When Google (GOOG) announced its results for the quarter that ended in June on Thursday, investors were mostly impressed and the stock jumped 3 percent on Friday. The company pointed to 22 percent year-over-year revenue growth, although earnings were below analyst expectations due to increased spending.
Deep in the numbers, there was the continuation of a more disturbing trend: the continued drop in the price ads command, as the New York Times pointed out. The "cost per click" number was down 6 percent year-over-year.
That isn't a sudden change. Difficulty generating revenues from mobile ads is a long-term issue for online firms. "The revenue opportunity is very, very high, but right now mobile does not monetize as well as other forms," said Nikesh Arora, the company's chief business officer, during the analyst conference call.
Mobile has long been hailed by many in technology as a great boon. It has provided enormous benefit to some companies. Apple is probably the biggest winner, depending as it does on hardware sales. Those whose business models need ad revenue, however, are in a pickle, largely because of the physical restraints of device displays.
On a desktop or laptop browser, there is lots of room to line up ads along the edge or top of a page. Look at the layout of Google search and you'll see multiple ads. Then a company can also offer space for video ads, which pay even more. The combination of ads provides a multiplying factor.
There simply isn't the room on a smartphone. You can try to fit in additional ads, but they get smaller and easier to ignore by audiences. Advertisers use that as a reason to push back on prices. Systems that employ automated bidding can drive down costs even more, because advertisers collectively have greater control over the negotiations.
Even if you point to an apparent exception like Facebook, as the Times does, because it reportedly accounts for 16 percent of mobile ad dollars spent, the picture is still far from rosy. For example, in Facebook's earnings from the first quarter, mobile ad revenue was 59 percent of all the company's ad revenue, up from 30 percent the year before.
Good, right? Not quite. Mobile represented 76 percent of daily average users and 79 percent of monthly active users. Even though there is crossover between mobile and non-mobile users -- someone might use a desktop at one point of the day and a phone later -- it still means that mobile use brings in less revenue per consumer.
This may be a big reason why Facebook is testing an e-commerce addition to its site. Depending too much on mobile advertising could impede revenue growth, at least for the near future.