Google Announces Policy Revamp As YouTube Ad Row Escalates

The ad controversy that initially appeared to be just a tiny issue, at least to Alphabet Inc.’s (NASDAQ:GOOGL) Google, has intensified with a number of companies suspending their advertising on YouTube.

Google did give an initial and rather weak explanation at the onset of the crisis stating that the company has policies to debar ads from appearing on pages or videos with offensive or derogatory content. But implementation is not always easy, given the millions of sites in its network.

Moreover, 400 hours of video get uploaded to YouTube every minute, which makes the implementation all the more difficult. The company, however, said that it has already initiated a review of the problem.

But advertisers did not seem satisfied with the “half-hearted” explanation. The issue that primarily centered on the U.K., went global in no time, with over 250 brands suspending their advertising on YouTube. The list includes big names from private as well as public sectors including Transport for London, The FCA, HSBC, Toyota , McDonald’s (NYSE:MCD) , Heinz, The guardian, Channel 4, , L'Oreal, Marks & Spencer, Hargreaves Lansdown (LON:HRGV) and Sainsbury’s.

Google reacted quickly with some “serious” announcements. The company posted some notable policy revamps including more fine-tuned advertiser controls, addition of safer defaults, expanded video-level reporting for advertisers and increasing investments to implement its ad policies faster. Google also mentioned its plans to add a significant number of staff and deploy latest artificial intelligence (AI) powered tools to assess dubious content.

The stock has lost 1.9% since the issue surfaced three weeks back.

Dissatisfied Advertisers

The withdrawal of ads continues despite Google’s proposed amendments. In the last couple of weeks, at least a dozen advertisers pulled their ads on YouTube upon the discovery that their ads were appearing next to YouTube videos that display offensive or controversial content. The list includes big names such as Verizon (NYSE:VZ) , AT&T (NYSE:T) , Coca-Cola and Wal-Mart (NYSE:WMT).

With growing industry pressure, Google is reportedly bringing in stringent quality control measures. Bloomberg reported that the company is launching a new system to enable external partners such as comScore and Integral Ad Science to verify ad quality standards on its video service.

According to Alphabet’s Chief Business Officer Philipp Schindler, "We switched to a completely new generation of our latest and greatest machine-learning models." “Google has made quick progress on its own. Using the new machine-learning tools, and a lot more people, the company in the last two weeks flagged five times as many videos as "non-safe," or disabled from ads, than before,” he added.

Our Take

Google is embroiled in a legal battle across practically all continents and issues like this are likely to add to its woes, at least in the short haul. Apart from being a huge drain on ad revenues, these give it a bad name on quality assurance.

Alphabet Inc. Revenue (TTM)

Moreover, the cost of developing and implementing a proper solution could put pressure on the company’s margins. This could be a reason why Google has been ignoring the issue. Hence, developments like these are worth keeping an eye on.

However, we believe the issue will not be a long-term threat, given Google’s long history of execution, leading search market share and growing focus on innovation, strategic acquisitions and Android. With a huge cash balance and technological prowess, the company has the flexibility to pursue growth in any area that exhibits true potential.

Currently, Alphabet has a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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