AmTech’s Rob Sanderson writes a careful, impassioned analysis of why Google’s plummeting paid click growth (GOOG) may not actually clobber the company’s revenue. We think he’s right to some extent: The click quality improvements will boost advertiser ROI and, thereby, keyword pricing. But we would be surprised to see Google emerge from this quarter completely unscathed.
The primary source of concern specific to GOOG has been a deceleration in paid click growth. This concern is magnified by comScore data, which suggests that paid click growth (in the U.S. ) has completely stalled and is basically flat year-year. We doubt the comScore sample accurately reflects the absolute click-through rate for GOOG, but the direction is probably right.
While most analysts and investors agree that quality improvements will bring along price improvements, there is concern about magnitude and timing. We believe that higher prices will completely offset lower volumes and that the timing will be immediate.
Rob then walks through an example that illustrates his point. He argues that, as click quality improves (searchers click only on links that they are REALLY interested in), keyword pricing will move higher. Importantly, he says, this impact will be immediate (most analysts assume it will be delayed, as advertisers adjust). He also notes, intelligently, that Google is not run by a bunch of morons.
As evidence, Rob shows the click-price dynamic in Q4, in which click growth slowed, but prices jumped rapidly:
The price paid per click will move higher to reflect the same economic value to the merchant. We believe the primary controversy related to the decline in paid click growth (and on GOOG stock) is how quickly will quality improvements lead to price improvements? We believe this move will be close to immediate. There are two reasons why we make this claim: 1) GOOG is an efficient marketplace – there are hundreds of thousands of advertisers that bid on Google keywords and 2) improvements in conversion rates and ROI are measureable – this is the mantra of GOOG. We also believe that GOOG management knows what they are doing and would not intentionally slow revenue growth.
Empirical evidence that price increase is fairly immediate: In addition to the intuitive sense of the discussion, Q4 results provide empirical evidence that the auction will fairly immediately bid up price. GOOG reports growth in paid clicks. Estimating relative price change is a simple calculation. The graphic below shows that growth revenue per click is nearly a mirror-image to growth in paid clicks reported by GOOG.
GOOG: Growth in Paid Click Volume vs. Price
Rob then concludes by discussing a “second-order effect,” in which merchants realise that their Google spending is getting more efficient and, therefore, allocate more spending to Google. This, too, makes sense, at least to some extent.
We think Rob’s argument is basically right–which is why we’re not expecting Google to have flat U.S. revenue in Q1. We would still be surprised to see the company post a gangbuster quarter, however, at least relative to the consensus that existed before analysts began cutting estimates.
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