As Economy Darkens, Google Is Booming

Mobile Becomes a Significant Business With $2.5 Billion Annual Run-Rate

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If we're headed into a second-dip of the recession, no one told Google. The company turned in a 33% surge in revenue in the third quarter on big increases in search, display, and increasingly, mobile advertising.

Larry Page, Google
Larry Page, Google

Google disclosed that mobile revenue--both search and display advertising--is now a $2.5 billion run-rate business, up from $1 billion a year ago. That matches Google's display ad revenue from a year ago; Google didn't provide an update to display advertising this quarter.

Total revenue came in at $9.72 billion, up from $7.29 billion a year ago; net income was reported at $2.73 billion, up from $2.51 billion in the second quarter of 2011 and 26% from a year ago. "When I look back over the last quarter, the word that springs to mind is , 'gangbusters,'" said CEO Larry Page.

Some analysts and investors had projected that performance would be negatively impacted by big acquisitions like the $12.5 billion August purchase of Motorola Mobility, which signified a major foray into hardware. But profits from advertising -- comprising almost the entirety of Google's revenue -- appeared to have remained strong, though the company gives very limited information on how search, display, mobile and video ads perform as separate categories.

But it's clear that Google is becoming successful as a product company in its own right beyond search. Mr. Page led off his remarks touting the progress of Google+, noting that the social network, which launched on June 28, now has 40 million users and 3.4 billion photos uploaded.

However, the company stated that it had 20 million users on Google+ after the first month, so clearly growth is slowing down. Mr. Page emphasized that Google+ was still in "very, very early stages" and had been open to the public for less than a month.

Mr. Page said he was encouraged by the growth of Android, observing there are now 190 million devices activated globally. Similarly, Google's Chrome browser, the focus of its "Better Web" marketing campaign, is up to 200 million global users. "Turns out people really care about getting to the web quickly and securely, and having a whole ecosystem of apps at their fingertips," Mr. Page said.

The company is hiring almost as fast as it is growing. Google made 2,500 new hires in the quarter, bringing its total workforce to 31,353, up from 20,000 a year ago. Mr. Page said Google is also shutting down projects with less potential -- such as SideWiki and FastFlip -- to pour resources into others.

Display ad revenue -- from DoubleClick, YouTube, and Google's ad network and exchange -- is Google's next big source of revenue beyond search, but Google provided few specifics on how its progressing. Google's chief business officer Nikesh Arora did say that the top 20 display buyers on YouTube and Google Display Network are now spending about $15 million each -- up from $2 million in 2009 -- and the company has big display deals with companies like Dreamworks and Disney. He also noted that six-month display deals totaling $600 million are now in place with some agency partners.

When the executives were asked to evaluate individual markets, Mr. Arora said that there was "softness, but not weakness" in Western Europe but declined to elaborate further.

The lion's share of Google's revenue and profits are still in search, and its share of search queries has remained fairly static since dropping from its December 2010 peak of 66.6%, but showed growth in September with a half percentage point gain, bringing it to 65.3%, according to comScore. In an interview, Group M Search CEO Chris Copeland said growth of Google+ and integration of the +1 button could be having a positive impact on query volume.

"The big benefactor of Google+ is going to be Google search," he said.

However, there's more of a consensus around Google's long-term gains in share of paid search spend. According to data from IgnitionOne, an analytics unit of Dentsu's Innovation Interactive, Google's share of paid search has risen from 70% in the first quarter of 2008 to 82% this past quarter. Bing/Yahoo's share was 18.4% and has trended downward for the past three quarters.

Google's strongest competitor, Microsoft's Bing, actually offers a higher rate of return than Google, according to Sid Shah, senior director of business analytics for the search firm Efficient Frontier, but it can't deliver the same high-quality traffic at scale and thus has limited inventory, which has the effect of propping up Google.

"[Bing/Yahoo] has done a good job of being able to raise traffic quality and raise trust with advertisers, but now they have to increase volume, and for the last three quarters they haven't been able to," he said.

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