Will Ebiefung

About the Author Will Ebiefung

Will Ebiefung studied finance and accounting at the University of Tennesee. He works as a freelance investment analyst focusing on equities with market caps below $100 million. In addition to writing, Will is a full-time investor focusing on web properties and debt-based securities.

Alphabet Inc’s (GOOGL) Google Is in a Tough Spot


Image result for google "female employees"

Tech giant Google, a subsidiary of Alphabet Inc (NASDAQ:GOOGL), is in a public relations nightmare. And this problem will be expensive to fix. Out of the blue, the Department of Labor has accused Google of what it calls ‘systematic compensation disparities‘ in regards to gender. The government thinks Google is underpaying female employees.

Google, on the other hand, vehemently disagrees. A spokeswoman for the company calls the DOL’s accusation unfounded and explains the company’s ‘gender-blind’ approach to determining employee compensation. She makes a strong point. At Google, the people in charge of employee pay don’t even have access to demographic information. But regardless of what is actually going on at Google, the damage has been done. The company sustains another reputational hit and may be forced to settle out of court to prevent a costly and embarrassing lawsuit from harming its reputation and scaring away talent. But this latest scandal only tips the iceberg of Google’s problems.

The YouTube Problem has no Clear Solution

Google is still dealing with the fallout from its YouTube controversy. Billions of advertisement dollars have fled the platform after fears of brand damage from corporate ads being shown in front of YouTube’s often questionable content. Unfortunately for Google, this problem has no easy solution. In fact, trying to solve the problem may be so expensive that it negates the financial benefit of solving it. Google doesn’t release much information on the matter, but according to Anne Wojcicki, there is no timetable for profitability on the site.

Despite having a billion monthly users – a third of all internet users – YouTube may still burn cash. Google suggests the cash burn is because of re-investment into the site, but it probably has more to do with operating costs. YouTube’s costs seem to be already too high for the site to be profitable, and attempting to ‘clean up’ content will put a further strain on margins and perhaps make profitability impossible. Google is in a tough spot for four reasons.

  1. Manually censoring YouTube videos is prohibitively expensive due to the sheer volume of content uploaded to the site every minute. Artificial intelligence has come a long way, but expecting machines to be able to detect ‘offensive’ content may be a stretch.
  2. If keywords are used to identify questionable content, content creators will simply use code-words to bypass the sensor. Many are already doing this.
  3. Relying on user reports, the traditional method of identifying questionable content is the cheapest but most flawed solution to YouTube’s problem. Ideological bias influences reporters. Users are already organizing mass reports to get rid of content creators they don’t like.
  4. Youtube has demonetized thousands of videos and recently increased the minimum channel views eligible for ads. This and all the other strategies alienates and discourages content creators, potentially driving them to competitors.

Conclusion

Google is having a tough time in 2017 in the face of a potential government lawsuit over gender discrimination and the hard to solve the problem of questionable content on its YouTube platform. These headwinds suggest significant downside in the stock for the coming months. YouTube is probably still losing money, and most of Google’s plans for making the site more advertiser-friendly may increase operating costs so much that profitability will never come.

Google needs to take a step back and reassess it monetization strategy for YouTube. Attempting to censor such a large amount of content is impossible. In my opinion, the most effective way to solve YouTube’s problem will be to hand-pick ‘clean’ content creators from the largest channels and offer ads on these channels as a premium offering for reputation-sensitive advertisers.

 

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