Google just released Q1 earnings for 2021. The earnings call brought interesting points to daylight, such as Youtube’s competition from Tik Tok and Google’s from Amazon’s ad business. In the article, I quote the earnings call from The Motley Fool’s transcript.
A summary of Google’s Q1 earnings
In Q1 2021, Google brought in $55.3b in revenue, more than $3.5b than analysts expected. Search (revenue from AdWords) grew by +29.7% YoY, Youtube ads by +50% YoY, and Cloud by +48% YoY.
Mapped out over the last two years, we see how much Q1 doesn’t follow the regular pattern of previous quarters. Search in Q1 2021 was almost as strong as in Q4 2020.
When taking Search out, we see strong linear growth from Google Cloud and “other” taking over Youtube ads. “Other” includes Youtube subscriptions, hardware, and the Play Store. I’d be curious to understand whether Youtube subscription revenue outruns ad revenue.
Search faces competition from Amazon
"In the first quarter in Search, we saw sustained strength across most categories led by retail. We also saw strong performance in tech and CPG."
E-commerce didn’t just drive growth in Search, but in the internet ecosystem. The growth of Shopify and recent Amazon earnings (more about that in a second) are good reflections of that.
Yet, e-commerce is traditionally one of the weakest areas of Google. What changed? On the one hand, Google announced the merger of phrase and broad match in Google Ads. In other words, it’s getting harder to target exact match queries. Google also started to report fewer keyword data in Google Ads (up to 28%) in September 2020. Both trends might have implications on the strong Q1 performance.
Google’s strong Q1 performance highlights two important points:
- The Covid crisis spurred e-commerce growth, and the trend continues even though some countries see recovery and open up again.
- Google Ads accounted for 80.8% of total revenues and still outpaces any other product or business unit at Google by a multiple.
When speaking about ad-revenue growth and e-commerce, we also have to mention Amazon’s role. Bezos’ e-commerce company owns more than 10% of the digital ad market. Q1 earnings show $6.9b in “other” revenues, including advertising revenue, and grew 73% YoY. To be clear, if “other” would only contain ad revenue, Amazon would make more money from ads than Youtube by now.
This goes to show how important the e-commerce war is for Alphabet. However, other than Amazon, Google can broaden ad coverage across a wide range of intents, not just e-commerce.
Philipp Schindler, Alphabet’s Chief Business Officer, responded to a question about the key drivers of Search (highlights mine):
"I usually look at the different components of Search as basically four key drivers. The first one obviously being the queries. So, are we really the place -- best place for users to turn to when they need information. The second one is, I would call it, as coverage. So what percent of coverage is really commercial and then what percentage are we actually covering with ads. And then we need to ask ourselves, do both of these have upside. The third one is click-through rates or individual. At click-through rates, close to being optimized, is there more more we can do here by just delivering better creative, better ads, better answers, to what extent can we deploy next-generation machine learning here. And then the last one is obviously the CPC, right. How much is someone willing to bid for click on their ad. And this is obviously to a large extent driven by the quality of traffic we're sending. And then conversion rate is a big driver of this. So, we're working very closely with our partners, advertisers and so on, across the world to help them optimize their conversion rates and their ROI. Those are really the four big components and I'm excited about all four of them actually."
What Schindler describes here are the four basic levers Google has to drive the majority of its revenue:
- The number of searches performed on Google
- How many queries show ads
- How many people click on ads (CTR)
- Cost per click
Google shows ads for queries with commercial intent, but not for every query. That’s growth potential! At the same time, it might come at the expense of organic results, especially if Google shows more shopping ads.
Youtube Shorts is not TikTok
On the earnings call, Sundar Pichai says: "With respect to YouTube, people continue to find all types of informational content, from educational videos to podcasts. In fact, according to a recent study conducted by Ipsos, 77% of respondents say they used YouTube during 2020 to learn a new skill."
It’s interesting to hear Schindler acknowledge Youtube being more than a video platform. Users listen to podcasts and music (think: Youtube Music).
Notice how Schindler calls out Shorts:
"YouTube Shorts continues to gain popularity with over 6.5 billion daily views as of March, up from 3.5 billion at the end of 2020."
That’s not a coincidence. TikTok is the biggest competitor to Youtube, but Shorts are move of a copy of Instagram Stories. TikTok, however, works differently. Youtube Shorts are an extension of the core product. Users don’t sign up on Youtube to create Shorts. It’s a way for Youtubers to engage their audience with a short format (literally the name of the product).
On Tik Tok, short videos are the product. But that’s not all: Tik Tok creators remix other videos. They create and evolve memes. It’s almost bi-directional communication. That’s why popular songs are made on Tik Tok, not Youtube Shorts. Creating Shorts makes only sense when you already have a big user base on Youtube. Shorts are a content commodity feature.
On the call, Pichai mentions: "Third, we continue to deliver helpful innovations to enable hybrid work with Google Workspace. This includes digital tools for front-line workers like nurses and retail store workers, as well as new security offerings. These innovations have helped grow our revenue per seat and the number of seats in the last quarter. Workspace is being adopted by customers, including [Indecipherable] in healthcare, Sun Life in financial services and Airbus in manufacturing and aviation."
As digitization marches on, Google wants reserve a seat at the productivity table for the next industry. Software and knowledge workers were an easy target, but the market becomes increasingly saturated. Where else do you find highly productive teams? Healthcare, hospitality, and logistics. It’s no coincidence that Atlassian announced a Jira product for non-software workers.
From a Growth perspective, we have to ask ourselves what acquisition channels we can use as productivity moves beyond software teams.