Google is facing a worldwide advertiser backlash over ads programmatically placed on YouTube in videos containing hateful, terroristic and racist messages, but the near-term impact from the controversy will be “minimal,” according to RBC Capital Markets analysts.
“Yes, this is a headline negative and we can understand why brands would be upset,” RBC’s team of internet analysts led by Mark Mahaney wrote in research note Thursday. But the firm is not altering its revenue projections for 2017 for Alphabet, Google’s parent company. The RBC analysts reiterated their “outperform” rating on Alphabet and their $1025-per-share price target on the stock. “Google is one of the strongest, most consistent fundamental stories in tech. Period,” they wrote.
The uproar quickly swept across the U.K. advertising community, following an expose last week by the Times of London about ads from major brands appearing on YouTube against videos from white supremacists and radical Islamic preachers and other brand-unsafe content. On Wednesday, AT&T and Verizon said they were pulling ads from YouTube and Google’s non-search ad networks. GSK and Enterprise are among other U.S. marketers joining the boycott, along with more than 250 advertisers in the U.K. including Volkswagen, McDonald’s, the BBC, L’Oréal, Marks & Spencer, HSBC, Royal Bank of Scotland, Lloyds, Audi and Havas.
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Google has responded to the issue by outlining a number of steps it plans to take to combat ads inappropriately placed against such offensive content, including hiring more staff and developing artificial-intelligence algorithms to better identify hate speech. Google also says it is improving the controls and reporting tools advertisers have about where their ads are displayed.
“We’ve begun an extensive review of our advertising policies and have made a public commitment to put in place changes that give brands more control over where their ads appear,” the tech giant said in a statement Wednesday. “We’re also raising the bar for our ads policies to further safeguard our advertisers’ brands.”
The RBC analysts noted that Google released “an apology/proactive change press release” to try to reassure advertisers that it’s taking good-faith efforts to correct the problems. Still, Google and YouTube execs seem to have been caught off guard by how broadly and swiftly the ad pullback over hate-speech content has spread.
To gauge the potential effect on earnings from the boycott, RBC estimated that a 10% hit to YouTube and Google display network revenue would amount to $1.5 billion for 2017, reducing Alphabet’s total revenue by 1.7%, while a 2% drop in YouTube and Google network ad revenue would result in total revenue declining $309 million, or 0.3%. That’s based on the analysts’ rough estimates that YouTube will account for roughly $14 billion in revenue in 2017, and Google’s display network will generate $4.8 billion.
But again, RBC isn’t currently changing its forecasts for Alphabet. That said, the RBC analysts noted, any drop in advertising on YouTube stands to benefit Facebook and Instagram, given marketers’ strong interest in reaching audiences on social, mobile and video networks.
