GOOGL - Google

[jeffmori7]

goog sells the modem business

 

http://9to5google.com/2012/12/19/google-gets-2-35b-of-its-motorola-purchase-back-with-its-sale-of-motorola-home-to-arris/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+9to5Google+%289to5+Google+-+Beyond+Good+and+Evil%29

 

That puzzles me a bit.  I thought they wanted that business.  With their fiber to the home project it seemed like a good fit, not to mention I think Apple will be going after the Television next in a big way.

 

I think that GOOG is less interested in being in hardware then you might think. 

 

They want GoogleTV to succeed as a platform, no doubt, but I'm sure they will be happy to partner with Sony, Samsung and other hardware manufacturers to get onto the TV screen.  They will probably have reference devices that are manufactured by others, just like with the LG Nexus 4, but I'm not so sure they want to be selling set top boxes.

 

Yes, and this is probably to have a word on reference design that they have kept a 15% stake in Arris, so they can control partially the design, without the need to be a true hardware company.

[Liberty]

http://www.bloomberg.com/news/2013-01-03/google-investigation-by-ftc-ends-with-voluntary-changes.html

 

Google Investigation by FTC Ends With Voluntary Changes

[Guest valueInv]

Check out the last graph:

 

http://www.asymco.com/2012/11/14/google-vs-samsung/

[Guest valueInv]

Samsung getting in some hot water:

 

http://www.guardian.co.uk/technology/2012/dec/26/samsung-multibillion-fine-apple-europe

 

Google probably is too

[Guest valueInv]

I'm guessing more operators are going to want their pounds of flesh:

 

http://gigaom.com/2013/01/18/google-should-be-ashamed-for-paying-carriers-to-handle-its-traffic/

[Guest valueInv]

Ad rates across devices:

 

http://beta.fool.com/anindya7/2013/01/18/apple-surging-ahead-google-mobile-ads/21676/?ticker=AAPL&source=eogyholnk0000001

[VAL9000]

Ad rates across devices:

 

http://beta.fool.com/anindya7/2013/01/18/apple-surging-ahead-google-mobile-ads/21676/?ticker=AAPL&source=eogyholnk0000001

 

Some interesting information in there.  Check out the second image.  Look at those eCPM's rise across all devices.  Guess that should help resolve this issue that keeps popping up:

 

Take a look at googles % of display ad revenues and where they expect much of their advertising growth to come from.

 

[Guest valueInv]

Another group angling for their pound of flesh:

 

http://paidcontent.org/2013/01/21/report-google-made-e50-million-copyright-offer-french-publishers-want-e100-million/

[VAL9000]

From the Q4 Release - http://investor.google.com/earnings/2012/Q4_google_earnings.html

 

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012.

 

We can see here how the cost per click is now starting to rise.  That's good news.

 

[Guest valueInv]

From the Q4 Release - http://investor.google.com/earnings/2012/Q4_google_earnings.html

 

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012.

 

We can see here how the cost per click is now starting to rise.  That's good news.

 

What is going on with the margins?

[siddharth18]

From the Q4 Release - http://investor.google.com/earnings/2012/Q4_google_earnings.html

 

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012.

 

We can see here how the cost per click is now starting to rise.  That's good news.

 

Cost per click or click thru rate is often the function of ad placement, text and color and is subject to fluctuations when Google changes formatting, layout and positioning.  As long as eCPM rises, that's all one should care about.

[Guest valueInv]

From the Q4 Release - http://investor.google.com/earnings/2012/Q4_google_earnings.html

 

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012.

 

We can see here how the cost per click is now starting to rise.  That's good news.

 

Cost per click or click thru rate is often the function of ad placement, text and color and is subject to fluctuations when Google changes formatting, layout and positioning.  As long as eCPM rises, that's all one should care about.

 

I can understand click thru rate being a function of that. How is CPC affected by text or color?

[RichardGibbons]

I believe CPC is seasonal, too, with the highest CPC in the fourth quarter.  (They sell keyword advertising using an auction format, so greater demand for keywords could push up the price that quarter.  So, QoQ is less relevant than YoY.

 

[VAL9000]

Cost per click or click thru rate is often the function of ad placement, text and color and is subject to fluctuations when Google changes formatting, layout and positioning.  As long as eCPM rises, that's all one should care about.

 

CPC in this context is less about micro issues like placement and more about macro issues like supply and demand for online advertising.  Google runs an auction system for ads, so when they report average CPC they're talking about the entire system's earning capabilities.  All combinations are included.  New markets tend to have significantly more supply than demand, and that causes a drag on CPC.  Examples of this include developing countries and mobile.

 

eCPM is more of a content publisher metric, where the cost of impressions is significant and the choice of advertising partner highly relevant to earnings. 

 

I believe CPC is seasonal, too, with the highest CPC in the fourth quarter.  (They sell keyword advertising using an auction format, so greater demand for keywords could push up the price that quarter.  So, QoQ is less relevant than YoY.

 

CPC may be seasonal (I'm not sure - it makes sense but there are offsets), but the discussion here is about GOOG's ever-decreasing CPC.  If you look at Q3 v Q4 2011 you'll see an 8% decrease in CPC, which bucks the idea that CPC is seasonal.  That we had an increase Q3 v Q4 2012 is a sign that this is stabilizing.  The major concern has been that GOOG's model doesn't work as well on mobile platforms, which is where search traffic is growing most rapidly.

 

[ItsAValueTrap]

I don't think that much attention should be paid to CPC.  There are many factors that could affect it that has nothing to do with the health of Google's search advertising business.

 

For many searches, no ads are displayed at all.  If Google allowed more ads to be displayed, they would get more clicks at a very low CPC.  These ads are typically pretty irrelevant to the search.  Google disables ads / makes the minimum CPC threshold high to improve the user experience.

 

There are other areas where Google experiments with its ad system.  It is often making tradeoffs that display less ads to improve the user experience.  Advertisers have a content score... those with low content scores have to pay more for advertising.  All these things have effects on the number of clicks and CPC.

 

Sometimes Google makes dramatic changes to its ad system that will cause short-term pain as Google effectively wipes out a lot of advertisers' campaigns.  The advertisers will adjust and come back with their ad dollars.  It has happened in the past and the right thing to do is to be greedy when other people are fearful out of ignorance.

 

2- Fundamentally, it would be bad for Google's advertising business if advertisers lost enthusiasm for advertising on it.

 

My thesis is that most advertisers on Google measure their ROI.  You can verify this by searching on Google and seeing how many people implement technology to track how well their ads are doing (e.g. affiliate links are a dead giveaway).  All these guys care about is ROI and optimizing it- as long as they are making money they will keep advertising.  Things that would cause this to go down would be: economic recession, their product is banned and can't be sold online anymore.  Other than that, I  don't see fundamental drivers that would cause Google's advertising customers to spend less.

 

If anything, Google has huge tailwinds behind it as you can buy more and more products online.  Online retailing is still in its infancy.  I would love to buy my tax software online (and if Ufile advertised on Google, I would click an ad).  It is (or was) cheaper in physical stores... I don't expect this to last. 

 

3- The other tailwind is that Google and its advertisers are getting better at advertising.  Google is constantly trying to figure out how to better deliver relevant ads (e.g. retargeting), making life easier for advertisers (Google Analytics, its automated ad bidding tools, etc.), etc. etc.

[VAL9000]

I don't think that much attention should be paid to CPC.  There are many factors that could affect it that has nothing to do with the health of Google's search advertising business.

 

For many searches, no ads are displayed at all.  If Google allowed more ads to be displayed, they would get more clicks at a very low CPC.  These ads are typically pretty irrelevant to the search.  Google disables ads / makes the minimum CPC threshold high to improve the user experience.

 

There are other areas where Google experiments with its ad system.  It is often making tradeoffs that display less ads to improve the user experience.  Advertisers have a content score... those with low content scores have to pay more for advertising.  All these things have effects on the number of clicks and CPC.

 

Sometimes Google makes dramatic changes to its ad system that will cause short-term pain as Google effectively wipes out a lot of advertisers' campaigns.  The advertisers will adjust and come back with their ad dollars.  It has happened in the past and the right thing to do is to be greedy when other people are fearful out of ignorance.

 

This is true, Google does optimize its ad display based on "quality", but CPC is still an incredibly important metric when it comes to the health of the business.  The context of the above message related primarily to Google's main source of advertising growth: mobile.  The data in CPC shows that AdWords are much less profitable on the mobile platform than traditional desktop.  If mobile searches cannibalize desktop searches, then the projection is that Google's business will be permanently less profitable.

 

We know that there are more mobile ad clicks as a percentage in Q4 than there were in Q3.

 

We know that CPC rose from Q3 to Q4.

 

Therefore, we can fairly safely guess that CPC is now rising in mobile.  Plus we saw other data that indicates this.  Plus it just makes sense.  Mobile has a lot of useful characteristics that desktop advertising doesn't have, specifically highly granular location data.  As advertisers figure it out, they will begin to take advantage of the cheap advertising on mobile.  As more advertisers pile on, the cheap advertising sets itself at the proper market price.  The "mature" markets are those that have stable CPC.

 

Those factors you mention do have an impact, but by far the greatest impact on CPC is supply vs. demand.  Supply is measured by search activity (generally stable growth year over year).  Demand is measured by aggregate advertising spend.  CPC drops when there is huge growth in new markets (e.g. mobile, or Asia, or both), because the supply increases more quickly than the demand can react.

 

2- Fundamentally, it would be bad for Google's advertising business if advertisers lost enthusiasm for advertising on it.

 

My thesis is that most advertisers on Google measure their ROI.  You can verify this by searching on Google and seeing how many people implement technology to track how well their ads are doing (e.g. affiliate links are a dead giveaway).  All these guys care about is ROI and optimizing it- as long as they are making money they will keep advertising.  Things that would cause this to go down would be: economic recession, their product is banned and can't be sold online anymore.  Other than that, I  don't see fundamental drivers that would cause Google's advertising customers to spend less.

 

If anything, Google has huge tailwinds behind it as you can buy more and more products online.  Online retailing is still in its infancy.  I would love to buy my tax software online (and if Ufile advertised on Google, I would click an ad).  It is (or was) cheaper in physical stores... I don't expect this to last. 

 

I think you're generally right about advertisers and ROI, but it varies by industry.  Nobody buys big four consulting services over the internet, but they still buy AdWord placement - ROI for this type of spend is really difficult to measure/guess.  Conversely e-tailers can measure ROI at a very granular level by linking clicks to conversions.  Because of this, they are much more price sensitive and keyword savvy.

 

Not sure what version of Google you're using but when I search for Canada Tax File, uFile is the second sponsored link.

 

3- The other tailwind is that Google and its advertisers are getting better at advertising.  Google is constantly trying to figure out how to better deliver relevant ads (e.g. retargeting), making life easier for advertisers (Google Analytics, its automated ad bidding tools, etc.), etc. etc.

Agreed, they are getting better.  I think the biggest gains in terms per-unit improvements are being made in new markets - YouTube, mobile, maps, but as you point out above the small changes to the biggest chunk of the business, North American AdWords, can have a much more significant impact to the bottom line.

 

 

 

[Palantir]

Okay. Not to derail this discussion. But what are your price targets for IV for Google? I have mine at IV=900

[ItsAValueTrap]

If mobile searches cannibalize desktop searches, then the projection is that Google's business will be permanently less profitable.

I would try to see things from the point of view of the consumer.

 

I want to buy something... e.g. new balance shoes.

I go online to figure out where I can buy them cheap.

I will see ads for online retailers and I will click on those ads.  In my case, the ads are actually more relevant than the organic search results.

I will compile a list of retailers and figure out which has the best price, what pair of shoes I want, etc.

 

I don't have a smartphone, I don't intend on getting one, but even if I did... I would never do this process on a smartphone.  Trying to buy something online on a smartphone would be painfully brutal.  So... my thesis is that smartphone CPC will always be low.  People don't really buy stuff on a smartphone (*in the future, maybe people will buy things like smartphone apps or use their smartphone to find local places for entertainment or whatever).  Because they don't buy a lot of stuff, the advertisers aren't going to pay a lot for that type of advertising.

 

Not sure what version of Google you're using but when I search for Canada Tax File, uFile is the second sponsored link.

Some people might realize that Ufile is cheaper in B&M stores.  So they might click on an ad and buy the product in a B&M store.  This can lower Google's profits since the advertiser might bid less because they only look at online conversions, instead of trying to figure out the really complicated task of figuring out how many sales are driven from online to B&M stores.

 

I guess in general, I find it silly that not all software is being sold online at a lower price than B&M stores.  It's so obvious to me that software is best sold online.  The B&M store generates zero value (unlike selling shoes where you can see if they look good and fit).  Online is a cheaper delivery solution.  The customer can download the software right away instead of driving to the store or waiting for a package to arrive.  There are also cloud backups... you can download your software again.  As online retailing matures, I think that Google will generate more revenue from advertisers.

[VAL9000]

If mobile searches cannibalize desktop searches, then the projection is that Google's business will be permanently less profitable.

I would try to see things from the point of view of the consumer.

 

I want to buy something... e.g. new balance shoes.

I go online to figure out where I can buy them cheap.

I will see ads for online retailers and I will click on those ads.  In my case, the ads are actually more relevant than the organic search results.

I will compile a list of retailers and figure out which has the best price, what pair of shoes I want, etc.

 

I don't have a smartphone, I don't intend on getting one, but even if I did... I would never do this process on a smartphone.  Trying to buy something online on a smartphone would be painfully brutal.  So... my thesis is that smartphone CPC will always be low.  People don't really buy stuff on a smartphone (*in the future, maybe people will buy things like smartphone apps or use their smartphone to find local places for entertainment or whatever).  Because they don't buy a lot of stuff, the advertisers aren't going to pay a lot for that type of advertising.

 

Plenty of people buy things on smartphones.  Here's some proof of that:

 

http://www.nasdaq.com/article/strong-holiday-sales-a-prelude-to-amazons-growth-in-2013-cm205318#.UQCrmB1WxBk

 

The estimate of $3-5bn sold on smartphones represents about 5-10% of Amazon's total sales.  Not bad.

 

That said, the CPC thing only becomes relevant if people are searching for something in the first place.  It's only that people are searching for sneakers on their smartphones that advertisers are able to bid on the ads for clicking.  As far as impacting the Google model, your example is the exact opposite of concerning behaviour.  If you refuse to search for sneakers on your phone then you are not cannibalizing high value desktop searches with low value phone searches.

 

Also, really, you don't have a smartphone?  How can you project what's hard or easy on a smartphone if you don't have one?

[Palantir]

It is not a rule that G's revenue will be permanently impaired by the switch to mobile. It's a challenge that the business needs to figure out in order to sustain profitability.

 

 

Sometimes you need to let the company do the work.

[Guest valueInv]

It is not a rule that G's revenue will be permanently impaired by the switch to mobile. It's a challenge that the business needs to figure out in order to sustain profitability.

 

 

Sometimes you need to let the company do the work.

 

They pay a cut of their mobile search revenue to operators and hardware partners. They don't do that on desktop for the most part.

[ItsAValueTrap]

If you refuse to search for sneakers on your phone then you are not cannibalizing high value desktop searches with low value phone searches.

Yeah... I don't think that Google shareholders should worry too much about smartphones.  It's mostly irrelevant.

 

People use smartphones for different reasons than a desktop/laptop.  That is going to mean very fundamental differences between mobile and non-mobile advertising.

 

Also, really, you don't have a smartphone?  How can you project what's hard or easy on a smartphone if you don't have one?

The screen is small and typing is slower on a smartphone.  I don't think I really need to own one to know that.

 

On the other hand... I guess there *are* some people who shop on a smartphone.  If you see something in a store, you can hop on a smartphone to check if it's cheaper elsewhere.  Then you can try to pricematch or simply buy the item elsewhere after the B&M retailer has so kindly showcased the product for you.

 

The estimate of $3-5bn sold on smartphones represents about 5-10% of Amazon's total sales.  Not bad.

The article simply says mobile, which would presumably include Kindle purchases for eBooks and such.

 

---

All in all, I really don't think that Google shareholders need to worry too much about smartphones.  It's not going to fundamentally change Google's business.  And all Google has to do to adapt is to figure out the user interface issues.

 

I'm a lot more worried about Google losing its search dominance.  Its second biggest business is its ad display network (Adsense).  It has many competitors on that front and Google doesn't have a commanding lead in display advertising.

[ItsAValueTrap]

What do you guys think about ad retargeting?  I think that it is a huge, huge change for the display advertising business.  Forget about smartphones, ad retargeting is an important innovation that is going to make display advertising a lot more profitable.

 

This is really important for businesses that depend on display advertising... Adsense, Youtube, Facebook, many of the Web/Dot-Bomb 2.0 companies, etc.

 

Of course, this practice is going to open up a lot of privacy issues.  If somebody else hops onto your computer, they may see ads related to embarrassing hobbies or activities or products to deal with insecurities (e.g. weight loss, hair loss, etc.).

[VAL9000]

Yeah... I don't think that Google shareholders should worry too much about smartphones.  It's mostly irrelevant.

 

People use smartphones for different reasons than a desktop/laptop.  That is going to mean very fundamental differences between mobile and non-mobile advertising.

How can you say that it's irrelevant in one sentence, and then say that there are fundamental differences between mobile and desktop advertising in the next?  Mobile represents the single greatest threat to Google's business model today.  Here are some examples:

- Siri bypasses Google's search capabilities - that's potentially 10-20% of the US smartphone base potentially bypassing mobile advertising

- Apple Maps displaces Google Maps for local search - again, 10-20% bypassing Google ads

- People choose Apps over search for content initiation on mobile - about 100% of smartphone users use apps

- Classic AdWords and AdSense model doesn't transfer well to mobile devices

 

These shifts in consumer behaviour are all opportunities for competitors to displace Google's internet advertising hegemony.

 

Also, really, you don't have a smartphone?  How can you project what's hard or easy on a smartphone if you don't have one?

The screen is small and typing is slower on a smartphone.  I don't think I really need to own one to know that.

 

But you can't use your laptop to buy Christmas gifts on the bus.  Convenience is marked by many attributes.

 

On the other hand... I guess there *are* some people who shop on a smartphone.  If you see something in a store, you can hop on a smartphone to check if it's cheaper elsewhere.  Then you can try to pricematch or simply buy the item elsewhere after the B&M retailer has so kindly showcased the product for you.

This is a good use case.

 

 

The estimate of $3-5bn sold on smartphones represents about 5-10% of Amazon's total sales.  Not bad.

The article simply says mobile, which would presumably include Kindle purchases for eBooks and such.

 

Ok, here's another example.  IBM says that 16% of sales over Thanksgiving were made on mobile devices:

http://www.prnewswire.com/news-releases/early-promotions-drive-record-online-sales-for-thanksgiving-fuels-black-friday-retail-surge-reports-ibm-180691231.html

 

 

All in all, I really don't think that Google shareholders need to worry too much about smartphones.  It's not going to fundamentally change Google's business.  And all Google has to do to adapt is to figure out the user interface issues.

It's much more significant than user interface issues, but we can leave it at that.  I think smartphones are extremely important to Google and if they do not execute well then they will be severely punished.  However, I also believe that they are executing extremely well (for a large company) and that they will maintain their dominance via the dozen or so mobile strategies they have going on today.  So, I think we'll both be right, but we're coming to the conclusion in different ways ;)

 

[Palantir]

I find it funny that when you read the Google, Apple, and Microsoft threads, all of them essentially predict that each of these companies, who are all competing against each other, is going to go into decline. (Google - "mobile ads less profitable" , MSFT - "no traction in phone", AAPL - "not cool anymore"). Truly fascinating.