Google’s mobile strategy starts to pay off

Last updated: October 18, 2013 5:02 pm

Google’s mobile strategy starts to pay off

By Richard Waters in San Francisco

Google’s advertising business is firing on all cylinders as the internet search company waits for all the pieces of its mobile strategy to fall into place. That was the message from third-quarter results on Thursday that comfortably topped expectations and produced one of the surges in investor enthusiasm that occasionally punctuate Google’s earnings announcements. This time, the surge sent Google shares up more than 13 per cent on Friday to top $1,000 for the first time.That came as Google claimed some early success for an important new system that was implemented fully in July to make it easier for customers to buy advertising on mobile devices and measure its effectiveness.

“There seems to be a lot of interest on the part of advertisers and agencies” in the new approach, known as “enhanced campaigns”, says Youssef Squali, an analyst at Cantor Fitzgerald.

Nikesh Arora, Google’s chief business officer, said the system had demonstrated that mobile ads are more effective than had been realised at turning users into customers, prompting more advertisers to bid for mobile slots.

Yet there was scant hard evidence of an impact on Google’s revenues or profits. Rather, the company’s closely followed cost per click – the average price paid each time a user clicks on an advert – fell 8 per cent from a year earlier. That was a steeper decline than Wall Street had been expecting and the worst for a year.

Google executives blamed the fall on a number of factors, not just a rising proportion of cheaper mobile advertising. However, analysts continued to look to the indicator as an important barometer of the mobile transition, and a sign that Google’s overall pricing power had slipped.

Another indication that the company’s ambitious mobile strategy remains a work in progress came with the disclosure that revenues from its Motorola handset division had fallen by a third from the year before, to $1.14bn, with the pro-forma loss edging up to nearly $250m.

The fall came in the quarter that saw the launch of the Moto X, the first handset designed and built entirely under Google’s control and a device that the search company had said would prove it could turn round Motorola.

“We’ve now had the first product that hasn’t set the world on fire. I don’t know what else they want to do with this company,” says Carolina Milanesi, an analyst at Gartner.

Despite the questions over some aspects of its mobile plans, Google’s overall online advertising business more than took up the slack in the latest quarter.

Leaving aside the Motorola handset division, net revenues rose 23 per cent – the fastest growth for six quarters. After three months in which its shares had underperformed the Nasdaq, that was enough to touch off a powerful rally.

Product listing ads – the new format Google has introduced to replace its comparative shopping search service – were among the bright spots, says Mr Squali. With the holiday season approaching, signs that the product advertising was performing well buoyed hopes on Wall Street as Google embarks on its seasonally strongest quarter of the year.

Google’s profits were also boosted by the tougher quality controls that it said it was applying to other companies that run itsadvertising on their own websites.

Thanks to the new controls, this type of advertising was flat compared with a year before – a move that forced advertisers to place more of their advertising on Google’s own sites, where it generates a much higher margin for the company, analysts say. This probably accounted for the single biggest part of Google outperformance in the quarter, according to Ms Milanesi.

In spite of some questions hanging over Google’s handling of the transition to mobile, the company’s overall growth continues to reflect the surging importance of smartphones and tablets to its business. Its paid clicks – the number of times users click on adverts – jumped 26 per cent, the biggest increase for a year, as advertisers rushed to try out the new computing platforms.

If advertisers are flocking to mobile, it has been to keep up with some profound changes in their audience. About 40 per cent of YouTube’s traffic now comes on mobile devices, up from less than 10 per cent two years ago, Larry Page, chief executive, disclosed on Thursday.

“We think Google are well positioned globally – they have a more than 50 per cent [market] share globally in mobile,” says Clark Frederikson, an analyst at eMarketer, an online advertising research firm.

That has put Google in an enviable position as the mobile revolution takes hold, even if it has yet to demonstrate fully to advertisers and its own investors how the new mobile markets will work to their advantage.