Google Ad Revenue Climbs; Once Again Blames YouTube for Ad-Price Declines

Company's Total Revenue Rises by 11% to $17.7 Billion

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Google's quarterly earnings reports have been a broken record since the fourth quarter of 2011. For fifteen straight quarters heading into the second quarter of 2015, Google has increased the amount of money it makes from advertising and the number of ads it sells despite making less money on average per ad.

Nothing changed when Google posted its second-quarter earnings on Tuesday, even though the company has tried to reverse its ad-price declines and until this year seemed close to success.

Google has lately blamed its ad price declines on YouTube's skippable TrueView ads that it says don't bring in as much money as search ads, and once again faulted those ads for the latest quarter's ad-price declines.

Cost-per-click (CPC) "pricing on YouTube for TrueView lower than CPC pricing on desktop and mobile, but YouTube TrueView ads represented a larger percentage of overall clicks," Google CFO Ruth Porat said during the company's earnings call on Thursday. That indicates that people are watching more ads on YouTube, but YouTube hasn't found a way to get brands to pay as much for those ads as they do for Google's search ads.

Despite YouTube's lower ad rates, the video service that counts more than 1 billion monthly viewers appears to be more popular than ever.

Ms. Porat said people are spending more than 60% more time watching videos on YouTube than they did a year ago, and Google's chief business officer Omid Kordestani said that YouTube's average mobile viewing session lasts more than 40 minutes on average, a more than 50% increase year-over-year.

In addition to YouTube's relatively lower ad prices that are dragging down the average amount advertisers pay per ad click, Google must still deal with marketers who aren't sure how much money Google's search ads merit today, especially as more people are coming across those ads on their smartphones.

Weighing down marketers' willingness to pony up for Google's mobile search ads is the difficulty in being able to attribute ad clicks to product purchases, according to 360i chairman Bryan Wiener. There are two reasons for that. One, people may be searching while on the go and buy the product from a brick-and-mortar store as opposed to an e-commerce site where it would be easier to trace the path to purchase. Two, "generally the average order size is smaller on mobile than desktop," Mr. Wiener said, which means that brands are trying to keep the size of their search ad investments in proportion to the return they can expect on those investments.

Google has tried to stanch the price bleeding for years. In 2013 the company introduced a program called Enhanced Campaigns for its basic search-and-display ads that asks marketers how much they're willing to pay for a desktop ad and then what percentage of that price they're willing to pay for the mobile version; the idea being that by tethering the two rates, the traditionally higher desktop prices would buoy the lower mobile prices.

"We continue to close the gap between mobile and desktop search monetization," Ms. Porat said during the company's earnings call on Thursday. She later said that Google's mobile ad prices are actually growing year-over-year and its desktop ad rates are "not declining."

Earlier this year Google changed its search-ranking algorithm to favor mobile-friendly sites. Google's hope appeared to be that giving people a better experience when they're searching on their smartphones would lead them click on more results and spend more time on the sites they click on, be it a publisher's site carrying Google banner ads or an e-commerce site selling the product promoted in a Google search ad.

And recently Google rolled out an ability to estimate to what extent brands' desktop and mobile ads lead to conversions, such as store visits or product purchases.

But the continued price declines for ads run on Google's own sites indicate that mobilegeddon and Enhanced Campaigns haven't been enough to compensate for an influx of YouTube's lower-priced TrueView video ads that then-CFO Patrick Pichette blamed for the company's ad price declines in the first quarter of 2015. As noted above, Ms. Porat pointed to YouTube as the reason for the increasing number of clicks on Google's ads and declining amount of money Google makes per ad click.

Google had seen price increases for the ads it sells on others' sites in the two periods heading into the second quarter, but the average cost-per-click for those ads fell in the second quarter, as did the number of times people clicked on them, which Ms. Porat attributed to Google reducing the amount low quality inventory in its display ad network.

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