I've seen a lot of chatter about Google's (GOOG) quarterly results, with many investors focusing on "cost-per-click," which was down 8% compared to the same quarter last year.
Let me give you a little perspective on this issue from the advertiser's perspective. GOOG shareholders might not like lower costs for a click, advertisers think it's excellent news.
Let me be clear, I don't believe one should evaluate GOOG merely on click costs alone, but if you do, prepare for some disappointment in future quarters. Here's are three reasons why
Reason 1: Search media: The times are changing
In the olden days, say before 2008 or so, Google was pretty much the only pay-per-click provider. It was a great model. An advertiser could bid on search terms and have their ads appear alongside the search results.
But searching for information today is more nuanced and subtle. Social media channels such as Facebook replace search in some meaningful ways. If you're researching a topic for a term paper, you may continue to rely on Google. But if you're in a strange city and searching for a place to have dinner, your social network may be a better resource.
Given that companies like Facebook have introduced advertising, and offer abilities to target specific interests, advertisers may find better results allocating some of their budgets to social media. True, Google+ is gaining steam, but it's not the only game in town.
Reason 2: Pay-per-click advertising: A constant 24/7 auction
Before Google, advertising had a set price. Media outlets such as TV networks and newspapers would charge a set rate. And while those rates were certainly flexible based on demand - kind of like airline fares, pay-per-click ad rates are set via auction. That's how pay-per-click works. Making allowances for the quality of your ad (the likelihood someone might click on it), Google serves ads based on how much you're willing to pay for that click.
But if bidding for keywords represents an auction process, that auction has become a lot more competitive as technology has improved.
Think about it this way. Stocks are essentially sold in an auction process throughout the trading day. Today's technology allows high-frequency traders to take advantage of predicting patterns in the bids and offers for stocks.
Why would pay-per-click advertising be any different? It's an auction, too - and it runs 24/7. If you have a high-frequency search engine bidding system that knows exactly when bidding a penny more gets your ad served more effectively (and knows when bidding that penny more isn't worth it), your campaigns are going to be more efficient and more competitive. And that puts downward pressure on click costs.
Reason 3: Advertisers don't focus solely on clicks
Clicks alone do not represent the advertiser's true marketing costs. It is true that some advertisers may buy pay-per-click ads simply for the branding value (keeping their name in front of you), but most require some additional action to be considered "successful."
Let's say you sell shoes. A click to your site doesn't do you any good unless someone actually buys shoes. If you pay 50 cents for a click and 5% of those who click make a purchase, your cost to make that sale is $10.
That may be an unprofitable sale, but if you get a regular customer, that could be $10 well spent.
But that can impact the amount you're willing to spend for the initial click. You may want to pay more for a click or less for a click depending upon how effective you are at actually selling shoes on your site. And that may be far more important than how much you'd be willing to spend to get a click in the first place.
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I'm neither exceptionally bullish on Google, but not exceptionally bearish given the pounding the stock took last week. Besides, does it really matter if cost per click falls if overall revenue rises?
Google's management is certainly keenly aware that the pay-per-click advertising model, while profitable, may not be as profitable in the future - which is why the company is extending its franchise into social media, browsers, the Android platform, etc.
And Google shareholders should probably be aware of how advertisers are reacting to a changing search engine landscape in understanding this cost-per-click metric.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
