Search is still a great business. Google’s profits (33 percent operating margin in Q4) are far better than other ad-driven companies whose margins are historically half that rate. But it is increasingly difficult for Google to grow search revenues. Google already has dominant market share in general web search in western markets, while China remains problematic due to government censorship and Baidu’s market leadership. The next big source of search volume will come from smartphones, which will be harder to monetize. Compared to the web, a mobile searcher will almost certainly be less likely to complete a purchase transaction or fill out a registration form, leading to lower cost-per-click pricing than web search.
Search underperformed in Q4 because, although clicks were up 30 percent, prices were down 8 percent. Google blamed cost-per-click declines on a natural result of volume growth, foreign exchange rates and ad format changes, but some observers thought mobile ads and search might be responsible. Google bragged that display ad sales were on a $5 billion yearly run rate, probably to compare with Yahoo and Facebook rather than as a piece of its own total $36.5 billion ad business. Casual observers might think this is new, but Google has always had a big display business. It’s just that it derives mostly from its DoubleClick and AdSense networks.
Where Google should focus now
What the quarterly numbers mean is that Google has to drive up the value of paid search clicks and sell more of its own display inventory. Google’s slightly botched integration and privacy strategies are integral to both. For immediate payback, Google needs to prioritize and shift resources to two areas:
Vertical search. Rather than bias its search results to its own properties, Google should accelerate its efforts in vertical search beyond travel and financial services. It could build out price-comparison properties around other markets like apparel and electronics relatively inexpensively by filtering its own results and licensing consumer reviews from companies like Bazaarvoice and Power Reviews. Searches done on vertically targeted microsites would command higher CPC rates because searchers would be “prequalified” leads. If Google’s microsites were effective, they would show up in organic search results naturally, and Google could even buy some of its own paid search listings.
De-emphasize less-critical businesses. I have already described how mobile search is challenging; mobile display advertising is also a long-term play, and who knows how Google could improve Motorola profits. A handful of apps wins doesn’t prove a compelling case for competing with Microsoft Office. TV advertising is a pipe dream for now, and progress in branding display advertising will build relationships with advertisers and agencies that can feed TV ads in the coming decade. Google could reallocate resources and budgets away from these projects and zero them in on vertical search and display ad platforms and sales.
Finally, a little more reporting clarity wouldn’t hurt. Google could be more consistent in how it describes its biggest businesses — paid search, the different ad networks by CPC and CPM accounting, display ads sold directly for its own properties — instead of burying their financial results under two ad sales categories. That way it could demonstrate progress in each and make clearer comparisons with competitors. Then investors would really know if Google were gaining share versus Yahoo, Facebook, AOL, Microsoft and Groupon, its biggest rivals in online marketing.