Google Reports Better-Than-Seen Revenue Growth
online.wsj.com
online.wsj.com
Paid Clicks Cost Per Click Paid Distribution
Q-2-Q Y-A-Q Q-2-Q Y-A-Q In $M
2011Q1 18 4 8 -1 337
2011Q2 18 -2 6 12 355
2011Q3 13 28 -5 5 383
2011Q4 17 34 -8 -8 442
2012Q1 7 39 -6 -12 468
2012Q2 1 42 1 -16 507
2012Q3 6 33 -3 -15 556
2012Q4 9 24 -2 -6 634
2013Q1 3 20 -4 -4 680
2013Q2 4 23 -2 -6 706
2013Q3 8 26 -4 -8 755
2013Q4 13 31 -2 -11 824
2014Q1 1 26 0 -9 845
2014Q2 2 25 -2 -6 893
> (Except that right now growth in the sheer number of
> mobile ads is outpacing the growth in monetization
> of those ads.)
That is why I'm having a hard time imagining a way that Google is going to pull higher CPCs here. It feels very commodity to me and that is a margin game.
As a margin game that 32% net margin which is funding free food, self driving cars, and moonshots comes under pressure.
So I would say, the value from a click doesn't change for the advertiser as long as they are running the same business - nobody can make those clicks MORE valuable for the advertiser just by charging more.
Now, if advertisers are getting cheaper clicks with good margins, its a matter of time when the competitive forces drive the margins down to what's acceptable to survive for that segment. This is true for most advertising channels, not just online. This assumes that there is a fixed tolerance for margins for a sector/device combination. Unless all advertisers collude to keep CPCs down for themselves, the cost should reach equilibrium - think about it, why would other competitors not drive up the cost and get MORE traffic, until they reach their margin tolerance? It is a volume vs. margin question. More volume means less margin, and there is an equilibrium to be had.
As you have also stated elsewhere, CPCs going down is hard to understand without a distribution of CPCs bucketed by traffic. As volume grows and new markets are penetrated - it could either mean that it is touching more lower margin businesses OR equilibrium has not been yet established for those new markets. But it is hard to conclude that existing high margin businesses are suddenly paying less for those clicks unless their fundamental business properties are changing i.e. lawyers can't make the same money as they used to anymore and hence margins are squeezed. That may or may not be true - but it is not possible to deduce that from what's given.
> I don't understand your equalization of CPCs with value.
Now flip your point of view around to that of the advertiser, you've got $1M to spend on internet advertising. Every quarter you advertise with different strategies and campaigns and you measure your business. If you are like many you are constantly tweaking that, some print, some radio, some Internet, vary the mix vary the message, these folks A/B test the crap out of this stuff. When you find bidding $5.00 a click gets you the same business activity as bidding $4.90 a click you say "Great, that gives us more money to spend on some other channel!" You have just reduced the CPC that Google sees from you by 2% and you are still getting the results you want.
When CPC is eroding both quarter to quarter and year to year it means that people as spending less money on buying ads from Google on a per ad basis. They may get more total impressions (and this is what I suspect Pichette thinks is the confounding variable in the paradox) but each impression is worth less. And the interesting thing that Marissa Meyer proved at Google early on was that people valued less intrusive advertising over what Altavista and Yahoo where doing at the time. I believe her insights still hold, and if Google continues to add more 'slots' into their properties they are going to erode value (ad blindness). It is a tough spot for them.
[1] New hires back in 2010 got to do a class called 'life of a dollar' which was perhaps the absolute best introduction to how Google monetizes search you could get.
1. How do you know that CPCs are falling because of existing advertisers paying less vs. new advertisers in new markets/mobile are paying less ? I.e. what evidence suggests that existing high value auctions are depreciating in CPCs/Value ?
2. CPCs are a proxy for value only if they have reached equilibrium. Since it is an auction as you have explained, it takes time for different participants to converge to the right bid configuration. That can take months or years to mature. So if the mobile market is new, how do you know that it has already reached equilibrium ? Desktop CPCs rose for a long time until they established that for many verticals.
This also explains the Bing results. Google owns mobile search, so the shift toward mobile (with its lower CPCs) disproportionately affects them. Microsoft continues to flounder in mobile, so their average CPC will be higher right until it becomes nonexistent.
Strategically, this is a good trend for Google. They're being disrupted, but they own the primary disruptor.
People use desktop search to research big-ticket items: cars, vacations, mortgages, life insurance, mesothelioma, consumer electronics, etc. There's a lot of value in a sale there. A personal-injury lawyer may collect hundreds of thousands of dollars from a client with a solid case. As a result, these keywords get bid up really high, because the profit potential of a new customer is high.
People currently use mobile search for day-to-day local needs. What restaurant should I go to? Where can I find parking? What's there to do in this town? Most of these have sale prices in the $10-50 range, and so there's just not as much money coming out of the sale. As a result, the keywords don't get bid up as high, and CPC is lower.
These use cases are not substitutes. Just because people are searching for restaurants does not mean they aren't also searching for mesothelioma. We see this in the revenue numbers, which continue to rise. But as a percentage of the total addressable market, high-value keywords like insurance and lawsuits will shrink as the market becomes larger. If you're looking at aggregate CPC numbers this will look like Google is becoming less attractive to advertisers, but what's actually happening is that Google is becoming viable for less attractive advertisers. The total market size is expanding, and with that come more marginal customers.
This, BTW, is one reason why I think Wall Street analysts are idiots. They pay attention to the wrong metrics, because those are the only numbers they have to pay attention to. I have my own set of metrics that I use to judge when it's time to sell Google stock, but I'm not going to reveal them here.
Facebook isn't having the same problems monetizing mobile. I haven't looked too deeply into their results, but last I checked their ad margins are rising rapidly. Facebook ads seem to be a lot more valuable to advertisers than a Google ad, and they have lots of runway with a lot of premier real estate on mobile devices (Instagram, WhatsApp).
If the "post-pc" trend continues and people increasingly do their computing on tablets or phones, the future doesn't bode well for Google.
Facebook has a very different ad strategy on both desktop and mobile. They target brand awareness much more than purchasing intent. As a user, I'm starting to see Facebook ads in my newsfeed of sites I never searched for or Liked on Facebook; AFAICT, they're using cookie data from the advertiser's website itself to inject the ad into your stream, so that you're reminded of the product on a regular basis. I can see why this would be worth a lot to the advertiser (targeted brand advertising!), but as a user, it is creepy and annoying as hell.
They also own AdMob, which is one of the more successful in-app-advertising platforms.
On the search side I am fairly indifferent.
Only if they can maintain similar margins in the long term. If it fundamentally eats a chunk of their profit margin, I'm not seeing that as a net positive for its share price.
But I did download the slide deck, look at Slide #5 of 15. See how all the CPC numbers for all the properties are down.
Now look at how Paid Clicks (page 4) are up for the same periods. More clicks, less money per click. It includes their AdMob business (aka Mobile) but blends a bit because is a search ad on Android a O&O (Google Sites) click or a mobile click?
But there is a more interesting point here. If we stipulate that Simpson's paradox is at work here, and we stipulate that Pichette is interested in communicating clearly to the shareholders, would he not have the fiduciary duty to disclose the confounding variable?
After all if the appearance that the value of Google's search advertising business is eroding away, and that is, rounded to the nearest billion dollars the only business that makes Google any money[1], as an officer of the company you would want to say "Sure it looks that way but when we break it out you can see that really we're doing fine." otherwise you would leave people with the wrong impression, and they might sell or buy your stock acting on that misimpression which might form the basis for future litigation against the company. (This happened a lot in the 90's btw).
For me, I tend to be skeptical (its my nature), so if Pichette wanted to convince me that the ship is doing fine, he needs to let me know why there is water in my stateroom. :-)
[1] Youtube is catching up to be sure. But pretty much not a whole lot more is.
> But there is a more interesting point here. If we stipulate that Simpson's paradox is at work here, and we stipulate that Pichette is interested in communicating clearly to the shareholders, would he not have the fiduciary duty to disclose the confounding variable?
I checked out the transcript, and it turns out I was mis-remembering the context of the mention of Simpson's paradox: it was with respect to a question along the lines of "Why is the aggregate CPC growth higher than both the network and the Google Sites"? It would of course be comically absurd for a CFO to mention Simpson's Paradox and not say what the confounding variable is, and even more ridiculous for nobody else on the call to ask him to clarify. In context, the variable was the network/Google sites split.
UC Berkeley was sued for accepting male grad students at a higher rate than female grad students. On examination, most departments at Berkeley admitted females at a higher rate than they admitted males, but males preferentially applied to easier departments.
You can't take a DARPA grant to research robots and then spend it on interpretive dance lessons.
(I'd really like to see that...)
Google does not own mobile search. Infact it is struggling[1] big time in mobile search. People do not use google to search on mobile. Infact, they use specialised apps like yelp, priceline etc to search for what they need.
[1] http://www.nytimes.com/2013/07/19/technology/google-misses-e...
I thought Google's buying traffic are payments to Mozilla / Apple / Samsung / etc. for being the default search engine. Mozilla's payment is like $300M/year, so I can't figure out how to get to the $3.6B number. Apple may have a much better deal on iOS.
Maybe it is YouTube payments. There is talk about YouTube Revenue being $3.5B and I assume that started from nothing about three years ago. I assume about 1/2 of YouTube revenue goes to the content creators.
High CPC terms, like class action lawsuit ads, have been saturated for years. Now you see ads for low margin and low cost items as well.
That said, as an experienced paid search professional, lower CPCs are good for me if overall quality remains the same or improves because it lowers my acquisition costs and improves my ROI. This in turn causes me to spend more with Google.
Beyond that though is the notion that while CPCs may come down, Google has been pushing hard on the retargeting front. There has been a lot done to try to educate advertisers about the notion of multiple touch points and cross-channel attribution. With this comes paying for net more clicks since additional touch points may increase the conversion rate significantly, and thus might warrant paying for multiple clicks.
They still have a ways to go IMHO...for starters, why the heck isn't display data baked into some sort of search funnel-esque report? And why can't I see revenue associated with view-through conversions? AdWords has the data if conversion tracking is setup...
Closing the display loop and enabling advertisers to see the actual INCREMENTAL contribution of display impressions and view through conversions is critical to this IMHO.
https://www.google.ca/search?q=google+reports+22%25+revenue+...
Although, judging from advertising in general, it may be better for advertisers to get your attention whether you want it or not. And they are the ones who decide whether the advertising occurs.
But if another company did ad-relevance better than Google, more efficiently (cheaper) and effectively (clicks, sales), it seems that Google couldn't beat them, because the revenue at first would be lower and Google is Wall St-committed to increasing revenues. They would have to acquire the new company (if they could).
Unfortunately, ad-relevance requires data about the person, and Google is best placed for this (alongside Facebook). Despite the privacy-backlash, people increasingly live online and accept the loss of privacy. So, instead, we have startups with new ways to gather new personal data, and are acquired by Google/Facebook.
1) The ads are now displayed so prominently that everybody has to notice them. Earlier, they where less prominent and more clearly marked as ads. So there is probably a shift in demographics. Less dedicated buyers and more people who just stumble upon the ad.
2) On tablets and phones people might a) misclick more and b) surf more without the intend to buy.
It's possible that lower conversion rates after the click would lead people to put in smaller bids, but I'd say thats unlikely. There's no shortage of people willing to buy ad space with high click throughs.
This is so true. I went to advertise on reddit the other day and was surprised when I realized that the ads I was buying were for the "Sponsored Links" at the TOP OF EVERY PAGE, but I trained myself to not see them 5-6 years ago and hadn't really seen them since. /scratches head.
then cpc become kink when everyone realized advertising based in demographic was not generating returns for the brands, because in the internet nobody knows you are a dog.
so everyone spend all their money on cpc, because they were told that was the metric to follow. until they realized it also does not result in conversion.
then they start spending all their money on conversion, and realized they had to give away all their profit per conversion.
then they briefly guessed that going back to before cpc was good, and everyone dumped their money on ad networks and paid cents for million of impressions god knows where. turns out those impressions were all in russian warez sites and porn.
now everyone is spending all their money on viewable impression. until they realize no browser allows for a real world implementation of this, and even if they did, in the end it is exactly the same as buying the more expensive placements on impression based publishes. but this is still beginning, so we are here. everyone is dumping their money on this this week
oh and every step, after the premium bands got tired of the new thing, the publishers being stuck with it, start a race to the bottom on price.
I find myself clicking adwords ads frequently since the change. They practically look identical. I imagine it was a nice boost to revenue.
Sometimes I feel sorry for the advertiser when I accidentally click such sneaky text Ad, especially when the first real, natural search result is the link to the advertising company's website, just below the Ad. It feels like a devious way to rip off advertisers who would have been first anyway.
However, they are also blocking a competitor from placing an ad there and potentially siphoning off traffic.
I hate this sentiment. It's silly. Google does not sell any information to anyone. Google just shows people targeted ads.
If you can show a way to infer personal details from the mere fact that someone is shown a particular ad (or particular huge set of ads), then publish your results so Google can figure out how to not leak that information.
Consider, a mobile phone network that sold drone strikes on its users using the privileged information they have on their location. The precise flow of money and information is not that important to the consequence for the end user.
Google targeting is "using information about me to benefit another company for financial gain of Google". It is not silly to call this selling...
Secondly,
> It is not silly to call this selling...
yes it is! When you sell X to someone, at the end of the transaction, they have X! Otherwise it's not selling!
The drone strike is not chosen for emotion but because it shares the targeting concept. If the mobile network didn't know your location, they cannot sell the service. If they do know your location they can. The difference between these two cases is the latter service includes, in some fashion, your location.
Is your location being sold to your enemy? You can argue the terminology but if you look at the consequences, your enemy has attacked you in your secret location because they bought something from the mobile network company.
Google sells clicks on ads. Once a click is bought, the buyers now has eyeballs on their websites. Not the information about the person doing the clicking. So, the information about the person doing the clicking is not sold.
The drone analogy is inapt.
Selling consequences of information in some very real sense includes the information. In your terms, the "benefit from some service", is a targeted ad which is a causal consequence of user information. A derived work if you like. Information isn't just one specific pattern of bits.
The drone analogy vividly demonstrates how selling a consequence, killing someone in a secret location, really does include their location as an intrinsic part of the service sold even if no-one actually hands out the lat/long.
Google does not sell the information. It puts up ads that users may (or may not!) click on. The clicking is the point at which the information transfer occurs, and it is voluntary and transparent. Or as transparent as it can be, anyway - if you are unaware of how the internet works when you click on a link, that does not make Google culpable for presenting said link.
The information Google has about the user is never given to anyone, least of all the ad buyers.