SAN FRANCISCO – Google is losing the battle against falling ad prices, but still winning the online advertising war.
In its earnings report on Thursday, the company revealed the decline of a key pricing metric has once again accelerated, as its cost-per-click fell 8% from a year earlier.
The reason is a surge in mobile ads, which cost less per unit and have lower click rates than those served onto desktop computers.
Google CEO Larry Page said almost 40% of the traffic on the company's YouTube video site now comes from mobile device users, up from 6% two years ago.
Yet, the search giant more than made up for lower prices with higher volume, as its number of paid clicks climbed 26% year-over-year. That was higher than the 21% jump reported by rival Yahoo.
The net result was a 19% jump in quarterly revenue (or 12% including its lagging Motorola handset unit) and a 36% surge in net income.
Google's ad numbers suggest that changes that the company has made to how it sells advertising have merely slowed — not stopped — the downward pricing pressure caused by a surge in mobile ad traffic.
Close Google watchers will remember that the impact of mobile ads on Google's business first revealed itself 15 months ago, during its quarterly earnings report in July 2012.
That's when the company reported its cost-per-click dropped 16% from a year earlier, alarming Wall Street and prompting a short-term drop in its stock price.
In response, Google made changes to how it deals with professional online ad buyers, essentially stripping them of the ability to target ads at either desktop, tablet or smartphone users.
Instead, the company's technology now determines where and when to place text and video ads onto those different platforms, based on where Google thinks is best.
Thanks to the new method, which Google has dubbed "enhanced campaigns," the company earlier this year had slowed the annual rate of decline in its cost-per-click to 4%.
Yet, the decline has accelerated during the last two quarters, and for the period ended in September, prices were falling at twice that rate.
The reason is mobile.
Google's algorithms can't change the fact that most mobile device users think cheap-looking text ads that pop up on smartphones or tablets are more annoying than enticing.
Annoying ads aren't clicked on as frequently as relevant ones, which is one reason mobile ads are so cheap per unit.
The click-through rate for ads served on Android-powered tablets fell to 2.3% in the third quarter, from 3.2% a year earlier, according to a report released this week from market researcher, The Search Agency.
For smartphone users, the rate dropped to 3.1% from 3.9%.
Sheer volume is another reason for the decline. The number of these ads is exploding as more consumers make the switch from desktop computers to mobile devices.
That same report from The Search Agency showed that one-third of the clicks on Google search ads in the U.S. now come from mobile users.
No wonder mobile ad revenue skyrocketed 145% during the first half of this year to $3 billion, compared with the same period in 2012, according to the latest report from the Interactive Advertising Bureau, a trade group.
That's eight times faster growth than the overall online ad market.
Those findings were echoed in the data from The Search Agency, which found that click volume on tablets in the U.S. surged 63% during the third quarter, and tablet advertising spending, 68%.
The surge came even though the cost-per-click for all ads displayed on tablets in the U.S. fell 10.4% in the third quarter, compared with a year earlier, as the report said.
Clearly, there's money to be made in mobile ads, and Google — no surprise — is capturing a large chunk of it, even as the average unit price of its search ads continues to fall.
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