Costs are rising and Google said yesterday that revenue, excluding sales passed on to partners, was $12.2bn (€8.8bn) in the first quarter, another stumble as the company missed a projection by analysts for $12.3bn.
Facebook, Intel, and Microsoft are also struggling to change their businesses to appeal to consumers and businesses spending more money on smartphones and tablets.
Google’s audience is migrating to smartphones, where the company gets less ad money for marketing spots than on desktops and tablets. While chief executive Larry Page boosted the number of promotions by 26%, average prices slipped 9%.
“Obviously mobile’s growing faster than desktop,” said Gene Munster, an analyst at investment bank Piper Jaffray. “The core questions that investors are dying to answer is just how that gap closes. They’re not showing it in the results yet.”
Google’s net income rose to $3.45bn during the first three months of 2014 from $3.35bn a year earlier.
“Mobile is perceived as the single biggest risk over the near term,” said Scott Kessler, an analyst at S&P Capital IQ. “Mobile is definitely helping Google and many others in the number of volume-related metrics, but mobile has also had a notable negative impact on pricing.”
Facebook’s stock dropped by more than half in the months after going public in 2012 due to investor concerns it wasn’t making enough money from mobile ads. Microsoft recently changed its CEO after stumbling in efforts to deliver mobile products and services. Intel earlier this week reported that its mobile chips business, which chief executive Brian Krzanich has called critical to its growth, had an operating loss of $929m in the latest quarter.
Google is also spending more to expand its services, with costs rising faster than total sales, which rose 19%. Expenses climbed 23% to $11.3bn in the latest quarter.
Patrick Pichette, Google’s chief financial officer, said the increase in operating expenses was largely tied to legal costs and other spending related to acquisitions. But it is in good shape amid rising revenue and healthy profits, he added.
“There you have it: strong results — and the optimism that provides us the confidence to fund strategic growth opportunities,” Pichette said. Still, smartphones are dragging down prices for digital ads, with smaller screens limiting the number of promotions that can be displayed, while marketers are becoming more selective in using them. The cost per click for search advertising on smartphones dropped 35% during the first quarter in the US, according to IgnitionOne. Tablets saw ad prices rise 29%.
“People want to see pricing stabilise,” said Ben Schachter, an analyst at Macquarie Securities. “It’s going in the right direction, at least, but it’s still declining.”
Google remains optimistic about its prospects. Nikesh Arora, chief business officer, said during the call with analysts that he expects wireless-gadget pricing to eventually outpace the traditional desktop spots. “In the medium to long-term, mobile pricing has to be better than desktop pricing,” Arora said. “In mobile, you have location, and you have context of individuals which you don’t have in the desktop.” Other revenue at Google, which includes the Play store and hardware such as Chromecast, rose 48% from the year ago-period to $1.55bn. Google is investing in new products to drive future growth. The company is licencing hotel-booking software from Room 77, a startup backed by Expedia. With Room 77, Google can cater to travellers looking to quickly book hotels, the most lucrative part of online travel. The company is also set to expand advertising services. For YouTube, Google’s video-sharing service, Arora said the search provider will offer customers guaranteed audiences under a new program. The advertisers will get access to some of the most premium content on the site, he said.
Google is willing to back away from investments that are not working. It is selling its Motorola smartphone unit to Lenovo for $2.91bn, after buying it for more than $12bn in 2012. Google, which still retains patents, said Motorola had a loss of $198m on a discontinued basis.