Good morning,
In yesterday’s Article I included a chart of Amazon’s North American Retail sales on a 3-year over 3-year basis. However, given that Amazon’s sales mix continues to shift towards 3rd-party merchants (from whom Amazon only recognizes fees), this is an inaccurate measurement; a better chart would use gross merchandise volume, which is not a figure that Amazon releases in their earnings report. I’ve removed the chart from the Article and apologize for the lack of precision.
Meanwhile, the most recent Sharp Tech covered Meta’s earnings and had an extended discussion of where I both agree and disagree with Cory Doctorow’s recent Wired essay The ‘Enshittification’ of TikTok. I think this one was pretty good — you can listen by adding Sharp Tech to your podcast player using the link at the bottom of this email.
Finally, this week’s Stratechery Interview is going to run tomorrow, likely in addition to an Update; assuming that happens, there will be no Update or Interview on Thursday.
On to the update:
Google Earnings
From the Wall Street Journal:
Google reported its first drop in advertising revenue since the beginning of the pandemic, as a slowdown in online marketing continues to weigh on the search giant’s business. Alphabet Inc., Google’s parent company, reported $59 billion in advertising revenue for the fourth quarter, a decrease of 3.6% from the same period in 2021. Those results marked the second time ad sales fell since Google became a publicly traded company in 2004.
Google is attempting to weather one of the most challenging environments for its core advertising business in recent memory. While the company’s fortunes soared during an uptick in digital advertising in 2021, it has recently faced pressures from a worsening economy and new competitive forces in fields like artificial intelligence.
I thought these results were very interesting, particularly in the context of The Four Horsemen of the Tech Recession. First off, YouTube continues to make the case that App Tracking Transparency is still a massive headwind for performance-marketing platforms: revenue was down 8% year-over-year, and once again the slowdown in growth — or in this case, acceleration in decline — outpaced search significantly. Last quarter I posted the following chart (now updated to include this quarter) and wrote:
What I see is that YouTube was previously growing faster than Search, and then in the second half of last year, those trend lines flipped. And what, you may ask, happened in the second half of last year? If you said App Tracking Transparency (ATT) you don’t win any prizes other than the satisfaction of knowing that your Stratechery subscription is paying off!
I know I’ve been harping on this for the past few Google earnings, particularly since the company is so clearly reticent to talk about it (in part because Search is a likely beneficiary), but with every quarter I am increasingly convinced that YouTube’s relative softness is really about ATT and not Ukraine or the macroeconomic slowdown or whatever other explanation Google comes up with. That view is augmented by the fact that WPP, Omnicom, and Publicis all had great quarters; the only advertising businesses that seem to be struggling are the ones impacted by ATT, and at this point the Occam’s Razor explanation is the structural one.
At the same time, that Search slowdown is striking: Search is not affected by ATT, and yet it is slowing all the same. Some of this, to be fair, is currency: search would have eaked out a bit of growth without currency headwinds; another bit is the difficulty of year-over-year comps. Even so, if you look at the three-year trends, which skip over COVID, search growth has steadily declined all year. Unfortunately Google only started separating out Search and YouTube three years ago, but back then combined growth was fairly steady at around the 50% mark year-over-year. That sort of growth is definitely not happening now, and it’s not clear how much of this is just an overall slowdown in Google’s business versus macroeconomic factors.
YouTube’s Aggregation Bid
This bit from Chief Business Officer Philipp Schindler about YouTube’s ambitions on Google’s earnings call was very interesting:
Next, connected TV, where users are increasingly watching their favorite creators on the big screen at home. According to Nielsen, YouTube is the leader in US streaming watch time. Advertisers are leaning in. With AI-powered solutions, we’re helping brands deliver efficient reach and ROI and address pain points like frequency and measurement.
Then there’s our subscription offerings. It’s clear the future of online video is about helping users seamlessly discover and watch content across ad-supported and premium services. Our goal is to be a one-stop shop for multiple types of video content. That’s why we first offered Music and Premium, where 80 million-plus paid subscribers and trialers enjoy their favorite content and music ads-free. We then expanded into YouTube TV, significantly improving on the legacy television experience. And then last fall, Primetime Channels launched, making streaming subscription services available on YouTube on an à la carte basis. Given the potential we see in our subscription offerings, we recently announced a multiyear agreement to distribute NFL Sunday Ticket. As Sundar highlighted, we’re excited about the opportunities this will open up.
What Schindler is describing here is the dream for all of these streaming services: being the true Aggregator of television — Input 1, if you will. YouTube is certainly the best placed, for multiple reasons:
- First, most of its tech competitors are streaming only. Apple and Amazon, for example, will happily sell subscriptions to other streaming services (and take a cut of revenue going forward), but they don’t have linear TV. YouTube, though, has YouTube TV.
- Second, YouTube has exclusive content because of its dominant position in user-generated content. If you want YouTube content there is, by definition, nowhere else to go.
The missing piece has been — in contrast to Apple and Amazon in particular — other streaming services. Primetime Channels, though, is clearly an attempt to build up YouTube’s own alternative to the Apple TV App Store or Amazon Prime Video Marketplace. This, as I noted last month, is why I think YouTube’s extravagant investment in NFL Sunday Ticket makes sense: it is a statement of intent and commitment that the service wants to use to convince other streaming services to come on board. The idealized future is one where YouTube is the front-door of all video period, whether that be streaming, linear, or user-generated.
YouTube Shorts Monetization
Schindler also said in his prepared remarks:
Despite ongoing revenue headwinds in Q4, we’re confident in YouTube’s long-term trajectory. Here’s how we think about our strategy. It all starts with a creator ecosystem. Creators are the lifeblood of YouTube. In 2022, more people created content on YouTube than ever before, long-form, short-form, audio, podcast, music, live streams. What sets YouTube apart is, we give creators more ways to create content and connect with fans and more ways to earn money than any other platform. More creators means more content, means more viewers, which leads to more opportunities for advertisers. The creator ecosystem and our multi-format strategy will continue to drive YouTube’s long-term growth…
Viewership [of Shorts] is growing rapidly, as Sundar said, 50 billion-plus daily views. We’re also still pleased with our continuing progress in early monetization. On the creator side, it’s been impressive to see the innovative ways creators are using Shorts to introduce their content and extend existing channels. We’re focused on providing creators with the best content creation and monetization tools, new, richer features and analytics capabilities that help individualize and optimize their content strategies. It’s early days for Shorts, but we’re confident the runway is long.
Shorts is often forgotten when it comes to TikTok/Reels drama, but this space is a three-way race, and Schindler is exactly right that the big advantage YouTube brings is the proven potential for monetization. The challenge, though, has always been how to attribute a revenue share of the sort used for YouTube generally. Normal YouTube videos are straightforward: a pre-roll or mid-video ad is obviously attributable to whoever created the video in question. When it comes to Shorts, though, a user is scrolling through an endless feed of videos; who, then, ought to be attributed for an ad in said feed? The video before? The video after? Here is the solution YouTube came up with:
To summarize, all of the eligible advertising revenue will be pooled, and music labels will be paid out first; from the remaining money 45% will go to eligible creators, who will split the pool based on their share of overall views. In other words, something akin to a Spotify model, where an artist’s share of plays determines how much they are paid.
This makes sense given the fundamental challenges attached to revenue sharing with Shorts as compared to regular YouTube, but it is a very different dynamic for creators to consider. Normal YouTube videos are all about driving a large and reliable subscriber base that watches your videos specifically; it’s not a paid subscription exactly, but it’s adjacent as far as creator incentives are concerned. You want to develop a user base that trusts you and consumes your content when you post it. Shorts, on the other hand, are going to be all about going viral — being a huge hit, in Spotify parlance. Sure, you as a fan can explicitly view the Shorts of your favorite creator, but that doesn’t really have any meaningful impact on their monetization, whereas the same behavior at scale can make or break regular YouTube creators.
The other point about this monetization strategy is to highlight the pressure it does put on Meta in particular when it comes to not just revenue but also profitability. Meta has had huge success growing Reels, but the company is actually slowing growth in consumption until it figures out monetization, given that more Reels views mean fewer time spent on the parts of its apps that currently make money. One challenge, though, is going to be that paying out 45% of its revenue to creators will raise the monetization hurdle significantly.
Still, Meta may not have a choice. From The Information:
An even bigger debate bubbling inside Meta has more far-reaching ramifications: whether to relax long-standing opposition to the sharing of ad revenue with creators. While rival YouTube, a unit of Google, has been sharing revenue with people who upload videos onto the streaming service for more than a decade, Meta executives have long been resistant to splitting revenue generated in Facebook and Instagram feeds, according to multiple people familiar with the matter. It is a more consequential matter for Meta than for Google, which derives a relatively small portion of its revenue from YouTube. In contrast, the ad dollars flowing to Instagram and Facebook account for most of Meta’s advertising revenue, which in 2021 totaled $115 billion.
Meta leaders worried that introducing revenue sharing to the Instagram and Facebook feeds would not only cost the company money, but set a precedent that could not be undone, said three people familiar with the matter. But opposition to revenue sharing is softening at Meta, as top executives realize the importance of winning over the creators who make short videos. Those videos have transformed popular culture in much of the world over the past couple of years, pushing up the value of content and giving creators more leverage and influence.
One challenge facing Meta is the relative difficulty in creating a compelling Reel as opposed to a compelling Story; I’ve mostly discussed this in the context of advertising, but it applies even more powerfully to creators, who have to organically earn their audience, not simply buy it. The more difficult it is to create something interesting the more valuable that skill is, and Meta may have to pay up, particularly if YouTube is doing exactly that (YouTube, notably, will not pay for duplicated content).
This challenge is compounded by the fact that creators are probably going to be more reliant on the underlying platform for monetization than they were in Stories, where they could easily post sponsored content that users were sure to see. That’s not the case if the algorithm is deciding what video you see next, instead of your choice of who you follow.
More broadly, note the point in the excerpt about Google being relatively more generous with YouTube monetization because it was a smaller part of its business: that’s likely true, even if the attribution question is important as well. The big challenge for Google, of course, is that other companies have a similarly cavalier approach in terms of profitability to their products that compete with Google’s own core business. More on that tomorrow.
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