Alphabet Lost $70B+ In Market Cap, Blames It On The Algorithm That Reduces Fake News On YouTube

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Written by Dana Sanchez
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FILE – This Oct. 21, 2015, file photo shows signage inside the YouTube Space LA offices in Los Angeles. YouTube’s inability to keep ads off unsavory videos is threatening to transform a rising star in Google’s digital family into a problem child. The key question is whether a recently launched ad boycott of YouTube turns out to be short-lived or the start of a long-term marketing shift away that undercuts Google’s growth, as well as Alphabet Inc., its corporate parent. (AP Photo/Danny Moloshok, File)

Google parent Alphabet reported declining ad revenue growth Monday, sending the stock down 8 percent, and Wall Street wants to know what’s going on.

Changes to the YouTube algorithm were among the factors that caused lowered ad revenue growth and engagement on Google, according to Alphabet CFO Ruth Porat.

YouTube made changes to slow the spread of fake news and conspiracy theories, demonstrating a willingness to put off short-term ad revenue growth in favor of the company’s long-term health, CNBC reported.

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Don’t feel sorry for Alphabet. On Monday, the company reported that ad revenue grew 15 percent. Sounds pretty good, but that compares unfavorably with its mind-boggling 24 percent growth of a year ago. Stock fell almost 8 percent on Tuesday morning as investors “punished” the giant tech company.

Missing revenue expectations is a rare event for Google, Reuters reported.

Eight brokerages cut their price targets for Alphabet after it released its results on Monday, helping knock 8 percent – or around $70 billion – off one of the New York market’s most popular stocks.

Much of the commentary focused on Google’s moves to take down fake and harmful content from its platforms, and the rising cost of doing this.

Although YouTube was one of the culprits, Porat didn’t go into detail beyond her statement Monday in a conference call with analysts.

“We aren’t sure what changes GOOGL made in the quarter that drove the deceleration and this is something the Street must figure out,” Morgan Stanley analysts said.

In the first quarter of 2018, Google began making changes to YouTube’s algorithms designed to stop harmful content from appearing in the feed of recommended videos you see on the side of a video page.

The goal was to make it harder to find videos of conspiracy theories, fake news and all that other junk that sometimes drives away advertisers. Instead of YouTube directing you to a conspiracy theory about the latest school shooting, you got videos from “authoritative” news sources the company deemed worthy of bringing you accurate information, CNBC reported.

“While YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience,” Porat said.

YouTube has almost 2 billion users. In the past, the company was “literally incentivized to keep its algorithms pumping junk to the top of people’s feeds so people would keep watching and the ad dollars would keep flowing,” tech editor Steve Kovach wrote for CNBC. “A devastating Bloomberg report earlier this month showed that for years YouTube executives ignored warnings from their own employees that the misinformation and nastiness on the site had gotten out of hand.

YouTube has increased its focus on responsibility and safety, and adjusted its algorithm in the first quarter to stop recommending content that violates guidelines or is harmful, J.P. Morgan analysts wrote in a research note Tuesday morning. “We don’t think there’s a single clear answer for Google’s (deceleration), but a number of factors are at work,” they added.

Google bought YouTube in 2006 for $1.65 billion.  It was a staggeringly high figure at the time for a 1.5-year-old startup. Ten years later, it was considered one of the best consumer tech acquisitions ever. 

As part of the buy, Google bought advertisers on YouTube. They’ve been pressuring the company to make sure their ads don’t appear to be sponsoring offensive content.