Can Google Turn Around Mobile Advertising?

The company has a plan to raise low mobile advertising costs. So far, it hasn't been working.

Advertising is Google's main source of revenue, but on increasingly popular mobile platforms the company is struggling to earn money.
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The day after Google announced lackluster second-quarter earnings, the company's stock price also had a lackluster day, opening with more than three-percent drop and recovering to end nearly 1.6 percent behind where it started.

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Several numbers disappointed investors: earnings per share were at $9.71, down over 4 percent from last year, with revenue also coming in below expectations. But one additional figure worried tech pundits: costs per click (CPCs) on Google's advertising fell by six percent year-over-year in the second quarter, its seventh straight quarterly decline.

A few datapoints illustrate where that decline came from. First, users are increasingly migrating to mobile devices: According to eMarketer, users spent 82 minutes per day on their mobile devices in 2012, not including time spent talking. That's up by nearly 30 minutes from the year before. Add to that the fact that mobile ads are far cheaper than ads on other devices, bringing in around 40 percent less per click, according to search marketing agency Covario.

More mobile users looking at more mobile ads mean less ad revenue. Even though Google's total number of clicks are continuing to grow, that's a particularly scary equation for Google, as 92 percent of its revenue comes from advertising.

To prevent a revenue slide, Google is hoping to turn around the mobile advertising game with what it calls "enhanced campaigns." The idea behind the revamped product is to show advertisers the value of mobile ads.

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"People don't buy a lot through a smartphone," says Alex Funk, director of digital media strategy at Covario. "You really aren't buying large-ticket items, but you are looking at where to buy from a store."

With Google's previous, non-enhanced advertising, a user might have searched for pizza and clicked on an ad for a local pizzeria. But rather than buying the food on her phone, she might call the shop and order – an interaction purchase that mobile ad analytics wouldn't have captured in the past, but that Google's new campaign promises to track. Google's new software also would allow that restaurant to increase the bid on its ads, depending on the buyer's proximity. In addition, Google says the new product will also allow companies to more easily manage their advertising campaigns across devices and audiences.

Google unveiled the campaign in February and will begin automatically upgrading all campaigns this week. Google CEO Larry Page told investors Thursday that three quarters of all AdWords Campaigns have already upgraded. Still, one analyst suggests the latest numbers show that the company is not yet succeeding with its new campaign (Google declined to comment for this story).

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"I think the thought was that as they moved to enhanced campaigns, that would lift mobile CPC rates toward what they would get on the desktop," says Kerry Rice, senior Internet and digital media analyst at investment banking and asset management firm Needham & Company. "I think the expectations were that with the transition really to enhance campaigns in [the second quarter], we would start to see that lift, and since we didn't, I think that's caused a lot of people some concern."

Because Google is a technical behemoth with massive financial resources at its disposal, it is perhaps the best company to solve that problem. And because advertising feeds the company's revenues, it has all the more incentive to develop a way to capture every dollar it can from those clicks.

"They know the future is in mobile. ... Your desktop is plugged into your office. Your mobile device goes with you," says Balk. "The way Google will continue to grow is to monetize that user activity."

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