Is the Online Ad Business Even Sustainable?

It takes a lot of ads for Google to pay for self-driving cars.

Google’s second-quarter results contained some worrisome details for investors in the search-engine giant: earnings-per-share came in below Wall Street expectations ($9.56 a share, versus pre-announcement estimates of roughly $10.78 a share), as did revenue. Cost Per Click (CPC), or the rate that advertisers pay Google every time someone clicks on an online ad, dropped 6 percent during the quarter—exceeding analysts’ expectations.

“The CPC drop is a bit surprising, and perhaps raises again the question of whether Google really benefits from the Mobile shift,” Mark Mahaney, a stock analyst at RBC Capital Markets, told The Wall Street Journal.

The price for ads served to mobile devices has dropped steadily over the past few quarters, perhaps (Forbes theorizes) as a result of Google opening more inventory in that category. Google has assured company-watchers that it has a long-term plan to capitalize on consumers toting mobile devices, many of which run the Android operating system.

But mobile isn’t just a challenge for Google—seemingly every major IT firm with an online presence is figuring out how to profit from it. Facebook has famously struggled with monetizing its mobile apps; and although more users than ever are accessing the social network via smartphones and tablets, the effort is costing quite a bit of money. “We aren’t operating to maximize our profits this year,” Facebook CEO Mark Zuckerberg said on a February earnings call.

While Facebook and Google wrestle with the new paradigm, Yahoo’s facing something of an outright existential crisis: display revenue for its most recent quarter was down 12 percent compared to the same quarter in 2012; the number of ads sold decreased 2 percent, while price-per-ad outright plunged 12 percent. Cost Per Click fell 8 percent compared to the second quarter of 2012.

“Software is eating the digital advertising business,” Tod Sacerdoti, CEO and founder of BrightRoll, wrote in a column on LinkedIn. “The traditional companies that produce content (WSJ, People, CNN, Disney) and the internet companies that produce content (AOL, Yahoo, Microsoft) are all losing share. Yahoo is particularly vulnerable in mobile and video, two categories in which they have insignificant owned and operated inventory to sell.“’

Yahoo, he added, “does not own a competitive offering in the programmatic side of display,” and nothing that could allow it to compete in a major way on the video and mobile fronts. Sacerdoti feels the company’s only alternative, if traditional display advertising is getting walloped, is to embrace the software side of things—in other words, take its billions of dollars and very bright engineers and throw them at a project designed to compete with other firms’ automated online advertising platforms.

But as Google and Facebook are proving, even the software adherents are experiencing some difficulties when it comes to optimizing online ad revenue—if advertising rates continue to fall, particularly in mobile, it could have significant repercussions on these tech firms’ bottom lines. The fact that people generally do everything possible to avoid ads, and dislike the idea of their personal data being used to serve more efficient ads, just makes things that much more difficult. If enough pressure builds up, it could start cracking the underlying “free” models on which these companies are built.

 

Image: Google

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