Google’s stock declined by over 4% yesterday. Many have put this down to the company’s decision to create a non-voting class of stock as part of a control-retention exercise as the founders sell shares. But more is going on here.
In the same week Facebook acquired Instagram for $1 billion as part of its efforts to be more relevant on the growing mobile platform, Google, for the second consecutive quarter, suffered a decline in “Cost Per Click” rates that is in large part attributable to the shift in traffic from the desktop/laptop to the mobile platform.
I believe what we are seeing here is the start of a secular trend that represents nothing less than the end of the web 2.0 era where we all consumed services through a browser on a computer. Replacing that era is a new, app-based, message-centric mobile Internet. In this new era the essential unit of advertising (a page based ad, whether text, display or anything else) is simply the wrong monetization vehicle. Something new has to emerge.
It is worth examining the earnings call in detail because these points were clearly articulated on the call by all Google executives.
Patrick Pichette, Senior Vice President and Chief Financial Officer at Google, speaking on the company’s quarterly conference call this week, said the following:
“Aggregate cost-per-click growth was down 12% and down 6% quarter-over-quarter.”
The statement represented the only negative on the call which had generally reported a very strong financial quarter.
Pichette was compelled to explain:
“So given the recent trends in CPCs and clicks, allow me to spend a bit of time today addressing this. The most important thing for you to understand is that our business is healthy. We believe that shifts in CPC and paid clicks taken independently really do not reflect the fundamental health of our business.”
What? This was a huge quarter and the CFO is almost pleading with the listening analysts to believe that Google has a healthy business. A cynic would quickly draw the conclusion that there is smoke here, and so – most likely a fire.
So Pichette explained more:
“Now allow me some details on this. In general, we attribute these trends to a combination of really 5 core factors. Those include FX, and then there’s 3 mix effects. For example, the mobile versus tablet versus desktop shifts, emerging markets versus developed markets shifts and even the basics of google.com versus our network. And then finally, ads quality changes which is also a huge factor.”
“Many in the financial community have tried to isolate or often I hear pick one of these among these factors as the primary driver for CPC or click trends. Some even say it’s about — all about mobile. Others suggest that it indicates weakness in demand for Google advertising. Well, on the latter point, I want to be very clear that that’s not the case.”
On the latter point indeed. What about the former point? Let’s repeat it: “. Some even say it’s about — all about mobile.”
Count me in the camp of the “some”. I don’t say this in any negative or gloating spirit. But isn’t it obvious? As Android, iPhone and other mobile platforms grow we are moving away from the page based Internet. The new Internet is app centric and often message-centric. The number of users engaged in this app-centric and message-centric Internet is both huge and their use is growing. People used Instagram for images, not Flickr or Picasa. They use Foursquare for checkins not Facebook. And they do so in large numbers and they do it a lot.
In this world, page-based ads, interstitials, pop-ups; pop-under; pop-over; and most of the other web era advertising units make absolutely no sense. And this is irrespective of whether they are text ads or display ads. Sure some will attract clicks, but for the most part they are ignored or worse still hated. And advertisers will not see the ROI in being in the mobile world using those methods.
As a web-era company, being heavily invested in a web-centric content and application ecosystem is becoming a liability. Facebook is challenged by this shift – hence Instagram; Google is also challenged by it. Yahoo has effectively been killed by it.
Listening analysts on the call didn’t miss the opportunity to focus on this point. At about the 35 minute mark on the call Mark Mahaney from CitiGroup asked:
“And then just real quickly on the mobile CPC issue. Can you just comment again on over time, over what period of time you would expect mobile and desktop CPCs to merge or do you think that’s a realistic expectation? What would cause that to happen or not?”
“Think of it as so much upside for us because essentially mobile is exploding in query growth and the formats themselves are just adapting already a lot and from a relatively crude base to so much more in the future. So that you’re absolutely right that right now, they don’t monetize as well because we’re kind of in what search used to be in 2002, 2003, 2004. So as these formats kind of continue to get better and better, we’d expect much better performance on them.”
Larry Page, possibly perturbed by that answer, intervened:
“This is Larry. I’ll add something, Mark. I think the mobile CPCs — I mean, people always spend their most effort on the major — whatever the major source of traffic or revenue is, and those are growing really quickly, albeit currently, obviously, there’s more on desktop. … The fact that you spend most of your money locally, I think that over time that may actually reverse and the CPCs action may get better. But I think we’re very bullish about that. We’re making a lot of investments in that area, in things like Offers and so on and Wallet. And we’re very, very excited about the potential there, and also Click-to-Call and other things that we do.”
The final question on the call at about 58 minutes was asked by Anthony Di Clemente from Barclay’s:
“Just one question for Nikesh or whomever wants to answer it. It seems like even though as you’re shifting to mobile, you have this presumably double-digit pricing step down for CPCs. But in the Display world, certainly, that pricing difference could be even more dramatic. In some cases, by half or 2/3. Prices getting cut on that shift to mobile. And so you guys at Google have the unique ability to compare and contrast the difference in price between like Search and Display and how the two are monetizing relative to desktop. And so any color on that comparison would be appreciated because I think there are folks out there that have a view that actually Search, core Search, monetizes better on that shift to mobile than Display does, and I would love to just understand that better.”
Nikesh Arora, Senior Vice President and Chief Business Officer responded:
“Yes, I mean, I guess — let me try to just explain to it from the advertiser perspective. So what we’re striving towards is advertisers are interested in ROI. Advertisers actually are not interested in whether they’re on the mobile product, the Display product, the Search product on the Web or the Search product on mobile. So what we are fast converging towards is we’re basically sitting down and understanding ROI targets of our advertisers. And then we have immense amounts of inventory at our behest, whether it’s mobile inventory, on Display or Search or desktop inventory or even inventory to our network. And what we are trying to work towards is being able to dynamically allocate across these various products, what allows them to get the maximum ROI. … In the long-term, we think mobile will monetize better. And we usually don’t see the difference happening on Display and Search as you alluded to. Larry, you want to add something?”
I will leave it to the reader to draw your own conclusions here. But one thing is for sure: Something big and dramatic is happening. Expect a lot more movement in the mobile space as the desktop giants get a better sense of the issues. And as for that Facebook acquisition of Instagram, it may not impact the real threat that mobile represents to Facebook – the threat of falling monetization due to the impracticality of delivering ads derived from the web era to a mobile audience.
[image via 3 Gazet]