The Bull Case on Google Explained: Mobile Isn’t the Problem – It’s the Opportunity
What’s wrong with Google’s (GOOG) ad business? It looks like something serious, considering that reports about it in October set off a sustained share price drop and at least three downgrades on the shares, marring what had been a lovely stock chart. But perhaps this is a bit short-sighted. What if what’s wrong with Google’s ad business now is merely the same thing that was “wrong” with it in 2004, just before its shares started a short 550% march up?
The problem, then and now, is the price of a Google ad. Google’s revenue from ad sales on smartphones and tablets are growing fast. And advertisers generally pay less than half as much for a Google ad accessed on a mobile device as they do for something searched from a plugged-in PC.
It’s the sort of platform disrespect Google experienced when it first went public with the business model. A decade ago, respectable companies put their marketing dollars into newspapers and magazines, not websites and search pages where ads were still viewed as a bit sketchy. As the Internet quickly caught on and Google perfected its effectiveness as an ad vehicle, its average ad rates rose quickly. As a result, so did its profit margins.
That is, margins rose until another new platform came along. That profit margin decline in 2012 is the result of gazillions of Google users stepping away from their PCs. The rising percentage of Google’s business on margin-sucking smartphones and tablets was a big reason its average cost per click for an ad shot down about 8% year over year.
Advertisers still command discount prices on mobile devices simply because technology limitations make those ads less effective than those that appear in desktop searches. On desktops, Google collects data that let it customize search results, like new car ad specials for the person who has been frequenting car review sites, or baby stuff for someone suddenly searching maternity clothes. Since most Google advertisers pay only when a searcher actually clicks on his ad, this sort of customization is key to Google’s bottom line. For a lot of reasons, no company reliant on Internet ads has yet found an acceptable way to collect as much click-predicting data from mobile searches.
Nevertheless, the transition from PC to mobile has created one of the fastest growing industries since Google 1. Worldwide sales of mobile devices will outstrip PCs in a matter of months, as they already have in India. Billions of dumb phone users are expected to switch over to Google-enabled smartphones in the next few years. Google’s traffic numbers already attest to a future with much more overall business. Last quarter’s actual number of paid clicks were up 33% over the number a year earlier.
It’s a safe assumption that Google’s ad prices will rise as more users come onto the mobile platform and Google learns better how to perfect ads there. In other words, we have seen this story before. If it ends only half as well, we’ll all be pretty happy.
Dee Gill, a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.