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The cost of mobile clicks

Google’s operating margins fell to 23.7% last quarter. This level is the lowest I’m aware of. From 2007 to late 2009 margin went from about 31% to about 37%.  Then from early 2010 until present they fell. The history is shown the the following graph.

[I included Microsoft and Apple operating margins for comparison.]

Some of the recent decline is due to the inclusion of Motorola into consolidated earnings. Motorola gross margins were therefore 18%. Excluding Motorola, Google gross margins (Revenues-Cost of Revenues) were 61.5% of revenues.  However, even excluding Motorola, Google’s core margins dropped.

One reason for the decline in core margins is the reduction in cost per click (-16% for search and -18% for network sites.) This is what Google pays to partners for access to traffic. The trend is not new. It was first discussed in January.

The bottom line is that an individual click is not as valuable as it used to be. Would a larger volume of mobile usage be a reason? Google won’t say.

The overall result in the bottom line is shown below. Microsoft and Apple are again put forward for comparison.

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  • http://twitter.com/davidchu David Chu

    Remember how big a deal it was when the iPhone became more profitable than Google? Now it looks like the iPad could one be as well when the Q4 numbers come out.

  • http://twitter.com/__MarkW__ Mark Wilcox

    Many more affluent users are spending much more time on their mobile devices.

    A lot of ads on network sites are in the side bar, first thing you do with a desktop site on a mobile device is double tap the text to zoom in and the ads disappear off the side of the screen. There isn’t really anywhere to re-introduce them without being much more intrusive (BTW your ads are fine on the desktop site but annoy me on mobile devices).

    This doesn’t explain the search ad decline. That could be because people are much more task focussed on mobile devices.

    Of course it could just be that there’s been a long economic downturn and people are “window shopping” online but simply not buying as much as they used to.

    • http://www.facebook.com/profile.php?id=741717344 Dick Applebaum

      I have found that some web sites do not allow any zoom on iPad… I really find this annoying.

    • SSShu

      I think they are more task focused when on the mobile. And the searches done on the mobile is probably cannibalizing their more profitable desktop search mode? Is that why theyre pushing the google search app?

    • MarkS2002

      My Yahoo, where I go for news, political views of the nutcase commentators, stocks, and sports, is now showing a particularly obnoxious ad bar at the bottom. Double tap the screen and start to scroll and the damned bar continues up the screen, with the kill X off the screen. Either I have to shrink the screen to cancel it and then double tap to read or continually deal with intrusion. It is going to cost them a user pretty soon.

  • http://www.isophist.com/ Emilio Orione

    Maps is for google a significant part of income, but with iOS 6 almost half of the total map search has flown away it is estimated.
    In fact Nokia is trying to acquire the map searches expanding its app on other o.s. other than windows phone with good timing.

    Another point is that apps are becoming dedicated search services and apps are going well on ios and not android for now.

    Mobile web browsing can be also responsible and also the general state of the economy, even bing or duckduck can have something to do with it.

    Having no data can only bring to speculation, but the decrease of google’s income is significative and something is happening indeed.

    The next big thing from apple will be siri, voice interfaces will be the next touch revolution and will mean trouble for google too, since android seems not to appeal paying and browsing customers like ios does.
    Searches in siri are quite different from searches in google voice. Siri knows your habits, your location, your friendships and family and is able to coordinate lots of dedicated apps to do an action or supply “the answer” instead of a list of websites.

    Are we observing the beginning of disruption of traditional text and logic based search in favor of context driven, intelligent, multi-source searches?

    • Thijs van der Wal
    • http://twitter.com/davidchu David Chu

      “Maps is for google a significant part of income”

      Are you sure? Data wise I agree with you, but revenue wise, I think Maps doesn’t bring in much. If it did, I don’t think Google would be charging for the use of it’s APIs. To me, I think Maps are one of those things everybody uses but nobody wants to pay for.

      • http://www.isophist.com/ Emilio Orione

        There is lot of advertising in maps, tipically commercial places nearby

      • http://twitter.com/davidchu David Chu

        Please see my response to Horace.

      • http://www.asymco.com Horace Dediu

        Maps revenue comes from ads. It’s significant and could be as much as 35% of what Google obtains from mobile.

      • http://twitter.com/davidchu David Chu

        Opus Research estimates it’s about 25% of Google’s mobile revenue. The interesting thing is why. Searching for a store in maps is used as an indicator of purchase intent which is used to serve better targeted advertising. So not all of the revenue actually has to be collected within the Maps app. It has a spillover effect to Google’s other mobile advertising arms.

  • http://twitter.com/fivetonsflax fivetonsflax

    Criminy, what happened to Microsoft’s operating margin last quarter?

    • http://twitter.com/ericstsai Eric

      Skype write-down happened last quarter.

      • Tatil_S

        aQuantitative write down happened. We need to wait a bit more for Skype write down.

  • http://twitter.com/fivetonsflax fivetonsflax

    I’m confused. If Google’s paying less for traffic acquisition, shouldn’t that *improve* their margin?

    • http://www.asymco.com Horace Dediu

      Terminology is unfortunate. CPC refers to cost to advertiser.

  • http://www.facebook.com/profile.php?id=741717344 Dick Applebaum

    @ Emilio Orione “Are we observing the beginning of disruption of traditional text and logic based search in favor of context driven, intelligent, multi-source searches?”

    Back in the late 1990′s when I developed web sites, things were a bit different, ala web advertising, than they are today…

    1) There was no Google or dominant search engine — rather there were several “major” search engines for which you would develop search metadata (in your page content) and submit these pages to the search engines for rating and ranking — which would drive “search” traffic to your site.

    2) Banner ads and other ads/links on your site were avoided by many — rather than being featured the way they are today. Many, including myself, thought: After going to all the cost/effort of attracting visitors to your site — why would you want to encourage them to just “click away” to more interesting or greener pastures?

    3) Tracking of an individual’s activity within a site was sometimes done to: a) improve customer service; and/or: b) tune the site for better performance. Usually, if an individual was tracked within a site it was provided as an opt-in service. Aggregate tracking within a site could be done without opt-in and provide most of the benefits to the site — and subtle benefits to the “not-individually-tracked” visitor… better performance and searching within the site.

    4) There was no tracking “between/among” different sites other than the afore-mentioned Banner Ads and links.

    This resulted in a couple of things:

    1) Your site could be readily located by the major search engines — there were even some “super searches” that would present results aggregated by the major search engines.

    2) Your web site and pages were designed and presented to accommodate the visitor/customer — not the advertiser. There was no ad cruft cluttering the web site causing confusing distractions.

    3) Sites were attractive and contained “white space” (gasp) to appeal to the visitor and make the site easy to understand and navigate.

    4) A lot of development time was spent loading the site quickly (even over low-speed modems) — so that the visitor had some basic information ASAP.

    5) Navigation was designed to allow the visitor to quickly search and drill-down to the information/products/content he was seeking. (As opposed to arbitrarily partitioning the site to serve additional ads and gain additional clicks).

    6) The better sites encouraged visitor/customer feedback on what they liked and disliked about the site.

    This appears to [mostly] have changed… I would suggest that while “content is king” — its power has largely been mitigated by “advertising”.

    Stay with me now…

    One of the greatest appeals of the iPad tablets over traditional pcs — is that “nothing gets between you and your stuff!”

    The OS and the apps are designed to provide answers, content and services with the least amount of effort possible… “get in… get it done… get out…” quickly — then move on!

    Another great appeal, to many, is that the iPad provides opt-in tracking — so you are in control of what is tracked, when it is tracked and who is doing the tracking

    It seems to me that today’s state-of-the-art web search, web site design and advertising is the antithesis of the way mobile users need/want to use the Internet.

    Simply stated:

    … “I want results… not ads!”

    … “When I want ads, I’ll ask for ads!”

    The “Siri / Surrogates (Wolfram and others) model is prefect for the mobile user (or will be as it fleshes out).

    Often, when I am at my PC, I will punch the Siri button on my iPad (the iPad is always handy). This is because it is easier to get “what I want” than surf/search and try to navigate the perilous reefs and eddies of web ads… Things like:

    “Siri: When’s the next Laker game on TV”

    Siri “The Lakers – Suns game starts at 7:3 PM”

    Boom!

    Siri knows the context of my personal information and habits because I CHOOSE to trust Apple/Siri with that information — to BETTER SERVE ME!

    IMO, the ugliest (and most invasive) things on the iPad (and computers in general) are provided by the web browsers: web sites and searches — in all their tracking/advertising-riddled glory.

    So, if Siri/Surrogates are the future… and they bypass the current model of monetizing web sites… what does that mean for the future of web ads, click-throughs, etc. — and for the web sites, themselves?

    Will these sites wither and die? I suspect that many will!

    Will the better sites adjust to accommodate themselves to the “new” way? I suspect that many will.

    What will the better sites do? How will they pay for their continued assistance? Membership or subscription charge? Custom apps?

    I don’t know the answers, but here’s an example I often use in the iPhone or iPad:

    I’ll install a free version (with ads) of an app if I am unfamiliar with (or unsure of) the the applicability to my needs.

    I’ll buy or upgrade an app to avoid unwanted (unsupportive to the app) ads.

    Also, I do subscribe (monthly fee) to a few specialty web sites.

    I do not mind ads in apps or web sites that are supportive of the site itself (new features, special events or offerings, seminars) — after all, these ads are extending the capabilities of the sites or apps I choose to use.

    OK… Lets bring this home!

    Is Horace thinking about advertising as a way of monetizing the Asymco site? Obviously, yes! There are few ads and most are tasteful and supportive of the site.

    I don’t expect answers to the following:

    1) What monetization would Asymco lose if they removed all ads for non-asymco-supportive services?

    2) Would Asymco need to compensate for this loss?

    3) How?

    4) How much?

    5) When?

    What can users, like myself, do to assure the survival of sites they enjoy — like Asymco?

    • JaneDoe12

      “What can users, like myself, do to assure the survival of sites they enjoy — like Asymco?”

      We could start paying an annual fee — $50 would be nominal. I don’t know if that would eliminate the need for sponsors though, maybe it should be higher.

  • David Leppik

    That evidence looks pretty weak to me. There are lots of reasons why cost-per-click could be going down, and mobile searches is only one. I don’t see enough people talking to Siri to make a dent in Google’s revenues.

    The thing about Google’s ad revenues is that it’s priced according to keyword popularity. Lawyers who specialize in rare medical conditions are willing to pay hundreds of dollars for their keywords, whereas many words are cheap enough for Amazon.com to pick up just in case they’re products. We don’t know where the sweet spot for Google is– whether the high-value words pay for the whole service, or if that’s a drop in a bucket compared to high-volume, low-value words.

    Many of the things Google makes money on are not things Siri knows about, so it (not she) sends you to Google. Siri diverts searches only from a few things it’s good at: restaurants, locksmiths, etc. And that’s only from the people who have access to Siri– which is a small subset of Internet users overall. Keep in mind that until recently, only a small fraction of iOS users could use Siri.

    Nor is the timing right for this to be related to Apple’s map transition, since the trend has been around at least all year.

    There are plenty of more mundane explanations. Perhaps this has nothing to do with search, and Google’s banner ad revenue has taken a nose dive. Perhaps they’ve gotten too aggressive with pushing advertisements on their website, and people are ignoring them. (The whole reason for looking at the “sponsored links” is that they tend to be highly related to your search; if they show too many, relevance goes down and people start to ignore them. And there are tons of little tweaks they could be making that have unintended consequences. Google is famous for using A/B tests to determine the effect of changes; that works on an immediate per-change basis, but doesn’t measure the impact of changes over time.)

    I have no idea what’s causing this. If I had to make a guess, it is the corrosive effect of lots of changes which seem to be a good idea from their A/B testing, but which clutter or devalue their advertising over time. Because A/B testing is such a seductively powerful way to make decisions, it could cloud the thinking of even the best and most highly motivated people at Google.

    • SSShu

      Sorry – just to branch out in what you said.

      If users use Siri to look up search for something – would that search data get listed under the user or Siri? Is it possible that the use of Siri and like apps have cast a small/growing fog of war on top of the iOS ecosystem?

      • http://twitter.com/davidchu David Chu

        I don’t think that’s a huge use case but I’m confident that Google would be able to track the user in that case, especially since you would still have to open a web browser eventually. (First party cookies are allowed).

        But I think the bigger question is, “What jobs will Siri eventually take away from Google?” Its not that good right now, but it’s still very early.

  • http://twitter.com/antonreut Anton Reut

    Other possibilities.

    Amazon is taking share for product-based searches. These are searches which typically have delivered high CPCs. Gartner has documented the gains.

    Consumers are price shopping many sites before purchasing – leading to lower conversion rates for individual advertisers and thus lower CPCs. More of a hunch but I’ve seen some studies inferring similar thesis.

    • http://www.brightlineseo.com/ Travis Reed

      Amazon and Apple may be gaining a smidge, but only a small fraction of a percent.

      Why would price shopping hurt conversion? They’re choosing competitors with less sophisticated contextual targeting, or something? I’d guess Amazon is pretty good, though I’m curious.

      What a lot of people don’t understand is the essentially relationship between CPCs and paid clicks. That’s because Google doesn’t explain anything, because they don’t really want anyone to understand how their business works. Three people, Larry, Sergey and Eric, own 2/3rds of the voting stock. It’s charitable, honestly, to call them a public company, and that’s basically how they treat public disclosure.

      Horace, I’ve been working on something re: Google I think you might be interested in. Could you email me?

  • Ncgo4

    I have never, ever, ever intentionally clicked on an ad on my iPhone or my iPad. Nor will I ever do so. I do, however, see lots of the enlarged ads. The reason is that they are intentionally so inconveniently placed on these small screens that I inadvertently click on them whilst trying to get rid of them. When Google reports the 50 or so “clicks” from me each week they are committing fraud. Can it be any wonder if payment for mobile clicks is significantly less than for clicks from a PC or a Notebook? Incidentally I have never met anyone else that intentionally opens one of these ads either.

  • Marketting Firm Employee

    Facebook.

    Google Adwords has never had any real competition until now. They have always been the best way to advertise online.

    But now we have facebook, and a lot of adwords spending is being cancelled, that money going to facebook instead.

    It will get worse, clients sre reluctant to switch because adwords is still as good (maybe better) as it always has been. It takes a lot convincing to get someone to drop a good thing.

    But when they do, we are seeing consistently better results when our clients advertise on facebook instead of google.