Google's most confusing metric

Damien Meyer | AFP | Getty Images

Google shares are at record highs, but advertising with the search giant is cheaper than ever—or at least that's what the company's own numbers indicate.

Ads are how Google makes more than 90 percent of its revenue, and sales have been strong. But the average price of those ads has been plummeting since 2011, according to the company's cost-per-click (CPC) metric. At this point, CPC has fallen year over year for 15 consecutive quarters—but that trend may reverse soon.

For years, the CPC decline has worried investors and analysts. While executives initially blamed foreign exchange costs, and later a mix of factors including emerging markets and ad quality changes, analysts wondered if the shift from desktop to cheaper mobile ads was gradually undercutting the company's core business.

But the CPC is an average across Google's diverse advertising options, and it doesn't give a clear picture about how individual businesses are performing. Executives have repeatedly said that looking at the CPC by itself is misleading, and trying to pin down one individual cause—like mobile—is misguided.

"The key thing to understand is that we believe that shifts in CPC, or paid clicks taken independently, simply don't reflect the fundamental health of our business," said Patrick Pichette, Google's CFO in 2011, when the drop began.

Blame YouTube

This year, company executives finally gave a specific explanation for the weakening metric. Google unit YouTube has experienced explosive growth over the last year. Users are skipping fewer YouTube ads, and each unskipped ad counts as a click. Those ads, which are generally cheaper than the average Google ad, accounted for both the recent click growth and lower rates, they said.

"Many commentators are incorrectly assuming that the growth trends in our sites, clicks and CPCs are primarily due to difficulties monetizing search on mobile," Pichette said in the first quarter of this year. "Excluding the impact of YouTube TrueView ads ... our CPCs would be healthy and growing year over year."

During last week's second-quarter earnings call, new CFO Ruth Porat attributed paid clicks growth to both mobile and YouTube advertising. As for the low CPC numbers, Porat again pointed to YouTube, which is making up a much larger percentage of overall paid clicks while remaining less expensive than other Google ads.

Mobile and desktop looking up

If mobile ads—which tend to fetch lower prices than desktop ads—were ever driving the CPC decline, that no longer seems to be the case.

According to Porat, mobile CPCs are growing, closing the gap with desktop. Digital performance marketing agency iProspect saw a similar trend with its client set (mostly large U.S. advertisers) last quarter—with mobile CPCs passing 70 percent of desktop CPC compared to about half the value last year. CPC for paid search overall was also up year over year.

"The space as a whole was valuing [mobile] less," said Jeremy Hull, director of bought media at iProspect. "Google is providing the tools to measure return on investment, and increasing CPCs mean that advertisers are trusting and seeing more value from those types of ads."

A report released last week by Adobe Digital Index also found higher mobile CPC compared with last year. Both Hull and Adobe researchers expect mobile to outpace desktop in the next year. Demand for YouTube ads will also grow as advertisers learn how to use them effectively, said Hull.

"You only have a few seconds to get someone's attention or they're going to skip—this isn't just like buying TV space on a new channel, it's a different medium," he said. "I think the CPCs are still low because not every brand is doing that yet. The low CPCs to me just scream opportunity."

As for the average CPC reported by Google, Hull would like to see a more specific breakout, but he understands why the search giant lumps all its numbers together.

"Google is known for its moonshots, and even in the ad space, Google is constantly testing new ideas," he said. "You could spend all week just debating how to break it out, and the breakout would change at least twice a year as products evolve."