Google's advertising prices take a hit in Q1 amid shift to mobile

Google (NASDAQ: GOOG) reported first-quarter revenue that missed analysts' expectations, as the company's core advertising business continues to grapple with a decline in how much advertisers pay per click amid a shift in computing from desktop PCs to smartphones and tablets.

Google is facing more competition in advertising on mobile devices from Facebook (NASDAQ:FB) and others. Google's total paid advertising clicks increased 26 percent year-over-year, but the amount Google gets paid per click dropped 9 percent compared to the year-ago period. Google, like other advertisers, gets less money per click on smartphones than on PCs.

"Mobile is perceived as the single biggest risk over the near-term," S&P Capital IQ analyst Scott Kessler told Bloomberg. "Mobile is definitely helping Google and many others in the number of volume-related metrics, but mobile has also had a notable negative impact on pricing."

The cost per click for search advertising on smartphones fell 35 percent during the first quarter in the U.S., according to researcher IgnitionOne, Bloomberg noted. Tablets with larger screens actually saw ad prices rise 29 percent in the quarter though. Meanwhile, the Wall Street Journal noted that marketers that work with digital ad firm Rimm Kaufman Group paid around 60 percent less for smartphone clicks than desktop clicks in the first quarter in order to generate the same payback.

Nikesh Arora, Google's chief business officer, said on an earnings conference call that Google is not that worried about the shift to mobile. "I've had a firm belief, and continue to hold onto it, that mobile pricing has to be better than desktop pricing," he said, adding that in mobile advertisers can often access users' location. "The more you know, the more effective the advertising," he said.

Arora acknowledged that there are "a whole bunch of building blocks that need to come into play"  to close the gap between cost per click for advertising on mobile and desktops. "The good news is a lot of people are spending a lot of time on mobile devices," he said. Some of the building blocks include simple things like letting people make purchases on their phones simply and easily. More complex tasks include getting merchants and advertisers to optimize the user experience on their mobile sites.

Google said overall first-quarter revenue jumped 19 percent to $15.42 billion. Analysts had projected revenue of $15.54 billion, according to Thomson Reuters. The company's revenue, excluding sales passed on to partners, came in at $12.2 billion in the first quarter, falling short of a projection by analysts for $12.3 billion, according to data compiled by Bloomberg.

The Internet search giant reported $3.45 billion in net income for the first quarter, compared to $3.35 billion in the year-ago period.

In late January, Google agreed to sell its Motorola Mobile division to Lenovo for $2.91 billion, getting out of the smartphone hardware business. Google is now counting Motorola as "discontinued operations," separated from its main financials, and said that its net loss from discontinued operations in the first quarter was $198 million, compared to a net loss of $182 million in the yea-ago period. Google said that, had it presented Motorola as an operating segment, the segment revenue for the first quarter would have been $1.45 billion.

Meanwhile, Yahoo CEO Marissa Mayer is developing a plan to try to get Yahoo to replace Google as the default search engine on the Safari browser on Apple's (NASDAQ:AAPL) iPhone and iPad, according to Re/code. The report, which cited unnamed sources, said that Yahoo has not formally presented its plan to Apple executives yet.

And, in what may be bigger news on the mobile advertising front, Twitter announced that it is giving marketers access to the MoPub Marketplace mobile advertising exchange. In a company blog post, Kelton Lynn, Twitter's product manager for revenue, wrote that the ad exchange reaches more than 1 billion unique devices and handles more than 130 billion ad requests inside Android and iOS applications every 30 days, "making it one of the largest mobile ad exchanges in the world. Advertisers can now choose to run simultaneous marketing campaigns to more than 241 million active users on Twitter, and to more than 1 billion mobile devices off-Twitter, through one interface at"

She wrote that Twitter has developed "a full suite of targeting, creative and measurement tools to enable Twitter advertisers to effectively promote their mobile apps," which are being tested in a private beta. She wrote that some of Twitter's early beta partners, including Spotify, HotelTonight, Kabam, and Deezer "have seen promising results from the initial tests."

For more:
- see this release
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this Reuters article
- see this separate WSJ article (sub. req.)
- see this Re/code article
- see this Search Engine Land article
- see this Twitter blog post

Special Report: Wireless in the first quarter of 2014

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Article updated April 17 with details on Yahoo and Twitter.