Markets

Google Hits a Revenue Ceiling as Paid Clicks Fall

By Jim Edwards

Updated on: July 21, 2011 / 4:38 PM EDT / MoneyWatch

Google (GOOG) delivered another amazing earnings call as Q2 2011 revenues rose a staggering 32 percent to $9 billion. Yet, buried in the management discussion, is a sign that Google may be approaching a ceiling on its revenues, or at least the first sign that there are limits to growth.

Aggregate paid clicks fell 2 percent between Q1 and Q2 2011, the company said. The company has not reported a fall in total paid clicks quarter-to-quarter or year-on-year in any of the last six quarters, according to its SEC disclosures.

First, keep this in perspective. Google's total revenues are not about to grind to a screeching halt. Its numbers are so eye-poppingly awesome for an advertising company that there just aren't superlatives in the dictionary to truly do it justice. Google takes about 54 percent of every dollar spent on web advertising. It gets about seven times more of each new ad dollar spent on the web than the largest "traditional" ad agency network, WPP (WPPGY), even though that advertiser has plenty of online businesses, and it's seven times as profitable.

But in addition to its total revenues, more than 90 percent of which come from paid clicks via advertising, Google always gives a measure of its growth in "aggregate paid clicks" and "average cost-per-click." As this chart shows, in recent periods growth has always been up:

(Source: SEC disclosures.)
The percentages represent year-on-year growth. In Q2 2011, for the first time in a long time, Google said its sequential quarter-to-quarter paid clicks declined:

Aggregate paid clicks, ... decreased approximately 2% over the first quarter of 2011.

That type of comparison has not been made in any of Google's quarterly statements going back to 2009. The company did report a 7 percent decrease in average cost-per-click between 2008 and 2009 (as you can see in the above chart). That decline was probably Google's recession. You can see that Google's sequential revenues suffered a downturn during the financial crisis in late 2009:

In Q2 2011, however, Google should have been growing on all metrics. So why didn't it? Google is an excellent proxy for the web economy as a whole, given that it represents more than half of some of its main sectors. The debate now should be, Is this decline a sign of a double-dip recession on the web, or just the law of big numbers finally arriving at the the web's biggest company?

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Image by Flickr user boboroshi, CC.