Venture Bytes #34 - Google Misfires

Google MisfiresGoogle has been under siege lately over YouTube ads that started appearing before objectionable videos promoting extremism and racism. The company had issued a statement saying that it was taking corrective action, including updating its ad policies and expanding safeguards for advertisers. But a few days later, the Wall Street Journal found advertisements from major brands still appearing with the hateful videos. This revelation led the major brands, including Coca Cola, PepsiCo, Wal-Mart, DISH Network, Starbucks, GM, and FX Networks to run for the exit – at least for the time being.The advertisement being viewed on content that does not align with the company’s values is only the beginning of the problem. The advertiser pays a fee that is split between Google and the creator of the video the advertisement aired on. This means that not only is the advertisement being viewed alongside content that might be racist or extremist, but also that the advertiser is effectively paying the producer of the objectionable content as well.Google’s market capitalization took it on the chin. It was down over $30 billion in the first few days after the crisis and is still below its pre-crisis level. The lost revenue as a result of companies pulling their ads from YouTube is estimated to breach $750 million, according to analysts, if not addressed satisfactorily. The negative reaction of advertisers is understandable. Business’s most valuable asset is its good name, its brand and reputation. In a survey jointly conducted by the World Economic Forum and the Fleishman-Hillard public relations firm released a few years back, three-fifths of chief executives said they believed corporate brand and reputation represented more than 40% of their company’s market capitalization. This is all the more important for consumer brands. That said, the key question to ask is will advertisers stay off the Google platform for good? Alternatively, was this an obligatory PR-driven reaction only to return when the dust settles? We believe the latter is more likely. YouTube is an immensely valuable platform for advertisers. In a world consumed by 5-10 second videos, YouTube is one of the few remaining places that offers ad space where viewers are going to watch longer-form videos and you can put a 30- second un-skippable, highly targeted ad in front of it. Even the average mobile viewing session lasts more than 40 minutes. Think of the other major long-form video platforms out there – Amazon and Netflix do not run ads and Vimeo’s following pales in comparison to YouTube.YouTube has a key advantage over network television: targeting rather than merely searching for a broad demographic, so you can search for exactly what something is thinking about and looking for in that very moment. Searches are highly targetable allowing a manufacturer, for instance, to pick the right audience for its video – GM can air new car ads on “how-to repair videos” for older car models. This targeting feature does cost more for advertisers however, and it was the more broad-based less targeted ads that found their way to objectionable content.This value proposition for advertisers is too good to pass up. While advertisers are leaving the platform in the short-term, we believe they will return very quickly. The Guardian – the news site that first spotted the improper ad placements and pulled its ads from both Google and YouTube - said it is “very likely” to reinstate search ads soon.A Stumble or a Fall?Tech companies have had no shortage of fumbles lately. Uber has been the brunt of many negative stories of late, from the sexual harassment allegations to CEO Travis Kalanick arguing with an Uber driver about company policies, to the company halting and later re-starting its self-driving car project after one of its cars was struck in an accident and flipped. Google has also been in the news lately due to its advertising scandal. Facebook has been the subject of much scrutiny with the rise of concerns regarding the spread of “fake news”, in addition to users live streaming graphic content related to violent crimes with the rollout of its live sharing features. While all these companies will likely bounce back from their fumbles, another company is about to get its shot at redemption, but it might not be as easy.This past summer, Samsung released its Galaxy Note 7 “phablet”, its latest top-of-the-line smartphone designed to compete with Apple’s iPhone 7 Plus. The phone was released with much promise and broke South Korean preorder records. Shortly after release however, a flaw with the phone’s design was discovered - customer’s batteries were overheating and exploding. Samsung issued a recall and replaced all the batteries, but even the new batteries began to smoke and explode. Samsung was forced to recall all the phones, with carriers exchanging the phone for other phones and even putting out an update that “bricked” any of the phones that weren’t turned in, making them nonfunctional.Samsung introduced its new flagship phone yesterday, the Samsung Galaxy S8. This begs the question, is forgiveness in consumer electronics hardware as flexible as it is with software companies? While consumers are quick to forgive Uber for a rogue incident of surge pricing, is it different when a $600+ phone is known to have exploded multiple times? In the eye of the public, perhaps there is a perception that hardware should be held to a higher standard – the product tends to be more expensive, thus putting a greater emphasis on quality assurance, and the products must go through numerous regulatory approvals before they can be released. Or perhaps, we are just being too trustworthy? Simply because it is something we can touch and feel and it has a bunch of regulatory approval logos on the back, does it mean everything is kosher, from the battery, to the radio waves emitted from the handset?Regardless, what is certain is that Samsung has zero margin of error with the Galaxy S8. Every incident of an overheating battery (as happens in isolated cases with every phone) is going to be scrutinized. A sizable number of loyal Samsung customers switched to other devices already following the incident. Early reviews of the Samsung S8 are encouraging. The device has enough innovations to pull consumers back into the fold again. But it is still very early and time will tell. The company needs to keep one thing in mind: in the hardware world, you don’t get three strikes before you’re out.