There could be big consequences for Google if YouTube can't get its act together for advertisers (GOOG, GOOGL)

Susan Wojcicki

Despite all of YouTube's popularity, and no matter how much ad money it stuffed into Google's coffers during the past quarter, the site's future is cloudier than ever.

Late Thursday night, CNN published a report that calls into question the effectiveness of YouTube's year-long efforts to remove material that advertisers found objectionable. Representatives for YouTube were not immediately available for comment.

In March 2017, it was reported that ads from Fortune 500 companies were appearing on videos promoting hate speech, terrorism and wild conspiracy theories. In response, YouTube began to rid the site of offensive and disturbing clips.

That was supposed to be the end of the story — but CNN recently found ads on YouTube, paid for by more than 300 companies and government groups, that continue to run alongside unsavory fare. The cable news channel wrote that the videos included such themes as white nationalism, pedophilia, and North Korean propaganda.

Some of the advertisers affected told CNN that they were pulling their ads until YouTube corrected these issues. But that's the big question now: Does YouTube have the ability to police the service? At minimum, can YouTube's managers create a safe haven for advertisers?

If not, the situation could have big implications for Google's parent company Alphabet Inc., and its relationship with Wall Street. Google is considered a growth company but investors want to know where that growth will come from in the future.

It's against this background that Alphabet will announce its latest quarterly earnings on Monday. Analysts expect Alphabet to report first-quarter earnings of $9.33 per share on revenue of $30.3 billion, according to Thomson Reuters.

In search of something new

For some time, the financial world has wondered when one of Alphabet's promising side ventures might develop into another significant source of revenue. One day, even the revenue bonanza known as search advertising will top out, and Google will need something new to bring in the cash.

YouTube is one of the top contenders. The iconic video-sharing service has emerged as one of the must-be places for advertisers seeking to reach the site's gargantuan teen and young-adult audience.

"We continue to believe YouTube is the major growth driver on the ad front," wrote Daniel Ives, head of tech research at market research firm GBH Insights. "This dominant platform now has north of 1.5 billion users watching on average 60 minutes per day."

Since Alphabet doesn't break out YouTube's financial numbers, nobody outside the company knows for sure how much money the video site makes. What we do know is that scaring away large advertisers is unlikely to help.

The regulation factor

Regulators around the world are also wary of the effects that big digital networks are having on society. If YouTube can't sponge the site clean of pedophiles and terrorists, how long will it be before YouTube CEO Susan Wojcicki is forced to follow Mark Zuckerberg to Capitol Hill?

And that's not the end of the bad news. Google, Facebook, and other big tech companies face big regulatory scrutiny in Europe on a range of issues.

One of YouTube's problems there began in 2015 when the European Commission concluded that the financial relationship between content creators and services such as YouTube was too one sided. The unit of the European Union that proposes legislation and enacts them if they become law, said copyright rules need to be "modernized" so creators can negotiate better deals with YouTube-esque platforms. Since then, the commission has tried to get proposals passed that ensures YouTube pays more to creators.

At the same time, some analysts believe music may be more important to YouTube than ever.

"Google is just starting to tap the potential in YouTube," wrote Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, on his blog. " And if it is able to position it as a competitor to Spotify in music streaming and Netflix in video streaming, it could discover a new source of revenue growth with strong operating margins."

YouTube's longer-term prospects appear to be much rosier. The service has no significant competitors while continuing to add viewers. And Facebook has shown, these regulatory hassles don't seem to drag a stock price down for very long.

On March 16, Facebook's stock was trading at $185 and then plummeted on March 28, during the Cambridge Analytica scandal to $153. But the share price has already begun to recover. On Friday, the stock closed at $166.

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