Alphabet underpins strength of YouTube, hardware as vulnerabilities start to show

Dive Brief:

Alphabet, the parent company of internet search giant Google, posted its Q4 earnings on Thursday, with revenues hitting $32.3 billion for a 24% year-over-year gain. In a call discussing the results with analysts, CFO Ruth Porat and CEO Sundar Pichai underscored the strength of Google's video platform YouTube, its burgeoning line of hardware products like the Google Home and also its cloud business.
On the YouTube front, Pichai pointed to the success of educational content shared on the platform, stating that there are 1 billion views on learning-related videos every day. Google's cloud business, built largely on the G Suite, also now has 4 million paying customers, including notable brands like Bed Bath & Beyond, Dentsu Aegis Network and Mattel. Pivoting from software to hardware, shipments of Google devices grew 2x year-over-year, according to Pichai, who said the company sold "tens of millions" of hardware products over the last year and who touted the strength of its digital assistant, Google Assistant.
Total traffic acquisition costs (TACs), the fees Google pays to other online companies and partners to run its ads and services, hit $6.5 billion, Porat said, rising 33% year-over-year to account for 24% of total advertising revenues.

Dive Insight:

Alphabet's Q4 earnings show the technology giant more vulnerable than usual coming off of a year where it was slapped with a massive antitrust fine from European regulators, losses stemming from the U.S. tax overhaul and a number of brand safety controversies on YouTube. The hikes in TACs additionally signal that people aren't going to the Google homepage as much for their searches, leading the company to rely more on third parties to drive traffic to its site.

Pichai putting a heavy emphasis on the success of YouTube's educational content also downplays the ugliness that emerged on the platform in 2017 and carried over into the new year. YouTube was at the center of two major waves of advertiser boycotts over brand safety last year as businesses realized their ads were appearing next to extremist and violent videos in the spring and then questionable children's content late in the fall. The year also started off with Logan Paul, one of YouTube's most successful influencers, landing in hot water over a video that treated an apparent suicide insensitively.

In Alphabet's earlier earnings reports for 2017, the ad spending freezes appeared to have little impact on the company's bottom line, but the controversies have lingered over the platform's reputation, and led to major policy shifts noted on Thursday's call, such as the hiring of 10,000 human staffers to manually review content and more stringent monetization policies for content creators.

One bright spot for Google is its burgeoning line of Made by Google connected hardware, which is boosted by the Google Assistant and includes the Pixel smartphone, Google Home, Mini and Max and Chromecast devices. Sales of Google Home, a competitor to Amazon's line of Echo products, have been surging. In Q4 — a critical sales period with the holidays — they commanded 40% of the market share for connected devices, according to Consumer Intelligence Research Partners. Google earlier this week also closed a $1.1 billion deal with the Taiwanese manufacturing giant HTC to add more than 2,000 of the company's mobile engineers to its team, which could considerably ramp up its innovation in the smartphone space for the third generation of Pixel phones and beyond.