Editor’s note: Google’s (Nasdaq: GOOG) latest earnings report on Monday shows that the technology giant is beginning to solve the mobile advertising conundrum as YouTube, mobile and programmatic advertising services begin firing on all cylinders, writes Technology Business Research analyst Jack Narcotta.
HAMPTON, N.H. – If the year leading up to 4Q15 was the break-in period for Google’s new mobile-centric advertising platforms, then TBR believes 4Q15 should be considered Google’s proof-of-concept, and its largest step forward to-date in removing the obstacles in front of it as its revenue streams and customer base shift from desktop to mobile.
Google’s 4Q15 results illustrate how Google is reaping the benefits from building an ecosystem around YouTube and its other mobile-focused digital properties.
[More coverage: Google’s Alphabet surpasses Apple as world’s most valuable company.]
Google’s revenue, gross profit and operating profit climbed 17.8%, 17.5% and 22.3% year-to-year to $21.3 billion, $13.1 billion and $5.4 billion respectively, record amounts for Google in any quarter.
Revenue and profit growth would have been larger were it not for the impact of foreign exchange rates against the U.S. dollar; per Google, currency fluctuations robbed it of $1 billion in revenue in 4Q15, and TBR expects exchange rates will influence Google’s growth through 2016, especially with revenue outside the U.S. typically accounting for more than half of its total revenue each quarter.
Google is capitalizing on the shift from traditional advertising outlets to digital media – advertising revenue climbed 18.1% year-to-year to $19.1 billion – but future-proofing its business against the ripple effect of falling ad prices, even as the aggregate number of clicks rises, will be a challenge. Prices for ads on Google sites fell 16% from 4Q14 despite paid clicks rising 40% over the same time period.
Additionally, as average YouTube watch time on a smartphone or tablet, according to Google CFO Ruth Porat, approaches 60 minutes, TBR believes monetizing this increased view time will require a balanced approach for Google. A greater number of video ads and video advertising services will increase digital-oriented advertising, but the larger scale will drive ad prices further down, making it more difficult for Google to profit from each ad.
TBR believes Google is well-equipped to capitalize on users shifting their search and internet habits to mobile and away from the desktop PC. Mobile advertising, especially YouTube video advertising such as its Google Preferred channels and its TrueView ads, was the primary driver of revenue growth. In addition to mobile searches rising “significantly” year-to-year and quarter-to-quarter in 4Q15, according to Google CEO Sundar Pichai, Google executives also noted broader utilization and engagement by mobile users across its core platforms, which promises an extended, seamless experience coveted by advertisers.
Instead of simply searching for a product or service heard about through word-of-mouth in the real world or via social media sites, users’ searches are now originating from Search, Gmail, YouTube and Maps. The interlocking display and programmatic advertising platforms formed by these services benefits both Google and its customers: Google grows mobile ad revenue along the uptick in mobile data traffic and the traffic it directs to its partners’ sites, and advertisers begin to finalize capitalize on – and monetize – Google’s year-long tinkering with its cross-platform advertising services.
In this scenario, TBR believes YouTube will be particularly important for Google in 2016, as advertisers’ target audience spends more and more time viewing video content, and brand advertisers shift their ad spend and content initiatives from broadcast television to the internet.
Strong competition from Facebook will slow some of the momentum of Google’s advertising business, but TBR believes these two rivals are staking claims in the advertising market based on their core strengths – Google in search and video content, and Facebook in social networking and content sharing – that will allow the two advertising platforms to co-exist through 2016.
Many of Google’s “science projects” aren’t generating revenue, but that’s not the point
Alphabet, the conglomerate that is the parent company of Google and several other subsidiaries previously owned by Google such as Fiber, Calico, Nest and Verily, reported that in calendar 2015 its “Other Bets” segment – composed of these “moonshot” initiatives and investigations into leading-edge technology and services – generated $448 million in revenue, up from $327 million for 2014, led by Nest, Fiber and Verily. Porat stated all other Other Bets programs were “pre-revenue”, signifying that they are spending money, not making it.
TBR believes the scale of Google’s advertising business, and the profits it produces, more than compensate for these moonshots, allowing Google to freely invest into the technological and human capital necessary to pursue these esoteric initiatives in life sciences, medicine, robotics, alternative internet service delivery, and autonomous cars.
However, Porat called out an emerging area of research for Google – machine learning – that, according to Google, is also intended to benefit its core business. Real-time voice processing and analysis and image recognition, already possible with Google Now and a variety of complementary apps will be exponentially improved by machine learning, setting the stage of the next wave of mobile search technology.
Greater use of voice-enabled searches on mobile devices will not only drive additional users and advertisers to Google’s mobile search platform, and TBR believes the extensible technology will allow Google to expand search’s capabilities into automotive, finance, healthcare, public safety and education markets.