Photo: Ken Sena, Evercore.
Google posted a solid quarter yesterday, with the top line meeting expectations and a beat on the bottom line, due to lower-than-expected capital expenditures. The quarter seemed to be mostly well-received, and most of the discussion centered on Google+ and Android.However, buried in the data is an indication that Google’s core business might be slowly eroding.
The problem is cost-per-click (CPC), which is down sharply: 12% y/y versus Street consensus of 6% (via BarCap’s Anthony J. DiClemente).
Google blamed the decline, writes Evercore’s Ken Sena, on “a combination of factors, including FX, mix effects (mobile vs tablet vs desktop; emerging markets vs developed; Google.com vs network), and quality changes.”
The CPC story is usually spun into a happy one, which is that CPC is trending downward into mobile, but mobile is a huge new growth engine for Google, so even though CPC keeps going down, revenue (and profits) should keep going up as people search ever more on their mobiles.
There’s a problem with that idea, as Henry Blodget wrote last quarter:
Most individuals do not spend more money buying things merely because they can now use the web on their mobile devices.
The commerce searches that generate most of Google’s revenue, in other words, can now be conducted on a mobile device instead of a PC, but this does not mean that they will lead to more spending. It just means that the consumer has more ways to access Google’s search engine.
The reason this is important is that, as was made very clear in this quarter, Google’s revenue is not determined by the number of clicks it gets on its search ads. It is determined by the return-on-investment of Google’s advertisers. And this ROI, in turn, is determined by the amount of money Google searchers spend, not by the number of times they click.
All of which is a long way of saying…
With the exception of mobile searches for local commerce products&mdashcoffee, lunch, etc.—most mobile Google searches probably do not lead to searchers spending more money than they would have if they had only had a PC to search with. Instead, most of these mobile searches are either not commerce searches (weather, contacts, locations, etc.) or are commerce searches that would otherwise have been performed on a PC.
So, unless/until Google invents a huge new commerce search business that is only relevant on mobile devices—a hypothetical product that has been hyped for years (since the mid-1990s), but has never really taken hold—the ROI for mobile search ads is likely to be far lower than it is for PC-based ads.
And that means that analysts who expect the “number of clicks” to drive Google’s revenue going forward are likely looking at this metric the wrong way.
As the chart above from Evercore’s Ken Sena shows, revenue is derived from the total amount advertisers pay, not the number of times users click.
Last quarter, people freaked out because Google missed; this quarter Google delivered a modest beat so people are upbeat, but we have been seeing this CPC effect on mobile for two quarters in a row now.
Therefore, the trend seems to be that unless Google finds a way to monetise local commerce products (as many location-based services are trying to do, as we explore in a recent report), the shift to mobile will probably erode the vitality of Google’s core search business as it dilutes the ROI it delivers over many more searches. (And this is without taking into account the huge TAC costs that Google pays to other mobile platforms like iOS, and will keep paying for a while even if Android ends up dominating mobile, which we don’t think it will.)
This is definitely a trend worth watching more closely.
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