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The economic fallout from COVID-19 craters Google's most important business: advertising.

Photo: Geert Vanden Wijngaert/Bloomberg via Getty Images
Power

How will Alphabet weather COVID-19 and plunging ad sales?

The economic fallout could have a massive impact on Google's core business.

As the novel coronavirus rages across the globe, people are increasingly leaning on tech giants for many of their basic needs: Apple to stay productive, Facebook to connect with loved ones, and Amazon to keep cabinets stocked and mouths fed. And of course Google, where people go to find information about the virus, to seek tests, to search symptoms, to stay informed.

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"This is an unprecedented moment," wrote Alphabet and Google CEO Sundar Pichai in an email to employees and published on Google's blog in early March. "It's important that we approach it with a sense of calm and responsibility, because we have many people counting on us."

But that need for the search giant will likely not translate into money for Google or its parent company Alphabet, as the economic fallout from COVID-19 craters Google's most important business: advertising.


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Google could see its revenues plummet 18% in 2020, losing $28.6 billion because of coronavirus as travel, hospitality and other industries slash ad spending, according to estimates from investment bank Cowen & Co. Such a loss would not change Alphabet's long-term health as a business, though analysts say it could change the company's makeup, spurring Alphabet to diversify its businesses further in other areas, including YouTube original content, the autonomous driving unit Waymo, and its "moonshots" division, X.

How is Alphabet's business being hurt by the coronavirus?

In good times, Google's ads business is an absurdly huge moneymaker, accounting for $134 billion in 2019, or 83% of Google's revenues, which the company uses to fund or prop up other teams and divisions (division X comes to mind). But an unprecedented crisis like the coronavirus pandemic is likely to have a significant impact on ad revenues as businesses cut budgets amid growing financial turmoil.

Andrew Frank, a vice president and analyst with Gartner, has already seen evidence that travel and hospitality companies are cutting — or outright canceling — advertising that appears in Google searches.

"Two days ago, I was looking just at Marriott and Hilton," Frank said. "If you just Google those two terms, usually they're running paid search ads for their branded terms. But they're not even doing that anymore. So effectively, some of those companies have gone to absolutely zero advertising, which have cut out everything."

That's not surprising given recent developments. On March 19, Marriott CEO Arne Sorenson posted an emotional video message to employees and through Marriott's Twitter account in which Sorensen admitted business is running 75% below normal levels; Hilton has furloughed workers, delayed hotel openings and withdrawn its earnings guidance for 2020. Meanwhile, Amazon also slashed the amount of money it spends on Google advertising across most categories in March, according to a Bloomberg report, which cited data from marketing agency Tinuiti.

According to a note published on Sunday, Morgan Stanley Chief U.S. Economist Ellen Zentner expects the U.S. GDP to plunge 30.1% in the second quarter because of coronavirus, pushing U.S. unemployment up to 12.8%. That economic contraction will translate to significantly less ad spending on Google, experts suggest.

A Google spokesperson declined to comment.

Another area where Google may feel the squeeze is Waze. The popular crowdsourced car directions app, which Google acquired for $1.3 billion in 2013, is driven by ads and user engagement. But restrictions in many states discouraging citizens from driving unless for "essential" needs likely means a huge decrease in user engagement, not to mention a decrease in ad spending.

"They are losing the consumer, and then, their advertisers tend to be physical brick-and-mortar," said Collin Coburn, a senior analyst with Forrester, in reference to Waze. "Granted, I live in the suburbs, but ads are typically like Dunkin Donuts, Subway and Exxon Mobil all saying like, 'Oh, there's a Dunkin Donuts two miles down the street.' I would have to assume everyone is pulling back with their ads."

Not everyone. Earlier this year, Google display ads for face masks, hand sanitizers and gloves flooded third-party websites and sponsored shopping lists in product searches — a flagrant attempt by some marketers to capitalize on coronavirus fears. In the wake of widespread criticism, Google blocked tens of thousands of ads, although users complained weeks later of face mask ads popping up in coronavirus articles.

What is Alphabet doing about COVID-19?

A lot, according to President Donald Trump, who declared at a press conference in mid-March that nearly 1,700 Google engineers were working on a website to help people get tested for coronavirus. His announcement surprised everyone — including Google itself.

But Trump's announcement, inaccurate as it was, pointed out that Alphabet, with its vast technological and scientific resources, is capable of playing a huge role in helping society confront this pandemic.

The Alphabet-owned life sciences moonshot Verily did launch a coronavirus assessment website and testing sites for Californians soon after Trump's announcement, offering free online screening appointments and directing patients who exhibit symptoms to undisclosed testing sites. (As of this writing, appointments are fully booked and the site is not taking new ones.)

Google also made its videoconference tool Hangouts Meet available to all G Suite customers, regardless of their pricing plan, through July 1, and created a fund aimed at temporary employees and vendors to take sick leave if they potentially have COVID-19 or face quarantine.

Earlier this week, Google announced several updates it was rolling out to provide COVID-19 resources, including a coronavirus website with basic information on the virus, safety and prevention tips, and links to guides on working from home and "coping techniques for stressful days."

YouTube has joined other streaming platforms in lowering default video quality in order to save bandwidth. For now YouTube is doing this in Europe, but a spokesperson confirmed to Protocol that the company will default all traffic worldwide to standard definition for the next month or so. (Users will still be able to manually adjust video quality to higher-definition settings.) To disincentivize misinformation and sensationalism, the popular streaming service also announced earlier this month it would change course and only enable ads on a limited number of channels that discuss the coronavirus outbreak, such as channels from news outlets. This is in addition to removing thousands of misleading videos, according to a YouTube spokesperson, and highlighting health accurate information in various ways.

And the future of the business?

Google remains in a good position to weather COVID-19, even with projected ad sale losses. For one thing, its growing Google Cloud business, which counts a wide array of clients, including PayPal, Target, 20th Century Fox and The New York Times, stands to be unhindered by the economic downturn. Google's Cloud grew 53% year-over-year from 2018 to 2019, generating $8.9 billion last year.

But like Facebook and Amazon, Google could certainly improve its standing with the public, which has taken a hit over the past few years with high-profile privacy scandals and accusations of sexual harassment by executives in the workplace, but only if it treads lightly. "It's a bit of a double-edged sword for Alphabet, because on the one hand, they certainly want to be seen as a positive force for good in society, and they can do a lot of good with all the data," Gartner's Frank said. "On the other hand, I think there's a danger that they lay bare a little bit: the extent of data collection that they're capable of doing, and that's what I think they need to tread carefully with."

Charlene Li, founder and senior fellow at the digital research and consulting firm Altimeter, recommended that Alphabet take an altruistic route with its coronavirus efforts.

"There will be tremendous pressure on them to not benefit monetarily in any significant way during this crisis," said Li, who added that over time, Alphabet's sites could provide marketing and ad support for specialized COVID-19 clinics that will want to advertise.

Where analysts agree Alphabet should focus its efforts moving forward is in diversifying its businesses away from volatile ads.

"This might accelerate the continued diversification of Alphabet away [from ads], so it's no longer purely reliant on them, because the limitations of Google's daily business become more apparent in these kinds of crisis situations," Frank said.

That may mean investing more in original content for YouTube, which is accessible without ads through paid membership. There's cash being left on the table there. YouTube has roughly 2 billion monthly users but just 20 million YouTube Premium and YouTube Music subscribers. The streaming platform could funnel more money into developing original content, given its budget is a fraction of what its competitors invest. (YouTube has essentially said it spent hundreds of millions of dollars on original content for 2019, compared with the estimated $15 billion Netflix spent on original content and the $7 billion Amazon spent on video and music content last year.)


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Alphabet may also decide to invest more money in fringe efforts like X, which is developing cutting-edge, far-reaching technologies that verge on science fiction, including robotic trousers to help paraplegics and the elderly walk, and an underwater camera system for studying fish and preserving the ocean's ability to "support life and help feed humanity, sustainably." X does not generate meaningful revenue for Alphabet, but several of its projects have become full-fledged groups and companies of their own, including Verily and the self-driving business Waymo, the latter of which Google spun off in 2016.

"The coronavirus pandemic is so disruptive that it makes you kind of rethink the entire technological basis of our infrastructure to see if there is a different way we could do business globally that would be less vulnerable to these kinds of disruptions," Frank said.

In that regard, Alphabet isn't so different from the businesses whose ads it so relies on for revenue. But unlike some of those floundering for survival, Alphabet has the financial might to prevail.

Updated on 3/26/20 with more comments from YouTube.

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