Google continues to ride high on advertising in June quarter
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New Delhi: Advertising powered Internet giant Alphabet Inc.’s revenue growth in the second quarter, as it has for years now.
Revenue at Alphabet—Google’s parent firm, formed in 2015—rose 21% to $21.5 billion in April-June from a year ago. Advertising revenue reached $19.14 billion, a 19% year-on-year (y-o-y) increase.
Nearly all of Alphabet’s revenue comes from Google’s advertising business—banner ads on websites, text ads on Google searches, or ads on YouTube videos. The June quarter confirmed Google’s core source of revenue is still growing at a robust pace.
“Our terrific second quarter results, with 21% revenue growth year on year, and 25% on constant currency basis reflect the successful investments we’ve made over many years in rapidly expanding areas such as mobile and video,” said Ruth Porat, chief financial officer of Alphabet, in an earnings call.
It’s clear then, from what Porat said, that mobile and video are the two main drivers of growth for Google as they are for its rival Facebook Inc., which announced its earnings a day earlier on Wednesday.
Both firms have been able to capture advertisers and users as they move from traditional desktop computers to mobile. While search-based advertising has been the biggest money-spinner for Internet firms in the past two decades, the emphasis is gradually shifting to mobile.
According to venture capitalist Mary Meeker, mobile advertising is growing massively, y-o-y, with a 66% increase in 2015 (over 2014). In the case of Google, it is greatly helped by Android—Google’s customizable, easy-to-use operating system—that powers more than a billion devices from phones and tablets to watches. According to reports, the company also pays Apple Inc. to make Google the default search engine on iPhones. Google has said more than half its searches now come from mobile devices, and some analysts estimate more than half of its revenue now comes from mobile.
eMarketer, a digital marketing researcher, forecasts Google will generate $57.8 billion in digital ad revenue worldwide this year, 9% over last year. It estimates Google will gain $47.57 billion in search ad revenue in 2016, or 55.2% of the search ad market worldwide.
Despite strong revenue growth, the falling cost per click—a key metric of ad performance—on advertisements is cause for concern as it suggests advertisers aren’t willing to pay as much for Google advertising, and the company has to find a way to replace that with some other metric. Cost per click went down by 7%, while aggregate paid clicks (how many times people click an ad) increased by 29% y-o-y. Says Anshoo Nandwaani, vice-president and principal analyst, Greyhound Research: “Falling cost per click is a sign of the times and is set to become more prominent. Advertisers increasingly want to see sales outcomes and companies such as Alphabet (more specifically, Google), InMobi, Facebook, among others, are currently unable to meet this demand. Most ad networks, including Google, are only able to show visibility and clicks. It will get increasingly tougher for ad networks to survive solely on the base of visibility and clicks.”
Porat also reported on Alphabet’s other businesses, classified as the other bets division, which consists of companies such as Google Fiber, Nest, self-driving cars and other moonshot ventures. Revenue at other bets rose 150% to $185 million, while operating loss widened to $859 million, suggesting the risky nature of this segment that includes futuristic projects. However, experts expect the firm to continue investing in this segment, albeit in a more controlled fashion under Porat, who became chief financial officer in May 2015.
Google is up against Facebook that has nailed an incredibly successful mobile advertising strategy, while Google’s is still a perpetual work in progress. And Facebook isn’t the only company it faces competition from. As Alphabet develops its own cloud services, it faces Amazon, which is, of course, way ahead of Alphabet as a cloud services provider, with $2.9 billion in revenue in the June quarter.
According to Greyhound Research estimates, if both Google and Facebook continue with the current pace of investment, operating margins and revenue accruals (in constant currency terms) in advertising, by 2020, Facebook will triumph as the global market leader with an advertising revenue base at least 15% larger than Google.
Seen in the context of Facebook, Google’s growth may not seem so spectacular, though the revenue it generates is staggering. Facebook is a much younger, nimble-footed firm that reached over $2 billion in quarterly profit in the three months to June, a mere six months after it hit $1 billion. Google, in comparison, took 3.5 years to go from $1 billion to $2 billion.
Facebook’s total revenue grew 59% y-o-y to $6.4 billion, and advertising revenue by 63% to $6.2 billion. Of this, mobile advertising revenue reached $5.2 billion, up 81% y-o-y, and was approximately 84% of total ad revenue.
While Alphabet does not break out the figures geography- wise, Google enjoys a strong presence in India. According to Greyhound Research, Google has done well to step up its presence in India and is serious about its enterprise business in India. It is also aggressively investing in the India Android ecosystem, and adding significant muscle to its mobility offerings besides its commitment to bring 20 million businesses online by 2017 and train over two million Indian developers on Android.