Google, Microsoft, Snap and Spotify Validate Expectations for 3Q23 Ad Industry Acceleration
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Reinforcing my prior view that the global advertising industry is healthy at the present time, each of Alphabet, Microsoft, Snap and Spotify reported calendar third quarter 2023 results on Tuesday, collectively showing very strong, accelerating year-over-year growth for the industry. Although it’s early in the earnings season, these four companies along make clear that the third quarter’s pace of growth will be faster than what we saw in the second quarter in the US and internationally, much as I previously expected. Importantly, media companies experiencing declines in their advertising are not suffering from a weak ad market; they are losing shares of ad budgets, usually because of budget shifts from traditional media (including digital extensions) to digital platforms and because the growth in advertising is typically coming from new advertisers, whether large digitally-focused marketers, domestic self-service advertisers or Chinese-based marketers advertising abroad.
First, Alphabet - around 30% of the world’s advertising revenues outside of China on a gross basis on my estimates - reported that Search (and other) revenue grew 11.3% led by the “retail” vertical (presumably including e-commerce), and YouTube gained 12.5% in advertising revenue with brands and direct response advertisers cited as leading that business’ growth. Google Network fell 2.6%, and while this is an improvement over prior quarters, it’s unclear if this is weakness in the network or in ad tech activities vs. a shift of the advertising budgets that Google captures from non-search to search-related advertising inventory.
In total, the company grew its advertising revenue base by 9.5% as reported and in constant currency terms. This remains a significant pace of expansion for the world’s largest seller of advertising. By region, company-wide (including Cloud and Other bets) the US was solid, up 8.9% while EMEA was up 12.4% in constant currency terms. APAC grew 16.1% on this basis, and Other Americas expanded 8.6%. Of note, YouTube subscription revenues for the YouTube TV vMVPD and YouTube Music Premium were referenced favorably as the drivers of non-advertising revenues within Google’s services business (ie ex-Cloud and Other Bets).
Meanwhile, Microsoft – the industry’s #4 player – grew search and news ad revenues excluding traffic acquisition costs by 9% in constant currency (essentially organic) terms. Although Linkedin ad revenues were not disclosed on the company’s press release, an 8% gain for the entire Linkedin business represented a 3% acceleration relative to growth observed during the calendar second quarter of 2022.
Next, Snap returned to growth with total revenue up 5% (vs year over year declines in the past two quarters). Excluding subscription revenues (the company now has 5 million paying subscribers to its services) ad revenues were likely up by around 2%. Brand advertising was described as flat while direct response advertising was up 3%.
By region, the relatively mature North America market remained weak with a -3% total revenue decline (and presumably a more significant advertising revenue decline) while Europe was up 24% and the rest of the world was up 30%. Daily active users were up only 1 million in the United States and 7 million in Europe. The bulk of DAU growth occurred elsewhere around the world as the company increasing focuses on its global opportunity as 36 million new subscribers joined in the Rest-of-World reason. Of course, it’s critical to be mindful that user growth does not drive advertising growth for Snap or other social media platforms. Time (and ad inventory), product enhancements and creating new ad products for new segments of advertisers are ultimately what matters most. For the fourth quarter, the company indicated its internal forecast calls for a range of 2-6% revenue growth, which would imply ad revenue growth of several percentage points lower.
Spotify also posted positive advertising trends on Tuesday, with a 24% year-over-year increase, or 16% as-reported. Such a pace represents that company’s fastest pace of expansion since the fourth quarter of 2021. Evidently the results were driven by music advertising rather than podcasting (up by “healthy” double digits), as music advertising grew by 20% as-reported.