U.K. ad controversy potentially 'big deal' for Google, analyst says

Shares of Alphabet (GOOG) dipped Monday after research firm Pivotal highlighted that the company's recent U.K. advertising controversy could go global, potentially creating a "big deal" for the Internet giant. BACKGROUND: On February 9, Britain's The Times published an investigative report alleging that "some of the world's biggest brands are unwittingly funding Islamic extremists, white supremacists and pornographers" through automated ad placements, particularly in YouTube content. As discussion on the topic grew, French ad agency Havas as well as the British government itself announced plans last week to pause their spending on Google's network. The U.K. Cabinet Office soon confirmed to regional publications that it summoned the company for "discussions," industry group ISBA urged Google to "immediately to review its policies and controls," News Corp (NWS) CEO Robert Thomson called on advertisers to "go back to basics," and McDonald's (MCD) UK and Sainsbury's (JSAIY) joined a growing list of British businesses temporarily halting their spending with Google. GOOGLE RESPONDS: Ronan Harris, managing director of Google U.K., stated in a company blog post Friday that "we can do a better job of addressing the small number of inappropriately monetized videos and content. We've begun a thorough review of our ads policies and brand controls, and we will be making changes in the coming weeks to give brands more control over where their ads appear." Google EMEA boss Matt Brittin built on those comments Monday, using an appearance at this week's Advertising Week Europe 2017 to issue a formal apology to "partners and advertisers who might have been affected by their ads appearing on controversial content," according to media reports of the event. PIVOTAL SEES BRAND RISK: Pivotal Research's Brian Wieser downgraded Google to Hold while dropping his price target to $950 from $970 on Monday, arguing that the Internet titan's advertising blunder could "marginally curtail" growth this year. While conceding that the spending-pause announcements so far represent a "relatively small" subset, the analyst says mushrooming worries surrounding the problem are a "big deal" for Google, as companies wary of even a single mis-branding incident could balk at what he calls an insufficient response from Google. The analyst also notes that Google already faces a "hostile industry" of European media owners who will be "all too happy" to stoke concerns against the latest ad technologies. Arguing that "the problems which have come to light will have global repercussions as U.K. marketers potentially adapt their U.K. policies to other markets and as marketers around the world become more aware of the problem," Wieser believes Google will need to respond with something like a zero tolerance policy to calm the waters. PRICE ACTION: Class A shares of Alphabet are down 0.5% to $868 in afternoon trading.