Google Still Suffering Ad Price Declines As Search Goes Mobile

Search Giant's Second Quarter Revenue Shy of Estimates

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Like most companies that derive their revenue from digital advertising, Google has been hurt by consumers' migration to mobile. The search giant found little relief in the second quarter, despite recent efforts to mitigate mobile from weighing down its ad rates.

Not including the money Google makes from its Motorola hardware business, Google generated $13.1 billion in revenue in the second quarter of 2013, improving on last year's mark by 20% but shy of analysts' estimates when factoring in the $1.0 billion added from Motorola. Google's primary cash cow, advertising, grew by 15% year-over-year to $12.1 billion.

Google CEO Larry Page
Google CEO Larry Page

While it's hard to criticize a business that consistently record double-digit growth, Wall Street isn't wild about Google's latest quarterly numbers and sent the company's stock down by more than 3% in after-hours trading.

What gives? Google's isn't making as much money off each ad it runs as the company previously had, even though it notched 23% more paid ad clicks in the second quarter compared with last year. The last quarter that Google recorded a year-over-year increase the average cost advertisers pay for people to click on their ads was the third quarter of 2011.

The declines have ebbed over the past three quarters -- down 15% year-over-year in Q3 2012, 6% in Q4 and 4% in Q1 of this year -- but the trend remained negative and dropped by 6% year-over-year in the second quarter. But questions hang over how soon Google can stem mobile's negative impact on ad prices.

'Enhanced' campaigns
In February the company announced that it would change the way advertisers purchase AdWords ads that primarily run on desktop and mobile search results pages but can also show up within mobile apps through Google's mobile ad network AdMob. Rather than setting separate prices for desktop and mobile campaigns, Google has conjoined the two through a program called Enhanced Campaigns that forces advertisers to place the desktop price bid and what percentage more or less they'd be willing to pay to run those ads on mobile.

The aim is for the higher desktop ad prices to buoy the smaller mobile rates, and during the company's earnings call on Thursday, Google CEO Larry Page described Enhanced Campaigns "the biggest ever change to AdWords."

Google's chief business officer Nikesh Arora said during the company's first-quarter earnings call that the transition to Enhanced Campaigns would be complete by the end of the second quarter. That didn't happen, and on Thursday Mr. Arora revised the estimate to the end of this month.

"Advertisers have upgraded 6 millions campaigns" to Enhanced Campaigns, Mr. Page said, adding that the figure translates that figure into 75% of all active campaigns.

Nonetheless "the Enhanced Campaigns impact will be more broadly felt in the next quarter," said Jared Belsky, EVP at search and display specialist digital agency 360i, which specializes in search and display advertising. Mr. Belsky pointed to the transition's original completion date of July 22 as the point at which "the masses switch on" and that to date primarily "premier marketers" have converted with many 360i clients only doing so in June and July.

Asked repeatedly during the earnings call to what extent Enhanced Campaigns has and will impact Google's revenue, Google execs maintained that the program is "still in the very early stages," per Mr. Page, and "too early to detail," per Mr. Arora. "Over the long term [Enhanced Campaigns] should have a positive impact on conversions," he said.

Moto X gets launch date
Enhanced Campaigns dominated the discussion, leading to little talk about Google's other businesses like YouTube or its push to become a consumer hardware manufacturer. Mr. Arora said YouTube mobile ad sales in June had increased by 300% from their January figures but didn't provide specifics.

As for Google-owned Motorola Mobility's upcoming Moto X smartphone that the company began advertising earlier this month, Mr. Page only tangentially touched on the product. "Having been a tester for a while, I'm very excited," he said referring to "what Motorola is launching soon" but not explicitly invoking Moto X. He later bristled when asked about the marketing investment in the product by responding that "too much has been made over those things."

Google CFO Patrick Pichette may have let slip the Moto X's release timing toward the end of Thursday's earnings call. "I'll leave it to the coming quarters to kind of really demonstrate the kind of new Motorola that's showing up, and you'll see that in the coming weeks actually."

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