Google's Non-Ad Revenue Growth Outpaces Ad Biz As Prices Decline

Execs Discuss Google Fiber's TV Potential, Live Sports on YouTube

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Google, the dominant player in search, online display and mobile advertising, is finding a trickle of revenue elsewhere.

Google CEO Larry
Google CEO Larry 

Long criticized as a one-trick pony, Google is learning some new tricks that don't include search or selling ads to Madison Avenue. Advertising used to regularly account for more than 96% of Google's total sales, but that has been slipping over the last year and in the latest period its down to 91% or $12.5 billion of Google's $13.8 billion revenue, which was up 19% year-over-year. That doesn't include its struggling Motorola Mobility mobile phone business.

Google's non-ads business -- 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 -- grew its revenue by 85% to $1.2 billion. By comparison, advertising grew 15%.

Wall Street liked what it saw, and sent the stock up by more than 8% in after-hours trading even though the company's earnings contained blemishes like Motorola. The third quarter marked the first release of Motorola product, the Moto X smartphone, since Google acquired the handset maker in May 2012. Yet Motorola revenues dropped by 33% year-over-year to $1.2 billion, and the division operated on a $248 million loss. Google, meanwhile, beat analysts' estimates with $2.97 billion in net income.

Struggling Motorola
Investors may have overlooked Motorola's shortcomings while eyeing Google's future product lines. Google's non-ads business is poised to signficantly grow in the coming years as Google officially rolls out products currently in testing such as Glass, self-driving cars and Internet connection service Google Fiber. That latter service could become a big business for Google as it could position it to rival big-time cable and Internet providers like Comcast and Time Warner Cable.

"One of the things that's unique about the Google Fiber offering is that your television service is available right through the data connection," CEO Larry Page said in a conference call Thursday. Mr. Page said earlier during the call that he won't be joining every future earnings call. He disclosed earlier this year that he had been diagnosed with vocal cord paralysis.

Google executives did not dive into how the company would profit from Fiber -- the service runs $120/month for TV and Internet but is in limited availability -- but it could use the TV aspect of the service to strike content deals that would lead to even more lucrative ad revenue streams. Google has reportedly had informal talks with the NFL concerning its Sunday Ticket package. If those talks evolved into a formal deal, Google could attract top-tier TV dollars that are normally allotted to live sports, though Google's chief business officer waved off a question about potential YouTube deals for live sports content.

Asked on Thursday's call about potential YouTube deals for live sports content, Google chief business officer Nikesh Arora said, "We are constantly talking to people about content all the time, and so, sure, we will talk to anybody who wants to talk to us about content."

Price declines
Google's core search business has one worrying trend. While Google registered 26% more clicks on its ads in the third quarter compared to last year, the average amount of money Google makes per click dipped by 8% year-over-year.

That year-over-year pricing decline -- which has been going on since the fourth quarter of 2011 -- is largely due to people migrating to mobile devices where advertisers are unwilling to pay as much to show ads as on desktop computers.

Google has devised a strategy to reverse the decline by by having advertisers set their rates in proportion to desktop bids through a program called Enhanced Campaigns. But that march to merge desktop and mobile ad buys has yet to make its mark. The roll-out of Enhanced Campaigns was completed in the third quarter, but Google CFO Patrick Pichette said that its impact would be seen over the long term.

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