Google Offers New Details on Ad Biz in Second-Quarter Earnings

Google's Business Chief Nikesh Arora to Depart

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Google offered the most detailed look ever at its multi-billion advertising business on Thursday, finally breaking out data on its own sites from data on affiliated sites following 10 quarters in a row of ad-price declines.

Google also said Thursday that its chief business officer, Nikesh Arora, is leaving the company to join telecom giant SoftBank as vice chairman and CEO of its internet and media business. Mr. Arora has worked at Google for nearly 10 years and oversaw its advertising business among other revenue segments.

But Google's advertising goose remains golden, it was clear as the company released financial results for the second quarter of 2014. The search giant generated $14.4 billion in ad revenue during the quarter, it said, up 19% from the equivalent period last year. That propelled the company's overall revenue to a 22% year-over-year increase, for a total of $16 billion, more than analysts had expected.

Rosy as Google's ad revenue has been, however, the business's underlying numbers have given investors cause for concern. For each period since the fourth quarter of 2011, Google has recorded fewer dollars on average for each ad a person clicks.

The declines are rooted in rising clicks on mobile devices, where advertisers aren't willing to pay as much. Google has tried to remedy matters, instituting an ad-buying process in February 2013 called Enhanced Campaigns, which tethers an advertiser's mobile ad price to its higher desktop rate. But that has yet to return ad prices to growth, leaving the company dependent on running more ads to expand ad revenue.

In the past it has been difficult to determine how much blame to put on Google, as opposed to the network of third-party sites on which it serves ads. Ads on Google's own sites regularly contribute roughly three-quarters of the company's ad revenue, with the remainder coming from its network.

And ad revenue growth from Google's own sites has risen with each quarter since the second half of 2012 while network ad revenue growth has slowed. That has led some to question whether network sites have become a dead weight on Google's ad prices.

Following the lengthy run of consecutive ad-price declines, on Thursday Google finally broke out separate ad price and ad volume growth rates for its own sites and network sites. And it does look like the network sites aren't performing as well as Google's own.

The number of paid clicks on ads on Google's own sites -- which includes search ads and YouTube's skippable TrueView ads -- increased by 33% in the quarter, compared with a year earlier. The average cost-per-click on those ads fell by 7% year-over-year.

The number of paid clicks on ads served on non-Google sites, by comparison, increased by 9%. And the average cost-per-click on those ads fell by 13% year-over-year.

Advertising should remain Google's cash cow for the foreseeable future. But the company has steadily diversified its business line beyond Madison Avenue. Google also makes money from digital-media sales through its Google Play store and hardware sales of Google-built devices, like its Nexus line of smartphones and tablets and Chromecast streaming-media dongle. That percentage of non-advertising revenue continues to climb.

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