Google's Future Profits Must Increasingly Depend on Mobile

Search has been such a fat, rich source of profits for Google that it's little wonder the company's domination of the 'space' - if something so essential to modern life can be degraded with such a limited moniker - has engendered resentment across the real and virtual worlds.

But the unpleasant secret which has begun to leak out is that ad rates have begun to decline as the population becomes increasingly mobile, at least as far as its viewing and buying habits are concerned.

The result is that Google and those of its competitors left standing must work harder to solve the puzzle of effective mobile marketing.

The problem is that the companies involved are loath to share data in a market where data is literally money. But without comparables and more scalable solutions, advertisers are proving notably reluctant to increase their spending. Until, that is, they are given more assurance that their investment is generating the kind of return that their own investors expect. It is a knotty problem because the solution is not solely in Google's hands and requires cooperation from competitors who are loathe to do anything to enhance Google's current advantage.

Control sure 't what it used to be. JL

 Conor Dougherty reports in the New York Times:

Google has seen an effective drop in ad prices.Over the past year it has spent considerable effort trying to persuade advertisers to buy more mobile ads in hopes that this will raise ad prices toward the plum levels to which it has become accustomed.

Over the last three months Google has, among other things, announced a project to deliver packages with drone aircraft and acquired a maker of high-tech utensils for people with hand tremors. But when the company reports its third-quarter earnings on Thursday, people will forget about the “moonshots” and remember that Google is a company that sells ads.

To that end, investors are mostly smitten. Google has grown around 20 percent a year like clockwork, which, given that it is on pace to make something like $60 billion in revenue over the next year, is quite a feat.

But there is one longstanding problem investors will be sure to pick over when the numbers are released. As people spend more time with mobile phones, where advertising has been less lucrative, Google has seen an effective drop in ad prices.

Nobody would accuse Google of letting mobile pass it by. The company has moved well beyond its roots in desktop search to just about every kind of screen, including the billion people using its Android mobile devices. But over the past year it has spent considerable effort trying to persuade advertisers to buy more mobile ads in hopes that this will raise ad prices toward the plum levels to which it has become accustomed.

Google has moved well beyond its roots in desktop search to just about every kind of screen. Its Google Now service provides information to smartphone users based on their location, habits and preferences. 

“They are pulling the advertisers into the mobile world that is passing them by, because users are already there,” said Ginny Marvin, of Search Engine Land, a website that closely follows Google and other search engines.

It’s not that advertisers are shunning mobile. Over the last two years the share of ad dollars spent on mobile devices has roughly tripled, becoming 11.4 percent of the total United States advertising market, according to eMarketer.

The problem is that consumers have moved even faster: They now spend close to a quarter of their time on mobile phones — this excludes the time they spend actually talking on them — which is enough to forget certain life skills, like how to navigate a crowded sidewalk.

To give a sense of how fast things are moving, just two years ago, in 2012, people spent only 14 percent of their time on a mobile phone, and advertisers spent around 3 percent of their dollars there.

If mobile advertising is going to catch up with Google’s dominant business in desktop search, which still accounts for a majority of its revenue, according to analyst estimates, then Google will have to bend that curve.

Google does not disclose how much money it makes on mobile advertising versus desktop, but for the past several quarters its “cost per click” — how much it is paid, on average, each time it entices a user to click on its advertisers’ ads — has been falling. Mobile is a primary culprit.

“Brands have been playing catch-up with mobile,” said Jeremy Hull, a director at iProspect, a digital marketing agency that places ads for companies.

Google sells search ads through a complicated auction process, so it cannot just raise prices. Rather, it needs advertisers to bid against one another more fervently, so that they raise prices on themselves.

To that end, Google has spent much of the past year trying to nudge advertisers toward mobile, by overhauling how the company sells and displays ads.

Last year, for instance, the company introduced “enhanced campaigns,” which, depending on your point of view, either encouraged or forced advertisers to think about mobile by having them bid on ads across several devices at once instead of creating different campaigns for different devices.

“Google is saying ‘O.K., you guys, somebody is on the phone a block from your store and you’re telling them about shopping online?’” said Ms. Marvin, of Search Engine Land.

Also, like any good salesman, Google has been supplying advertisers with reams of new features and data that it hopes will convince them that their ads are working. Central to this effort was last year’s “estimated total conversions” program, which tries to show advertisers how users are moving seamlessly between devices — in other words, that they may search for something on a phone and then buy it an hour later on a desktop.

The program has been augmented several times over the past year, but the overarching idea is to show advertisers that even if their mobile ads do not “convert” right away, meaning that viewers do not buy something, the ads might still be effective, since many people come back to buy later on a different device, or use the ad to make a phone call, or buy something at an actual store.

Is any of this enough to arrest Google’s decline in cost per click? Mark Mahaney, an analyst at RBC Capital Markets, says it might be.

One circumstantial piece of evidence he points to: Last quarter the company started breaking out price trends for ads on Google’s own sites, like its search engine, versus the ads it places on other sites. That data, previously unavailable to investors, shows the decline in cost per click has slowed on sites Google owns.

Mr. Mahaney’s theory is that Google is being more forthcoming with investors because it thinks those trends will continue to be flattering.

Even if Google turns a corner on ad prices, its profit margins are expected to be down, as the company is spending heavily on infrastructure like computer servers while investing in areas such as satellites, biotechnology and driverless cars. And while it is making more money outside of advertising — for example, by selling services to businesses through its Google for Work unit — this has not been as lucrative as its core business selling search ads, Mr. Mahaney said.

Google does not break out revenue for YouTube, but analysts believe it will continue to be a lucrative source of growth. This spring, for instance, Google created Google Preferred, a bid to grab TV advertising dollars by setting aside the top 5 percent of YouTube’s video channels and guaranteeing the ability to reach certain demographics, similar to the way brands buy television commercials.