reported a significant surge in search revenue for Q3, earning US$26.3 billion from advertisers. This exceeds the US$24.7 billion the company earned from Google search ads in the same quarter last year. This is a significant rebound for the company, whose advertising revenues were deeply impacted during the COVID-19 pandemic. Of course, it’s worth keeping in mind that the bulk of digital advertising revenue comes from Europe and North America, where the economies are more or less stable, and so this may not necessarily be pointing to economic recovery in other countries like India.

However, these results came under the shadow of the Department of Justice’s antitrust complaint against Google, which could have significant ramifications for the company. “We believe that our products are creating significant consumer benefits and will confidently make our case. Our company’s focus remains on continuing our work to build a search product that people love and value,” Alphabet and Google CEO Sundar Pichai said.

  • “Hybrid” work environment leading to cloud growth: The demand for “hybrid” work environments is leading to growth in Google Cloud demand, which has grown from US$1.83 billion to US$2.77 billion year-over-year. This essentially means that Google Cloud (and Google Workspace, formerly GSuite) are in higher demand as more companies try to make their policies work-from-home friendly.
  • Regulatory risk: In an SEC filing, the prognosis was a bit grimmer than Pichai’s remarks: “Prior, existing, and new investigations and regulatory actions have in the past and may in the future result in substantial fines and penalties, changes to our products and services, alterations to our business operations, and civil litigation, all of which could harm our business, reputation, financial condition, and operating results,” Google said.
  • Data localisation is a risk: In the filing, Alphabet detailed risks to its business that could “require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices”. It cited “Data localization laws, which generally mandate that certain types of data collected in a particular country be stored and/or processed within that country” as a part of this. Google executives reportedly clashed with members of the Joint Parliamentary Committee on the Personal Data Protection Bill, 2019 on this issue this week.
  • Growing watch time helping YouTube beat TV: “YouTube’s strong watchtime growth enables advertisers to reach audience that they can’t reach on TV, as we’ve often talked about. So they’re increasingly looking to us to help them reach people who are going to YouTube to learn new topics and engage with fresh, entertaining content, great, great unique content,” Alphabet and Google CFO Ruth Porat said.
    • This indicates that despite YouTube Premium being available in many territories around the world, advertising is key for that business, more so than for Spotify, whose ad-supported listeners don’t count for a majority of its revenue. “Both YouTube Music Premium and YouTube TV do have higher content acquisition costs as a percentage of revenues than YouTube ads. And we are early there continuing to build out that subscriber base,” Porat added.
  • What would happen if Google Search lost default space? “What do you think the recapture rate of queries on Safari toolbar would be if that deal were to change hands,” an investor asked Alphabet. That question essentially translates to this: Safari’s default search engine is Google (something Google has paid a lot of money for), so what happens if Google loses out on that default status? Pichai responded, “Most of our partners choose us because we are the best search provider. Users find us having the highest search quality, and so there’s organic demand for it.”

Alphabet Earnings — Q3 2020

  • Revenues: US$46.17 billion (up 14% YoY, up 20.57% QoQ)
  • Net income: US$11.25 billion (up 59.13% YoY, up 13.06% QoQ)

Press Release and Results | Transcript | 10-Q Filing

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