Google's Ad Revenue Rises in Q4 2015 Despite Continued Price Decline

Once Again YouTube Gets the Blame for Price Decline

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Credit: Courtesy Google

Another quarter, another three-month period in which Google made less money per ad, on average, than a year ago but was able to sell more of them to increase its advertising revenue by a double-digit percentage.

Continuing a trend that started in the fourth quarter of 2011, the average price brands pay when someone clicks on one the ads they bought from Google declined year-over-year in the fourth quarter of 2015, this time by 13%. But Google was able to get people to click on 31% more ads than a year ago, sending its total advertising revenue up by 17% to hit $19.1 billion. Overall the search giant generated $21.2 billion in total revenue, up 18%. year-over-year.

It's almost as if it doesn't matter whether Google's ad prices go down ad infinitum because it doesn't appear to affect its ad revenue. Consider Google's third-party ad business, in which the company sells ads on other publishers' sites and apps. In the second and third quarters of 2015, that business registered year-over-year declines in the number of ad clicks and average price per click, yet it still recorded a year-over-year increase in revenue.

The number of ads people clicked on and the price that advertisers pay for each click don't likely paint a clear picture of Google's ad business because Google's ad business is no longer oriented around selling ads that people click on. Originally Google catered to direct-response advertisers that were looking to pay for people to click on their ads in order to visit their sites, but in recent years the company has been courting brand advertisers who primarily care that people saw their ads and pay for every thousand times their ads were served, regardless of whether anyone clicked on them. But Google only breaks down its ads based on the number of clicks and the average cost-per-click.

Those click-based ads -- which include its search ads and YouTube's skippable TrueView ads -- are still very important to Google's ad business and likely account for a large, if not majority, share of the ads it runs and money it makes. But without seeing the other side of its ad business, such as the impression-based display ads it runs on third-party sites or unskippable pre-rolls ads on YouTube, it's hard to gauge what the volume and pricing trends that Google reports actually say about its business.

Having said all that, here's what Google CFO Ruth Porat had to say about its click-based ad formats and advertising businesses in general during the company's earnings call on Monday afternoon.

Mobile search ads were once responsible for its cost-per-click declines, but now the increase in revenue from ads running on Google's own properties "reflects substantial strength in mobile search." Once again YouTube's skippable TrueView ads -- which count as clicks when someone doesn't skip the ad -- took the blame for the cost-per-click decline, Mr. Porat said, though she said that YouTube revenue "continues to grow at a very significant rate." The same could be said of Google's properties as a whole.

Google's own properties are its breadwinner. Not only do they bring in more money than the third-party publishers, but they're increasing the amount of money they bring in more than the third-party publishers are.

On the flip side, Google's third-party ad business appears to be rebounding after two quarters in which it saw declines in both the numbers of ads people clicked on and the average price advertisers paid for each of those clicks. In the fourth quarter of 2015, advertisers paid, on average, 8% less money for each ad click, but people clicked on 2% more ads. Ms. Porat attributed the third-party ad business' revenue growth to the "growth of programmatic offset by the traditional network businesses."

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