You don't have to go far to find an industry pundit bemoaning Google's (GOOG 0.15%) (GOOGL 0.57%) on-going problems surrounding consumer's shift to all things mobile. Despite a 12% increase in revenues last quarter – 17% if not for the impact of a strong dollar on foreign sales – and healthy earnings-per-share (EPS) improvement, Google's stock remains in a funk.
Why? The same reason Google shareholders have been forced to endure a nearly 3% decline in share price the past 12 months: mobile. With so many consumers choosing their smartphones and tablets as the primary device to access the Internet, marketers are loathe to shell out the same fees for ads as they will on desktop devices. One look at Google's continuously declining cost-per-click (CPC) rates is a testament to that.
But before investor's throw in the proverbial towel, Google is beginning to make headway in the all-important mobile ad space thanks to improved technology that has many of its marketing partners gushing.
The problem
In Q1 of this year, CPC rates declined a whopping 13% on Google sites, and 7% on an aggregate basis. The fact that Google more than made up for the drop in fees by increasing the number of paid clicks by an astounding 25% on its own sites, and 13% overall, didn't seem to matter. At least it seems that way based on Google's languishing stock price.
It doesn't help that Google's primary digital advertising competitor Facebook (FB 0.82%) is absolutely blowing the doors off its own mobile ad efforts. Though mobile has only been a focus of CEO Mark Zuckerberg's for the past couple of years, already it makes up the vast majority of Facebook's overall ad revenues.
Last quarter is an ideal example: mobile ad spend accounted for 73% of Facebook's total advertising revenues. Google doesn't break out its revenues by device segment – no surprise there – but it's hard to imagine it can match Facebook in that regard; at least on a percentage of total sales basis. But that disparity may be changing.
The solution
Out-going CFO Patrick Pichette made it clear during his last quarterly conference call that one of the primary reasons for Google's increased overhead – operating expenses jumped over $1.1 billion last quarter compared to the prior year's Q1 – were expenditures relating to development costs. One of those development efforts in particular is helping Google boost mobile ad sales.
Mobile users simply don't use their phones or tablets to purchase items as a result of advertising as much as large-screen device users. However, that doesn't mean mobile ads aren't driving sales, it simply means consumers aren't using their smartphones to complete the purchase. The answer?
Google has improved its reporting capabilities to its advertising partners and now informs them of consumers that have seen a mobile ad, and then visited a brick-and-mortar store. In some instances, for example with big hitters like Target, Google is able to tell them what shoppers purchased following their mobile ad views and subsequent in-store visit. And according to both Google and its marketing partners; the enhanced mobile ad tracking efforts are working.
Some of Google's partners are boosting their mobile ad spend now that they're able to track response rates, even if the purchase didn't occur directly from a consumer's smartphone. How effective is Google's mobile tracking capability?
According to a Target rep, consumers who've clicked on a Google mobile ad and then visited one of its stores spend more than shoppers who weren't incentivized to drop by because of an ad. And an incredible one-third of mobile users who clicked on an ad during the holiday season dropped by a Target store. With provable results like that, it's no wonder advertisers are willing to shell out more mobile ad dollars.
As it stands, mobile ads command about half the fees desktop spots do, and that disparity isn't going to change overnight: nor are Google's declining CPC rates. However, the ability to track in-store purchases that result from users clicking on a mobile ad is a big step in the right direction and may – eventually – shift investor's focus away from CPC rates and back to top and bottom line growth: something Google continues to deliver on.
