Investors were comforted on Tuesday when Google announced strong fourth-quarter earnings, and the stock rebounded from a dip over the last week, climbing 5 percent in after-hours trading.
But a closer look at the results shows that while Google continues to be a moneymaking machine, its most lucrative business, search on desktop computers, is slowing, while Google has not yet figured out how to make equivalent profits on mobile devices.
“You would expect Google to be a key player benefiting from mobile, but that hasn’t played out in the last year,” said Jordan Rohan, a Stifel Nicolaus analyst.
The price advertisers pay Google each time someone clicks on an ad, known as cost per click or C.P.C., decreased 6 percent from the fourth quarter a year ago, falling for the fifth consecutive quarter on a yearly basis, though not as much as some analysts had feared.
The cost per click has been declining largely because advertisers pay less for mobile ads, and more people are using Google on their mobile devices and fewer on their desktop computers.
Still, Google has been trying to improve its mobile products — from developing new kinds of mobile ad campaigns to building devices like the Nexus 4 smartphone — and its executives say it is a matter of time before the numbers improve. Already, in the fourth quarter, the cost per click rose 2 percent from the previous quarter.
“We’re in some uncharted territory because of the rapid rate of change in these things, but I’m very optimistic about it,” said Larry Page, Google’s chief executive, on a conference call with analysts after the earnings were announced. “I think the C.P.C.’s will improve as the devices improve, as well.”
Mr. Page, who has had health problems related to his voice, sounded unusually weak and breathy.
Google reported revenue that was lower than analysts had expected. Google warned last week that analysts’ expectations were off target because Google sold Motorola’s set-top box division during the quarter and so did not include it in the quarterly results. Still, even including that division of Motorola, Google’s revenue would have missed expectations.
The company reported fourth-quarter revenue of $14.42 billion, an increase of 36 percent over the year-ago quarter. Net revenue, which excludes payments to the company’s advertising partners, was $11.34 billion, up from $8.13 billion. Net income rose 7 percent to $2.89 billion, or $8.62 a share.
The fourth quarter is generally Google’s brightest because it makes much of its money on retail ads that run during the holiday shopping season. This holiday season was the first that Google charged e-commerce companies to be included in its comparison shopping engine, and these so-called product listing ads contributed to its bottom line.
“Despite talk about retail having a weak season, Google’s product listing ad program has taken off quite successfully,” said Sid Shah, director of business analytics at Adobe, which handles $2 billion in annual advertising spending.
Home Depot increased mobile commerce sales by four times after using Google mobile ads, said Patrick Pichette, Google’s chief financial officer. He also cited YouTube ad revenue, saying the “Gangnam Style” video, the most-watched on record, has earned $8 million in online advertising deals. Election ad spending on Google increased five times over the 2008 election, he said.
Nonetheless, Google’s mobile challenge overhung even its usual holiday shopping sparkle. Consumers are increasingly shopping on phones and tablets, yet Google and other companies have not yet figured out how best to profit from mobile users.
One problem is that advertisers pay about half as much for an ad on a mobile device, in part because they are not yet sure how effective mobile ads can be. Another challenge is that consumers increasingly use apps, like Yelp or Kayak, to search on mobile devices instead of using Google.
And even when consumers use Google for mobile searches, they are often doing so on Apple devices like iPhones, for which Google has to pay Apple a fee. Those types of fees are large — equivalent to 25 percent of Google’s revenue in the quarter.
The shift to mobile is happening as Google’s biggest, most lucrative business — desktop search — is slowing. The share of clicks on Google results that happen on desktop computers has fallen to 73 percent from 77 percent in the last six months, while the share of clicks on tablets and smartphones has increased to 27 percent from 23 percent, according to data from Adobe.
The problem is that clicks on retail ads on tablets, for instance, cost about 16 percent less than they do on the desktop, according to Adobe. The price of clicks on retail ads on tablets rose 16 percent over the last year, but on smartphones they fell 11 percent.
As the desktop search sector slows, Google has a new search competitor to contend with: Facebook, which last week introduced a new form of personalized social search on the site.
Google has also recently become a maker of mobile devices, both by acquiring money-losing Motorola and by producing the line of Nexus devices with manufacturer partners.
In the fourth quarter, Google sold about 1.5 million Nexus phones and tablets, not including those sold by other retailers, according to estimates from JPMorgan, and has had trouble keeping supply up with demand.
Eventually, Google hopes, these various businesses will help it solve the mobile revenue riddle, but analysts say they do not expect it to happen in the near term. “You have your Motorola Android phone, get offered a local deal, go into the merchant, use Google Checkout to pay and get rewards,” said Colin Gillis, an analyst at BGC Partners. “That’s the grand vision and it’s a nice vision, but it’s not happening in March.”
Article source: http://www.nytimes.com/2013/01/23/technology/google-profit-exceeds-expectations.html?partner=rss&emc=rss
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