Google, Microsoft and Spotify Slow, But Still Grow Ad Businesses in 1Q23

Three significant global sellers of advertising reported first quarter results on Tuesday and in this note I provide a brief analysis of the numbers as I think they should be interpreted.   While ad revenues at Google, Microsoft and Spotify are slower than they have been, the difficult comparables of the year-ago quarter – which would have featured many advertisers whose spending was likely unsustainable – likely drives these outcomes much more than overall economic conditions, as growth in nominal and real terms likely occurred in most parts of the world.

First, Alphabet, the world’s largest seller of advertising posted essentially flat results for its various advertising business in gross terms, although if we assume that the company’s overall 3% drag from foreign exchange also applied to advertising, organic growth was actually 3%.  With a similar approach we could infer search was up 5%, YouTube was flat and Network was down 5%, all in implied constant currency terms

Importantly, I think that economic conditions do not explain these results.   Instead, I think difficult – arguably nearly impossible to beat – comparables are more likely to blame.  In the first quarter of last year, advertising was up approximately 25% in constant currency terms, presumably driven by the same factors which caused 2021 to be unsustainably frothy with many “digital endemic” and e-commerce-focused marketers failing to return in recent periods. 

Second, Microsoft, the #4 seller of advertising outside of China, grew gross ad revenues for its Search, News and Other activity by 3% as-reported, or likely around 6% in constant currency terms and around 4% excluding the benefit from Xandr.  Xandr’s 2% contribution to as-reported revenues contrasted with a 5-6% contribution during the two prior quarters.    Linkedin’s total business was up by 8% as reported, or likely more like 10% in constant currency terms.  As Talent Solutions was cited as driving the growth, by implication the smaller Marketing Solutions – what we think of as ad revenue - was slower-growing, perhaps closer to flat or negative.  Microsoft also faced difficult comparables with 22% growth in search in the year-ago quarter and 34% growth at Linkedin at that time (with Marketing Solutions likely growing faster than that figure).

Finally, the much smaller, but still globally significant Spotify grew 17% in the quarter as reported in Euros, or 13% in constant currency terms.  Constant currency growth amounted to 22% in the year-ago period, for reference.