Can Google stop the drop in mobile advertising prices?

April 23, 2013: 6:34 AM ET

Google's latest quarterly earnings raise concerns about its mobile ad efforts. But things may turn out just fine for the tech giant. More than fine, in fact.

154522FORTUNE – For Google, the money has always been in advertising.

Propelled by products like AdWords, advertising generated $43.7 billion in sales last year -- a whopping 95% of Google's (GOOG) overall revenue. Its continually lucrative ad business has allowed Google to use its cash for other less-profitable ventures: Android, self-driving cars, Glass among many others. But like most of tech, Google has been challenged by the transition from desktop to mobile computing -- and how to make money from users browsing the web on smartphones and tablets. One thing is for certain: The mobile market cannot be ignored. In the U.S. alone, mobile ad spending is expected to more than double from $7 billion this year to $16 billion in 2015. JMP Securities analyst Ron Josey recently estimated that mobile ads now account for 14% of Google's overall ad sales.

An important metric for Google tied to ads is called "cost-per-click." It measures the average amount advertisers pay Google each time a user clicks on an ad. Last quarter, the company announced it would reduce the number of ads on its mobile search page to preserve the user experience and predicted a higher cost-per-click. The latter didn't happen. Instead, Google's cost-per-click fell 4% compared with the same time last year and marked the sixth consecutive quarterly decline.

In truth, mobile ads still command lower prices than desktop ads do, the argument being that people remain less likely to click ads on their phones or tablets than desktops. (What's more, many users may be clicking on them accidentally.) "The saying goes that ad dollars follow eyeballs, but that's not entirely the case," explains Clark Frederickson, vice president of New York-based digital market research firm eMarketer. Companies may be quick to tout growing mobile sales, but at the end of the day, just over 10% of e-commerce occurs on mobile. And until mobile phones and tablets become just as much a buying device as they are say, a consumption device, Frederickson says many advertisers will continue to focus their ad dollars on the desktop for the time being -- even if the desktop's days appear numbered.

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153074Certainly, Google has laid the groundwork for a mobile ad boom, with its Google+ social network and popular Android OS, which has over 750 million users. In theory, these products should allow the company to easily push ads through to a wide number of devices via multiple channels, but tangible returns aren't there yet. Google+ may have over 500 million members, but just 135 million of those return to the social network each month. (A far cry from Facebook's 1 billion-strong user base.)

More products like Enhanced Campaigns should improve Google's mobile ad push moving forward. Rolled out last February, the AdWords feature lets marketers more easily advertise across different platforms and devices. In exchange for Enhanced Campaigns' ability to more easily and dynamically market across different platforms and devices, marketers give Google more control over ad prices. Indeed, Frederickson says Enhanced Campaigns played a big role in preventing a sharper decline in cost-per-click during Google's latest quarter. In other words, it could have been worse.

But it's far from doom and gloom for Mountain View where the future of advertising is concerned. With nearly 29% of the U.S. mobile display ad market, Facebook (FB) may have the largest share, but eMarketer expects Google to take the lead beginning next year. Simply put, as consumers rely more and more on their devices -- for purchases, as well as content consumption and creation -- Google in particular will become increasingly better positioned to reap the benefits from a developing market.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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