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Google: Leading the Race to Monetize Mobile

By Chad Fraser on January 23, 2013

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Investors keyed in on two figures when Google (NasdaqGS: GOOG) reported its fourth quarter results Tuesday night: paid clicks and cost per click.

Paid clicks represent the number of times that a user clicks on one of the search giant’s ads. Cost per click is the amount that Google charges advertisers per click.

The paid click figure continued its long-time march higher, surging 24% from a year earlier and 9% from the previous quarter. Cost per click, meanwhile, declined 6%. Still, that was much better than the 7.5% drop that analysts were expecting. It was also a big improvement over the 15% year-over-year plunge that Google reported in the third quarter.

The disparity between these two figures is tied to the rising use of mobile devices. An increase in tablet and smartphone users is fueling the higher paid click numbers, but advertisers remain unwilling to pay Google as much for mobile ads than for those served on PCs and desktops. That’s mainly because pay-per-click ads don’t display well on these devices’ small screens. As well, many advertisers believe users as more likely to make a purchase on a PC or laptop than a mobile device.

Still, the higher number of paid clicks more than offset the lower cost per click, helping drive Google’s overall revenue up 36.2% in the quarter, to $14.4 billion from $10.6 billion a year earlier. Including traffic acquisition costs (TAC), or money that Google pays its partners to drive traffic to its websites, the company would have generated revenue of $11.34 billion, up from $8.13 billion a year ago.

Analysts were expecting $12.34 billion of revenue. However, Google excluded revenue from its Motorola Home division, which it is in the process of selling, from the latest figure, while many analysts included it in their forecasts. Including Motorola Home, Google’s post-TAC revenue rises to $12.16 billion, which was closer to the Street’s estimate.

Earnings rose 6.7%, to $2.9 billion from $2.7 billion a year ago. Earnings per share increased 4.9%, to $8.62 from $8.22, on more shares outstanding. Excluding unusual items, Google earned $10.65 a share, up 12.1% from $9.50 a year ago. That topped the consensus forecast of $10.47.

Android: Google’s Secret Weapon

Google isn’t the only company facing the challenge of monetizing an ever-rising number of mobile users. Other firms that rely on pay-per-click ads, like Facebook (NYSE: FB) and Yahoo! (NasdaqGS: YHOO) are dealing with this dilemma, as well.

However, Google has a big edge when it comes to cracking the mobile puzzle: its Android operating system, which currently controls about 44% of the U.S. smartphone market, behind the Apple iPhone, with a 51% share. Google gives Android away to mobile device makers for free; it makes money by taking a cut of all apps sold to users, as well as from ads included in these programs.

Investing Daily’s Jim Fink recently looked at the advantage that controlling mobile operating systems offers in “Monetizing Mobile: Facebook’s Sponsored Stories Are Not the Answer.” Fink wrote:

“Many analysts are skeptical of Facebook’s mobile prospects. There is no getting around the fact that the mobile space is controlled by Apple’s iPhone iOS and Google’s Android mobile operating systems, and these companies can leverage these operating systems to build apps that get the upper hand against Facebook in monetizing mobile web browsing.” 

That, writes Fink, also puts a company like Facebook, which has no mobile operating system of its own, in a weak bargaining position:

“If Zuckerberg thinks Apple is going to make it easy for Facebook to integrate into iOS and monetize mobile ad spending on iPhones, he’s delusional. Whoever controls the operating system gets the lion’s share of profits; it’s that simple and what worries owners of Facebook stock.”

Google’s Mobile Experimentation Continues

In addition, as CNNMoney reports, Google continues to experiment with different ways to approach mobile devices, recently lowering the number of ads on its mobile search site so they don’t overwhelm users. That should make the ads that are displayed more effective, supporting pay-per-click rates. However, it will reduce the number of overall clicks.

Google also benefits from the expertise of smartphone maker Motorola Mobility, which it bought for $12.5 billion in May 2012. The acquisition brought with it $5.5 billion of patents that will help Google develop new products and give it protection from lawsuits from other tech firms. Google continues to restructure Motorola Mobility, including laying off workers and closing facilities. Still, the division continues to hold back Google’s profits: in the latest quarter, it posted a $353-million operating loss.

Google certainly has the resources it needs to both expand its mobile reach and turn Motorola Mobility around. The company ended the quarter with cash and marketable securities of $48.1 billion, up from $44.6 billion a year ago. Its cash reserve is also much larger than its $5.5 billion of short- and long-term debt.

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