PPC Advertising Takes Its Toll on Google

| About: Alphabet Inc. (GOOG)
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Recently, Google (NASDAQ: GOOG) has seen analysts put price targets as high as $1,000+ per share. For the investors that watched Google clamor up from $100 to $700 and then jumped in, you are likely feeling the pain. Google is off nearly 40% from its all-time highs and while everyone is simply blaming the poor performance of the stock market, there are some very specific reasons why Google's upward trend has not continued.

1. Bidding Restrictions

When Google first launched AdWords, its pay-per-click [PPC] solution for advertisers, the landscape was blank. That is, you could sign up to bid on a term and only pay $0.10 per click. As more advertisers signed up and competed for a particular piece of Internet search real estate, the price per click went up. It's simply supply and demand. Specifically, companies would bid up the term higher to maintain placement. As more advertisers appeared, advertisers would spend more to show up with greater frequency and to achieve more prominent placement.

Granted, Google argues that its PPC engine is not a 'whoever pays the most wins' model, but I know for a fact that ads we were paying $0.50 for a year ago are now at $2.00 - just to maintain pace. Simply said, as more people have jumped on the AdWords bandwagon, the price has gone up.

With that being said, companies have begun to protect their 'brand identity' online as well as their wallets. People do search for terms like satellite television or cable Internet, but in the same light, people also search for terms like "DirecTV" (NYSE:DTV) or "Comcast" (NASDAQ:CMCSA). Both of these are brand names and are trademarked by their respective owners. Many companies have started policies that: (1) prevent other advertisers/marketers for placing bids or ads using the trademarked name; (2) have begun direct PPC efforts of their own; (3) have disallowed partners or affiliates from outbidding the parent corporation's efforts.

In (1), other advertisers cannot even post ads for these very expensive, highly trafficked corporate brand and product names. In many cases, the Google interface does not even allow it without some form of authorization from the trademark owner. This practice effectively reduces the supply and demand effect. Fewer people able to advertise under certain search terms means less competition and therefore lower PPC charges and less clicks for each search. That is, people will often click 3 or 4 listings. So, Google has not only seen PPC costs flat line for these terms, but is also generating less clicks.

In (2), many companies have actually begun doing their own PPC campaigns. Companies have often had third parties manage their own PPC campaigns either for a fee or on a commission/affiliate basis. With the company direct getting in the mix (in some case disallowing 3rd parties to even do PPC), these 3rd party marketers are now competing with the 'manufacturer direct' and are unable to keep pace and then filter out. The end result is the same as (1) - less people buying clicks to continue to prop the PPC cost up.

In (3), which is akin to (2), the company has disallowed any of its 3rd party affiliates, partners, or agents from outbidding the corporate efforts for any term. That is, the parent company is saying "we are always going to be #1 and we are going to stop outbidding each other." The loser is Google as it puts a ceiling on the per click charge in a growing number of Internet search term spaces.

2. Better Fraudulent Click Detection

Click fraud has always been an issue. Competitors will click on your ad to falsely charge you. Google has pretty strong measures in place preventing blatant fraud. For instance, you cannot just click on the same ad 1000 times in a day from the same computer. However, you may be able to click on it once or twice a week. For an advertiser, maybe that is $4 or $5 of fake charges, but multiply that over an entire year and thousand and thousands of advertisers, and the detriment to Google can easily be in the millions of dollars.

Fraudulent clicks are a problem and 3rd party statistic and metrics programs are getting better at tracking and identifying these as they justify the ROI from saved click costs to their customers. As these tracking programs only get better, the amount of fraudulent clicks will continue to be revealed and be refunded by Google. It certainly is not the majority of clicks, but some say that even with Google's protections in place, anywhere from 3%-15% of clicks are fraudulent. Ultimately, you can count on at least half of these to be identified by the increasingly powerful tracking programs. Those few percentage points in terms of top line revenue will hurt Google.

3. Transition to CPA vs CPC

Just as banner advertising on a CPM has seen its results deteriorate, CPC seems to be somewhat at a plateau in the short term. Advertisers just cannot keep throwing more dollars at the problem to drive more sales. Look for Google to embrace more CPA (cost per acquisition, such as a sale or completed application) advertising programs going forward. In the long term, Google can likely do better than charging on a CPC basis, but in the short-term, the CPC charges may flat line and revenue recognition will slow.

Disclosure: none