March 28, 2017

GOOGL - YouTube Backlash Big Embarrassment but Growth Impact Likely Small

GOOG, GOOGL, HAV FP, WPP LN
By Phil Leggiere
The brand backlash and negative media coverage generated by the serving of YouTube advertisements adjacent to objectionable content represent a major embarrassment for Google's YouTube, but potential negative impacts are likely to be very small and temporary.

The backlash against Alphabet Inc.'s YouTube and Google Display Network, initially spurred by a February investigation by The Times of London identifying numerous cases in which advertisements by well-known brands have inadvertently appeared alongside hate speech and other objectionable content, has gained strong momentum in the past few weeks. The backlash was initiated in earnest on March 17 when the European-based advertising agency Havas SA suspended video advertising on Google for all its U.K. clients, citing a lack of assurances by Google of its ability to totally filter out objectionable content in the running of its ads.

In the two weeks since that move, a wider array of brands, first in the United Kingdom and expanding to the United States late last week, have followed suit, suspending or cutting back their current advertising campaigns on Google until the company resolves the problem of misplaced advertisements. These brands include AT&T Inc., Verizon Communications Inc., HSBC Holdings PLC, Enterprise Holdings Inc., Johnson & Johnson, Wal-Mart Stores Inc. and PepsiCo Inc.

It is important to note that none of these brands has targeted Google search advertising (which accounts for more than 85% of Google's advertising revenues), and in some cases Google's higher-priced guaranteed YouTube inventory was specifically exempted from any cutbacks. Nonetheless, it is clear the media frenzy sparked by these actions is evolving into a major challenge of confidence for Google, at least among brand advertisers.

While no doubt a major PR embarrassment, it’s highly likely, for reasons outlined below, that any negative impacts from this episode on Google’s revenue growth could be quite limited and temporary.

Content Adjacency Issues Getting Better, Not Worse
The kinds of content-targeting snafus recounted by the press, including examples of Daimler AG's Mercedes ads appearing next to pro-ISIS content and T-Mobile US Inc. ads running inside videos about abortion, make great copy and give the impression that ad placement on YouTube has become completely unmanageable and out of control. In fact, such problems with content adjacently of ads, which have existed in online video since the channel developed more than a decade ago, are outliers rather than the norm and, if anything, a less pervasive problem than a few years ago. The wide majority of advertisers OTR Global has spoken with for online video research in the past few years have consistently said Google is furthest along of all digital channels in making progress in addressing content transparency concerns. There’s obviously plenty of room for improvement, but compared with programmatic digital alternatives, the kinds of mishaps getting media attention represent a minuscule percentage of the enormous number of video ad impressions YouTube serves monthly.

Brands Represent Small Minority of YouTube Spending
Brand advertisers represent a small percentage of spending on Google display, which remains preeminently the province of direct-response ecommerce promotions, a segment of advertisers who (except in utterly extreme examples) are much more interested in getting in front of the right audience regardless of the content they are consuming. Most OTR Global sources estimate that at most 20% of YouTube current spending is brand budgeted and likely less than that.

Brands have been and remain a hard sell for Google, precisely because brands are used to and prefer to buy and serve ads against guaranteed premium content, whether for a particular show or channel (like ESPN.com). A PR blunder of this magnitude hardens that perception and can serve to reinforce brands' natural skittishness about automated buying versus more traditional guaranteed content. Google needs to demonstrate to brands that it can ensure content transparency and control. That’s actually something it’s already doing with mobile bumper ads, which are sold to brands against specific content inventory; this episode could be a major catalyst in speeding up that process.

In the meantime, YouTube’s mass of direct-response campaigns could likely be almost entirely unaffected.

Brands Would Find it Difficult to Replace YouTube
Given YouTube's unequaled scope and scale, few brands would find it feasible to pull all or even most of their budgets from YouTube for extended periods of time. Premium totally brand-safe sites like Hulu LLC have limited inventory. Nor is the idea of withdrawing from YouTube back to the safe haven of TV entirely realistic for most brands, as TV ratings and thus available inventory keep sliding.

A more likely scenario is that brands demand more extensive access to guaranteed premium at inventory on YouTube, perhaps verified by third-party measurement services Google has historically eschewed. Indeed, the International Business Times on March 27 reported one of the world's largest media buying agencies, WPP PLC's GroupM, was already negotiating for such inventory guarantees, at a discounted rate.

Google has not yet publicly commented on this possibility, but it could, in order to regain face with brands, accede to this desire. While this would cause a short-term hit in YouTube’s premium pricing, it could, in the longer term, be a plus for Google in its quest for more share of brand budgets.

Based on these considerations, it is likely the current bandwagon effect of negative media coverage is a real, but ultimately temporary and small setback for Google in its goal of attracting a bigger portion of more traditional brand spending and not an issue that could expose core spending on YouTube broadly to a serious downturn.

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