For years, industry analysts and investors have been raising concerns over the dependence of Google’s business model on ad revenue. With the widespread growth of social media and changes in the way people use the web, new questions are being raised about Google’s dependence on ad revenue and if it will turn out to be the company’s Achilles heel.
The Source of Doubt
Google’s lower than expected earnings reported in Q4 of 2011 amplified existing concerns about the search giant. To make matters worse, Google also reported an 8 percent decline in the cost per click rates from 21. The lower than expected earnings, as well as other existing concerns surrounding Google, resulted in a 9 percent loss in stock value after the earnings report came out in Q4.
Google’s 2012 Q1 earnings report shows revenues up 24 percent from last year. Google also announced the creation of a new class of non-voting stock that would be used to implement a 2-1 stock split.
Recording of 2012 Q1 Earnings Call
Focused on the Long Term
In the 212 Founders’ letter, Google founders Sergey Brin and Larry Page emphasized the importance of Google’s strategy.
“In our experience, success is more likely if you concentrate on the long term. Technology products often require significant investment over many years to fulfill their potential. For example, it took over three years just to ship our first Android handset, and then another three years on top of that before the operating system truly reached critical mass. These kinds of investments are not for the faint-hearted.”
Despite Google’s increased earnings in Q1, and affirmation by the company’s founders of the continued focus on the “long term” strategy that has led to Google’s success to date, concerns about the proposed stock split and Google’s future are still pervasive.
Mobile Ads and Android
However, a new report by eMarketer suggests that Google’s display advertising business will outpace Facebook by 213. According to the report, Google is expected to capture 44.9 percent of the expected $38.5 billion spent on online advertising in the US in 212. This growth in display advertising is expected to continue to increase as Android furthers its position as the leading smartphone platform.
According to a recent ComScore report, as of February 212, Android subscribers account for 5.1 percent of total US smartphone subscribers. This lead is expected to increase as more consumers trade up from feature phones to smartphones and even more cost-effective Android smartphones hit the market. It is even projected that Android devices will outnumber Windows devices by 216.
Mobile World Congress 212
Google’s position as the leading smartphone OS coupled with mobile advertising revenues in the US expected to reach $2.61 billion up from $1.45 billion in 211 and $796.6 million in 211 highlight that Google’s dependence on ad revenue could be misplaced.
Even with changes in how people use the web, and the increasing importance of social media sites, Google’s dominance in mobile looks to secure its position as a leader in display advertising and address concerns about the company’s business model.
What do you think? Is the dependence on ad revenue going to be Google’s Achilles heel?