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YouTube's ad woes leave Alphabet reaching for the cloud

It was not really the best of times for Alphabet CEO Sundar Pichai, as YouTube's struggle to attract advertisers led to a fall in profits of $1.5 billion from last year.

But Google Cloud's revenues, at least, bettered analysts' forecasts at $5.8 billion, as cloud continues to post throaty growth across the sector. And cloud revenue was up by 44% from a year before (though this was a nose slower than the 46% revenue growth posted by Microsoft's Azure).

Sundar Pichai called Google's cloud growth "strong," and said it reflected how both people and businesses were transforming their digital activities.

Outlook mixed: Google's parent company saw profits tumble by $1.5 billion, while Google Cloud bettered forecasts and grew revenue by 44%.  (Source: Askar Karimullin/Alamy Stock Photo)
Outlook mixed: Google's parent company saw profits tumble by $1.5 billion, while Google Cloud bettered forecasts and grew revenue by 44%.
(Source: Askar Karimullin/Alamy Stock Photo)

The cloud division, which former Oracle president Thomas Kurian has led since 2019, is still not quite making Alphabet any actual money, bear in mind. Though, it only lost $931 million in the quarter, a little less than a year ago, and finance chief Ruth Porat says Alphabet will "continue to invest aggressively in Cloud given the sizable market opportunity we see."

At the end of 2021, Alphabet had nudged up its share of the cloud market by a percent to 6%. But it still has some way to go to close the gap with Microsoft Azure's 20% and Amazon Web Services's 41%.

Meanwhile, open source advocates within Google Cloud just won an argument, with the company saying on Monday it will cede control of Istio, the last major component of the Kubernetes ecosystem to sit outside the Cloud Native Computing Foundation.

Cloudy weather

The company's biggest increases in headcount were again in cloud, in both technical and sales roles, says Porat.

Looking forward, the majority of Google's 7,400 new staff will go into Google Cloud, and much of the company's recent $4 billion investment in new office space in New York, London, and Poland is set aside for cloud teams. It's promised a combined spending of $9.5 billion on new data centers and offices this year.

Buying cybersecurity company Mandiant for $5.4 billion, which the company announced in March, is also an attempt to bolster its cloud security chops. It shows Alphabet is "sparing no expense" to rival Microsoft and IBM in the enterprise cybersecurity space, says Omdia's Eric Parizo.

The Department of Justice recently requested more information about the purchase, but this does not yet mean it will seek to challenge it on antitrust grounds.

Alphabet soup

Cloud's clip of revenue growth is nearly double that of Google Search, up only 24%.

Nevertheless, search still remains a much bigger fish at $39.6 billion, making up 58% of its overall revenue. As pandemic travel restrictions have begun to loosen, there's been a boost from people searching for holiday flights and things to do on their travels, the company says.

It's YouTube which is the disappointing sibling at the moment. Its revenues from advertising rose by just 14% to $6.9 billion, below the $7.5 billion expected by analysts.

One reason was Russia's invasion of Ukraine, which has dampened advertising spending in Europe and also caused Alphabet to suspend the "vast majority of our commercial activities in Russia," says Porat.


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The bigger reason is TikTok is eating its lunch, causing YouTube's advertising revenue growth to decrease to 20% from 30% a year ago. This will put more pressure on Alphabet to show more progress with its YouTube Shorts product, intended to imitate the short-video format working so well for TikTok.

Even with the earnings miss, Alphabet is in a better place right now than much of the rest of Big Tech, says Bank of America analyst Justin Post in a research note.

Compared with the other tech giants, Pichai's company currently has "more earnings stability, more potential exposure to an ongoing rebound in local and travel verticals [and] evidence of artificial intelligence advantages across the product stack," says Post.

And even with YouTube's disappointments garnering the headlines today, Pichai can point to solid growth in his bread-and-butter search business, while doubling down in a longer-term cloud bet to improve his third-place share of a fast growing market.

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— Pádraig Belton, contributing editor, special to Light Reading

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