YouTube’s huge miss shows digital media ad market is getting hit hard

Silhouettes of laptop and mobile device users are seen next to a screen projection of the YouTube logo.

Dado Ruvic | Reuters

During the pandemic, YouTube was one of Alphabet’s prime growth engines as more people were glued to their screens while stuck at home. The video site continued its rapid expansion last year as the economy reopened and ad spending soared.

At least for one quarter, the music has stopped.

Ahead of its first-quarter earnings report on Tuesday, Alphabet was expected to report growth at YouTube of 25%. That number came in way short at 14%, contributing to a broader revenue and earnings miss and a steep drop in Alphabet’s stock.

YouTube’s numbers are the latest sign that the digital media ad market is getting hit hard in an inflationary environment and amid rising concerns about deteriorating macroeconomic conditions. Last week, Snap CEO Evan Spiegel said the first quarter was “challenging” for the YouTube competitor, and the company provided a weak sales forecast for the second quarter.

For both YouTube and Snap, there’s a growing juggernaut taking market share: TikTok. Meanwhile, other media companies large and small are rolling out video and streaming services that are competing for consumer eyeballs.

Add it up and YouTube advertising revenue of $6.87 billion trailed the $7.51 billion Wall Street expected, according to StreetAccount.

“While the company’s search and cloud businesses performed well in Q1, its YouTube video business fell well below analysts’ forecasts, driven down by increased competition from social video platforms like TikTok and a plethora of premium entertainment services led by Disney+,” wrote Paul Verna, an analyst at Insider Intelligence, in an email after the report.

Nearly a year ago — in the second quarter of 2021 — YouTube revenue came in at over $7 billion, up 83% from the year prior, drawing it close to Netflix’s quarterly revenue. The disappointing results at YouTube in the latest period pulled down Alphabet’s profitability, contributing to a drop in net income.

YouTube has bet some of its future growth on a short form video product called Shorts, its answer to mobile-first rivals like TikTok, Snap and Instagram’s Reels. In May 2021, YouTube said it would pay $100 million to people who make popular videos. On Tuesday’s call, executives said Shorts boasts 30 billion daily views but the service is at the early phases of monetization.

A variety of factors are hurting the overall digital ad market. They include iPhone privacy changes, supply chain disruptions, labor shortages, inflation, and rising interest rates. Alphabet CFO Ruth Porat said on the earnings call on Tuesday that Russia’s invasion of Ukraine and Google’s pullback in the region also hurt YouTube revenue.

“The most direct impact is the fact that we suspended the vast majority of our commercial activities in Russia as we announced in early March,” Porat said. “From the outset of the war, there was a pullback in advertiser spend particularly on YouTube in Europe.”

The ad-supported video market isn’t the only part of the industry that’s suffering. Netflix said last week that it lost subscribers for the first time in more than 10 years, sending the stock down 35%. And Warner Bros. Discovery pulled the plug on CNN+ just weeks after its launch.

WATCH: Alphabet’s weaknesses were expected, but long-term story hasn’t changed

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