"Why do we need to understand Google?" is the question I ask in almost all of the training, pitches and talks that I'm part of. The answer, up till now, has been because it drives over nine out of ten UK searches and this statistic has remained the same for as long as I've been giving talks. Since Hitwise released their December 2012 search data I'm going to have to modify what I say to "it drives almost nine out of ten UK searches". Google's market share has hit a five year low.
The Google good news (and the bad news)
Google released its 2012 Q4 results last week and they were open about the challenges facing the business. The markets reacted positively and Google's share price increased by 5% but there was mixed news in that investor conference.
- Good: Total UK Revenues increased by 30% (Q4 2012 vs Q4 2011) from £1.06bn to £1.30bn.
- Bad: Google's average advertising Cost Per Click declined 6% year on year (see further down)
- Good: UK search traffic hit an all-time high in December 2012 with 2.7 billion searches.
- Bad: Google now commands less of the market then they did last year.
The challenge of CPC
Google's over-reliance on one source of income, the AdWords advertising platform (Google would be a ~$5bn turnover business, not a $50bn business without AdWords), has led to investors focusing on a single number, the average CPC (Cost Per Click). This metric is the average cost that Google receives from its advertising clients when a searcher clicks on an advert, and it has been falling at a dramatic rate.
The fall in CPC isn't down to a shrinking market or a poor product, in fact Google's advertising platforms are constantly evolving and giving advertisers wider campaigns which generate more ad clicks and more revenue for Google. The reason CPC is falling is because of mobile.
The percentage share of search that takes place on a mobile device is growing, and all indications are that this growth will continue, however mobile search offers fewer opportunities for Google to generate revenue. On the average desktop or laptop screen you'll see up to thirteen adverts on a Google search results page, but on a mobile device you rarely have more than four. This results in fewer click-throughs (users can click on multiple adverts before they find the website they are happy with) and lower bids as the competition is less (as the number of advertising positions is smaller but also because there are fewer mobile advertisers than online advertisers which deflates the auction model).
Google founder Larry Page said: "We're in some uncharted territory because of the rapid rate of change in these things, but I'm very optimistic about it. I think the CPCs will improve as the devices improve, as well."
The pressure on income.
Google is sometimes the middle man. When you search on an Apple device and you end up on Google then Apple takes a percentage of the ad revenue. If you use the Firefox search box then that earns money for the browser maker. In Q4 2012, 25 per cent of Google's revenue went straight out the door paying partners, with Mozilla taking home a minimum of $300m per year for the next three years, and that's up from the previous $103m deal.
Where do they go from here?
Mobile may be the bane of Google at the moment but the search giant's reaction to the mobile landscape has shown how they can adapt. Two years ago they ploughed resources in to capturing this market, which was - and still is - more fragmented and offers more choice than the online landscape, to make sure they retained market share. Their products expanded to cover mobile effectively and they acquired where they needed to land-grab. They're taking steps to own the supply chain, firstly with the operating system on mobile devices (Android) and now in to the hardware itself with Motorola - however beyond mobile they've had some stop-starts with non-mobile hardware such as Google TV.
The threat of Facebook as a search engine exists only in Facebook's head - their numbers are falling in the markets they led in first (active users are down in both the US and UK) and the social network will feel constant pressure from both users and the media on anything remotely related to privacy.
So the strengths, weaknesses, opportunities and threats for Google may lay in the mobile landscape, but when almost 90 per cent of the market use your product the challenge is an easier, internal one.