Google's ad business has matured into its awkward adolescent years, its latest results showed again Thursday.
The search giant's old friends -- direct-response advertisers -- have been around long enough to know how much they want to spend with Google and how to counter the company's efforts to get them to spend more, especially for mobile ads. And its new friends -- brand advertisers -- are still figuring things out.
As a result, even though Google's ad revenue totaled $14.1 billion in the fourth quarter of 2013, up 17% from the previous year, that growth seems to have stemmed from people clicking on more ads, not advertisers paying more for each ad.
The number of ad clicks jumped by 31% year-over-year, while the average amount of money Google makes per click fell by 11%. This has been the trend since the last quarter of 2011; the third quarter of that year was the last period when Google recorded a year-over-year increase in the average price-per-click.
Google has been trying to turn the price slide around. Since more people were being exposed to Google's ads on mobile devices and advertisers weren't willing to pay as much for those mobile ads, last February Google introduced a program called Enhanced Campaigns that forced advertisers to set their mobile prices in proportion to the traditionally higher desktop rates, in theory pulling mobile upward. A year later, it's hard to say whether that program is working as intended.
"Enhanced Campaigns accomplished [Google's] primary goal of opting in more marketers to mobile search," said Jared Belsky, president at 360i, the digital agency owned by Dentsu. "However their earnings would suggest that possibly the most sophisticated marketers have found smart algorithmic workarounds, which has countered the fears of runaway [price] inflation."
There are two ways to read this. On the one hand, Google is getting more advertisers to buy ads (or getting the same advertisers to buy more ads). So that's good. On the other hand, those advertisers are finding ways to underpay for those ads. That's not so good.
But the underlying issue is that Google can't rely on its longtime advertisers for big-time future revenue growth. That's seen too with Google Shopping, where Google charges companies to promote their products with placements now called Product Listing Ads. Mr. Belsky had expected those ads to result in incremental spending increases. That would be particularly welcome at Google because those ads typically cost more than standard search ads and would receive extra attention during the retail frenzy in the fourth quarter of each year. Instead "we've seen a significant level of cost-shifting," he said, meaning the Product Listings Ads are siphoning budget from traditional search campaigns.
That's far from saying the sky is falling on Google. "We're still in the very early days of how much advertising [dollars] will move over to digital media," said Google's chief business officer, Nikesh Arora, during the company's earnings call on Thursday.
Mr. Belsky suggested that the company is in the middle of a longer-term game. "I think that the analyst community continues to hang on every word about [Google's cost-per-click declines]. The forward-looking story is about the adoption of additional Google advertising products and a better uptick in brand advertising dollars," he said, noting new inventory Google has opened up in areas such as Gmail.
Hunting for brand ads
Google has been trying to attract brand advertisers for a couple years, though that push has gotten particularly aggressive of late. It has begun appending large banner-sized images to some search ads, for example, in executions that recall the look of a home-page takeover. These types of more visual ads stand to appeal to big-spending brand advertisers, like film studios and consumer packaged-goods companies, that are more concerned with eyeballs than clicks.
"For Google to grow, it can't just be CPCs. They have to bring in [advertiser] categories that are slightly unrepresented," Mr. Belsky said.
YouTube is one way to attract those advertisers. Google doesn't break out YouTube's revenue -- though eMarketer has pegged the 2013 figure at $5.6 billion -- but Mr. Arora pointed to YouTube as a primary property for brand advertisers within Google's portfolio. He indicated that the move late last year to sell YouTube ads according to Nielsen's Online Campaign Ratings should spur more brand ad spending. "We are seeing measurement as table stakes for brand advertisers because they want to understand what is the return of their brand spend," Mr. Arora said.
To say it again, Google isn't in any immediate danger. Excluding the Motorola Mobility hardware business -- which Google excluded permanently on Wednesday by selling the division it bought for $12.5 billion to Lenovo for $2.91 billion -- Google's fourth-quarter revenue grew by 22% to $15.7 billion. Net income hit $3.4 billion.
And Google's non-advertising business continues its steep rise, growing by 99% year-over-year to $1.65 billion in revenue. That fledgling division -- which includes the company's cut from movie rentals or app purchases through Google Play and the sale of hardware like Chromebooks and streaming media dongle Chromecast -- only accounts for 10% of Google's core revenue, but was only 6% a year ago and stands to grow when pricier products like Google Glass and potentially self-driving cars come to market. That would ease Google's reliance on advertising dollars and relieve the concerns about pricing at the forefront today.