Revenue and Profit Rise at Google, but Mobile Is a Persistent Challenge
SAN FRANCISCO — There is no denying that Google has become a mobile company. Now, Google — along with shareholders, industry partners and advertisers — is trying to figure out what that means.
In mobile advertising, Google is wrestling with how to make as much money on phones as it has on the ads that appear on desktop computers. Its fourth-quarter earnings report on Thursday showed that it is continuing to struggle with lower ad prices on phones. Yet some of the new types of ads it has introduced have paid off handsomely, as have mobile businesses like the Play store for Android devices.
But in other areas, like manufacturing smartphones, Google has decided that the business is better left to someone else. On Wednesday, it announced that it would sell Motorola Mobility, which it bought less than two years ago for $12.5 billion, to Lenovo for $2.91 billion. Motorola’s $384 million loss in the fourth quarter contributed to Google’s failure to meet analysts’ earnings expectations for the quarter.
Google's stock activity over the last three months.
Google executives would prefer that people stop talking about mobile at all.
“People aren’t distinguishing what they’re doing on different screens, so advertisers should be more agnostic about where they reach the user,” Nikesh Arora, Google’s chief business officer, said on a conference call with analysts. “The fundamental tenet is not to speak about mobile, mobile, mobile. It’s really about living with the users. What device are you on? What’s your question? How can we assist you? That’s a much broader and richer set of activities for us.”
And while everyone else is still obsessing about smartphones, Google has moved on to new kinds of devices and even robots. Eyewear with tiny computers called Google Glass is expected to be sold to consumers this year, and the company recently bought robotics companies and agreed to acquire Nest Labs, which makes Internet-connected thermostats and smoke detectors.
“While Apple hasn’t even put out a bigger phone, Google is leading in wearables with Google Glass. It’s got driverless cars. It’s wiring up homes with tremendous Internet speed connections,” said Colin Gillis, an analyst at BGC Partners. “Something’s got to pay off.”
To shore up their control and acquire new companies, Google’s founders, Larry Page and Sergey Brin, proposed in 2012 a new class of nonvoting shares.
On Thursday, Google announced that its board had approved the stock deal. Though some finance experts have doubted whether it would benefit shareholders, the news contributed to an increase of about 4 percent in Google shares in after-hours trading.
“It’s a little bit like, ‘This is my company; if you don’t like it, hit the highway,’ ” Mr. Gillis said.
Shareholders and equity analysts are also trying to figure out how to value today’s Google. Its stock price rose 25 percent since its last quarterly earnings announcement, yet Google has performed below analysts’ expectations more often than not in the last two years, and it did so again in the fourth quarter.
The company reported fourth-quarter revenue of $16.86 billion, an increase of 17 percent over the year-ago quarter. Net revenue, which excludes payments to the company’s advertising partners, was $13.55 billion, up from $11.34 billion. Net income rose 17 percent to $3.38 billion, or $9.90 a share. Excluding the cost of stock options and the related tax benefits, Google’s profit was $12.01 a share, up from $10.65 a year ago.
Analysts had expected revenue of $16.75 billion and earnings, excluding the cost of stock options, of $12.26 a share.
The fourth quarter is generally Google’s strongest because it makes money from retail advertisers during the holiday shopping season. Last quarter, that was even more pronounced because of the success of Google’s product listing ads, a new kind of ad with photos that Google requires retailers to buy to be included in its shopping listings.
In the fourth quarter, the price advertisers paid each time someone clicked on one of those ads rose 80 percent from the year before, compared with 11 percent growth in typical text search ads, according to Adobe, which manages ad spending for 1,200 advertisers.
Another new type of ad program from Google, called enhanced campaigns, lumps mobile ads with desktop ones and is expected to help Google’s mobile ad business grow. Nonetheless, the price advertisers pay when people click on smartphone ads is still about a third of the price of desktop ads, in part because people make purchases from mobile ads a quarter as often as they do on computers.
In the fourth quarter, the cost per click on ads declined 2 percent from the quarter before and 11 percent from the year before, continuing a two-year trend of declining prices.
Despite Google’s mobile challenges, among web businesses it might be the biggest beneficiary so far of consumers’ shift to mobile devices. Google services are the top web property on smartphones, reaching 87 percent of the mobile audience through apps and mobile browsing, according to comScore. (Facebook is next with 85 percent.)
And Google earned 42 percent of all mobile ad revenue in the United States last year, significantly more than any other company, according to eMarketer. Its share of mobile revenue, however, was down from 50 percent the year before and is not growing as quickly as that of Twitter, Apple and Facebook.
“It’s safe to say they figured out mobile advertising,” said Jordan Rohan, an analyst at Stifel Nicolaus. “Google’s problem is it’s 50 percent of online advertising, so it’s hard to grow as fast.”
Google benefited in the quarter from a brisk business in its Play store for buying things like apps and music on Android devices, and from widely distributing Google’s services on Android phones, which have a 52 percent market share in the United States, according to comScore. On YouTube, 40 percent of the time spent watching videos comes from mobile devices.
In November, Google announced that Nielsen would measure its traffic the way it does on TV channels, which is expected to help YouTube court advertisers.
“From a longer-term perspective, every piece of advertising becomes digital,” Mr. Arora said.
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