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Inflation and the Ukraine war weigh on Big Tech’s advertising profits

Google, Apple, Facebook, Amazon and Microsoft reported earnings this week. JUSTIN TALLIS / AFP via Getty Images

The first three months of 2022 proved to be a difficult time for US Big Tech companies, whose business is heavily dependent on digital advertising. Rising inflation, Russia’s invasion of Ukraine and other unfavorable macro factors forced advertisers to cut marketing budgets, resulting in lower profits for platforms like YouTube, Google and Facebook.

On April 26, Alphabet, the parent company of Google and YouTube, reported an 8 percent drop in profits of $ 16.44 billion from a year earlier for the quarter ending March 31. The figure missed Wall Street analysts’ expectations of $ 17.3 billion, marking the Alphabet’s biggest declining profit since the pandemic.

Alphabet attributed its disappointing earnings to slowing revenue growth in its Google search and YouTube businesses as advertisers cut marketing budgets amid rising inflation. The loss of the Russian market, which accounted for 1 percent of the company’s global revenue last year, did not help.

Russia’s invasion of Ukraine, which began on February 24, “had a huge impact on YouTube ads compared to the rest of Google,” Ruth Porat, Alphabet’s chief financial officer, told analysts during a conference call on April 26.

Alphabet suspended most of its commercial activities in Russia in early March as part of a boycott that hundreds of U.S. companies joined. The closure also affected Alphabet’s business in other parts of Europe. “Right from the beginning of the war, there was a decline in advertising consumption, especially on YouTube in Europe,” Porat said.

Meta, Facebook’s parent company, saw a similar impact on its digital advertising business in the first three months of 2022. On April 27, Meta reported quarterly revenue of $ 27.9 billion, missing analysts’ estimate of $ 28.2 billion. The profit came to $ 7.5 billion. Although it exceeded expectations, it represented a dramatic drop of 21 percent from a year earlier, mainly due to the company’s large investment in its metaverse project.

Russia is an important factor for Meta

During a earnings call, Meta CEO Mark Zuckerberg said Russia was a key factor weighing on its first-quarter results. In the wake of the war, Meta stopped accepting ads from Russian advertisers globally. Facebook was also blocked in Russia by its government for banning its citizens from viewing anti-Russia content. The company did not discuss inflation-related impact.

Technology companies with a more diversified business had a more successful quarter. Microsoft, which reported earnings the same day as Alphabet, had a 25 percent increase in profit for the quarter, driven by strong growth (46 percent) in its cloud services.

When Microsoft CEO Satya Nadella was asked about the impact of rising inflation on the company’s business, Satya Nadella said he did not hear customers wanting to cut IT budgets as a result of inflation. In fact, he said the opposite is true: Companies are looking for ways to reduce labor costs through technology. “Some of these projects are the way they want to accelerate their transformation or, for that matter, automation,” Nadella said. “I have not seen this level of demand for automation technology improve productivity because in an inflationary environment, software is the only deflationary force.”

Like Alphabet, Microsoft also suspended all services and sales in Russia in March. But Russia represented a smaller share (less than 1 percent) of Microsoft’s total business. The company expects that the war in Ukraine will reduce its revenue in the next quarter by $ 110 million, or 0.2 percent of the total.

Inflation and the war in Ukraine take a toll on large technology companies that rely on advertising

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