Google earnings fall on lower ad sales

This is an audio transcript of the FT News Briefing podcast episode: ‘Google earnings fall on lower ad sales’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, October 26th, and this is your FT News Briefing.

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Two tech titans reported earnings yesterday and things didn’t look good. The European Central Bank is set to start chipping away at its balance sheet. Plus, the US Supreme Court will decide on several cases that could change the landscape for businesses. I’m Marc Filippino, and here’s the news you need to start your day.

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Microsoft and Google reported third-quarter earnings yesterday. Microsoft beat analysts' expectations thanks to solid demand for its cloud computing services. Google missed the mark. Its parent company, Alphabet, reported yet another quarter of slowing revenue growth, in part due to lower ad sales at YouTube. Our west coast editor Richard Waters has more.

Richard Waters
Google is really a barometer now for the advertising industry. They make up such a large portion of digital advertising, and digital advertising is more than half of global advertising. YouTube advertising fell for the first time that Google reported separately for that business. And search advertising, which, you know, we’ve all become accustomed to seeing as one of the great, resilient businesses — even search advertising is disappointing. It only came in something like 4 per cent growth. I mean, this is a dramatic slowdown across Google’s businesses. I think it’ll send reverberations across the advertising industry.

Marc Filippino
Now, what does this tell you about the broader economy, Richard?

Richard Waters
Now, advertising pretty much moves in line with consumer demand. It isn’t a leading indicator, I mean, essentially. Advertisers, and as long as people are buying, they’ll be out placing adverts, you know, driving revenue. So as soon as we see advertising slow down or fall off of that, it’s a real sign, I think, that, you know, underlying consumer demand is softer. And, you know, Google is so big now that I think it really will be something that people across the economy look at.

Marc Filippino
How badly was Microsoft hit by the slowing economy? I know that their forecast for the rest of the year didn’t look particularly pretty.

Richard Waters
So PC sales have really fallen off a cliff in the last three months. You know, Microsoft is not immune. The good news, though, and I think this is, you know, applies to Google as well, is that these companies now are like supertankers. They dominate. Microsoft makes more money now from cloud computing, from all the things you do online rather than on the software running on your PC. And so that was enough to bail it out and it still grew 11 per cent, you know, which is incredible for a company of this scale.

Marc Filippino
Richard Waters is the FT’s west coast editor. He covers all things tech.

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The European Central Bank is expected to start shrinking its balance sheet. It’s a big deal because for the past eight years it’s been buying bonds. That was part of a stimulus strategy that quadrupled the central bank’s assets to nearly €9tn. Shrinking the balance sheet would amplify the ECB’s efforts to remove its stimulus measures and to cool off inflation. Last month, annual inflation in the eurozone rose at a record pace of 9.9 per cent. The ECB’s governing council meets on Thursday. It’s also expected to raise interest rates by three-quarters of a percentage point.

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The US Supreme Court has started a new term. On its docket are several cases that could have far-reaching effects on corporations. To talk more about this, I’m joined by the FT’s legal and enforcement correspondent, Stefania Palma. Hi, Stefania.

Stefania Palma
Hi, Marc.

Marc Filippino
How much impact does the US Supreme Court have on corporations and the way that they do business and their profits? Like, just give us the lowdown.

Stefania Palma
So historically, the Supreme Court case has had enormous impact on US companies and companies just doing business in the country, whether it be big antitrust cases or cases that brought about big decisions in intellectual property or perhaps even, you know, big class actions making their way up to the Supreme Court. So in terms of the level of impact, it’s, it can be significant for sure.

Marc Filippino
Now, in an article that you recently wrote, you laid out the big, the big cases involving business that the Supreme Court is going to tackle this season. What’s one that you really have your eye on?

Stefania Palma
There’s one case in particular that I think might be a bit under the radar. It’s one that is called Mallory versus Norfolk Southern Railway. And the whole sort of case is about an employee that is suing the company for alleged negligent behaviour. But the crux of the matter is where it is suing the company. So the company is headquartered in Virginia. The claim unfolded essentially where the worker worked, was sort of active for the company, which was in Ohio and Virginia. But he is actually suing the firm in Pennsylvania where the company just has a business licence. So if the court broadly rules in favour of the worker, this could completely upend a longstanding precedent around where companies can be sued. Essentially up until now, normally companies are largely sued either where they are headquartered or where they are incorporated. If the worker were to be successful in this case, it could open up the possibility for companies to be sued, even purely where they just have a business licence, irrespective of where the claim actually unfolds.

Marc Filippino
So another case that’s caught my eye, Stefania, is called Gonzalez versus Google. This looks at how liable social media companies are for content. What’s at stake in this decision?

Stefania Palma
So currently, online platforms are protected by US law from legal liability when it comes to the content that is posted by its own users. In this case, the question is whether this protection still stands, when we are talking about recommended videos that are published by a terrorist organisation and that could have radicalising effects. This is all tied into essentially the murder of an American student that was killed by Isis back in 2015. This could have enormous, obviously, ramifications for online social media companies, but businesses more broadly are taking a very close look in case the justices do opt for a broader ruling that hits businesses that are not what we think of as conventional social media businesses.

Marc Filippino
OK. Take a step back from the cases for a moment and take a look at the court as a whole. It’s conservative-leaning, which means that more judges have been appointed by Republican presidents than Democratic presidents. How could this impact the business cases that we’re talking about here in general?

Stefania Palma
There is actually quite a lot of uncertainty in terms of how this bench would rule when it comes to corporate issues. First of all, because we haven’t really seen this particular mix of justices really take on big business cases so far. Secondly, also because they’ve showed a very strong willingness to completely upend decades-long legal precedents. But also there’s been, I would say, a shift when it comes to the conservative wing of the Supreme Court. If a few decades ago, you could more predictably assume that they would try to further more sort of libertarian values when it came to business in the US, many scholars now point to the fact that that is not necessarily the case. What has driven this particular right-leaning wing has been more issue-based matters.

Marc Filippino
Stefania Palma is the FT’s US legal and enforcement correspondent. Thanks, Stefania.

Stefania Palma
Thank you.

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Marc Filippino
Before we go, I want to tell you about a live FT discussion about China’s Communist party congress. It just wrapped up and there were historic developments. Join FT China journalists Demetri Sevastopulo, Geoff Dyer and Tom Mitchell to talk about what these changes mean for China and the rest of the world. The live event starts today at 12pm London time. Subscribers to FT.com can register for free. We’ve got a link for you in the show notes.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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