Google Has the Same Mobile-Ad Problem as Facebook

Thursday, 18 Oct 2012 | 3:48 PM ET

Google's core advertising business is hurting, and mobile is to blame, analysts said Thursday.

A sign is displayed outside of the Google headquarters in Mountain View, California.
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A sign is displayed outside of the Google headquarters in Mountain View, California.

The search giant reported a 15 percent drop from a year earlier in cost per click (CPC) when it reported disappointing third quarter earnings Thursday. (Read more:Premature Earnings Release Sends Google Stock Plunging.)

Google has seen a decline in CPC for four consecutive quarters, but its CPC rose for eight consecutive quarters before it started falling. The reason the downward trend in CPC is sticking is because mobile is taking over the web.

"I keep saying Facebook isn't the only one that has a mobile issue—Google does, too," said Colin Gillis, an analyst for BCG. "If you are an investor in Facebook, mobile is priced into earnings. I don't think mobile in Google is priced in."

Why Google's Big Miss Doesn't Bode Well for Facebook: Pro
Daniel Niles, chief investment officer at AlphaOne Capital Partners, explains how both Google and Facebook face similar issues.

As consumers migrate to primarily mobile platforms, so do their Google searches. Advertisers, however, aren't so quick to follow.

"The short of it is mobile ad formats are different and quite frankly, people are using it in a different way and advertisers are not convinced they should be bidding up for keywords the same way on mobile the way they do on desktop," said Rick Summer, a technology analyst at MorningStar. "It's a pretty immature advertising ecosystem."

Advertisers are not willing to pay as much for mobile ads because they simply are not as effective as ads on a desktop, Gillis said. And the mobile ads that advertisers are buying are a lot cheaper than ads on a desktop, pricing at 56 cents on the dollar, he said.

While Google's price drop in CPC might be a sign that other companies exposed to mobile ad issues could also experience a slowdown, it doesn't mean that the Internet advertising market is doomed, Gillis said.

The fact is, advertising on mobile is still very new and the ad format is significantly cheaper so companies aren't generating as much revenue from mobile ads, but the lull isn't permanent, Summer said.

"For the quarter, companies exposed to this certainly could see near-term weakness," Summer said.

Some Internet companies still took a stock hit on Thursday immediately following Google's CPC news, including Facebook and LinkedIn.

email: tech@cnbc.com


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