Outside of Google's headquarters in Mountain View, Calif. Google is still the leader in online advertising, according to eMarketer, yet the advertising business is changing under its feet.
SAN FRANCISCO — For more than a decade, Google’s search advertising business has seemed almost magical in its ability to mint money. But the magic is beginning to wear off as people spend more time on mobile devices, where the company makes less money on ads.
Shareholders sent the stock up 8 percent in after-hours trading on Thursday, after Google’s better-than-expected third-quarter financial report. Still, the results revealed the company’s deep challenges: as its desktop search and advertising businesses mature, along with overall business in the United States, its growth rate is slowing and the amount of money it makes from each ad it sells is falling.
The problem is that mobile ads cost half to two-thirds as much as desktop ads, yet they lead to purchases just a quarter to a third of the frequency that desktop ads do. That’s because advertisers have not yet figured out the best format for mobile ads, tracking the effectiveness of such ads is harder and buying things on small screens is more cumbersome for consumers.
Google executives, on a call with analysts, acknowledged those challenges by emphasizing that they were embracing phones and other mobile devices, as well as nonadvertising businesses like hardware and business services.
“For years, everyone talked about the multiscreen world. Now it’s arrived, and on a scale few imagined,” said Larry Page, Google’s chief executive. Most consumers have more than one device, he said, and devices for people’s homes and bodies, like glasses and watches, will proliferate. The mention of watches was particularly intriguing because while Google has explored building a watch, it has not publicly announced one.
People activate 1.5 million Android devices a day and Google introduced its first Motorola phone, the Moto X. It has been encouraging advertisers to transition to mobile, like requiring them to buy mobile ads when they buy desktop ones, known as enhanced campaigns, and introducing new tools like one to track consumers across devices and tell marketers whether a consumer makes a purchase on a computer after researching an item on a phone.
Mr. Page also addressed long-term research projects, like Calico, the new health start-up financed by Google to investigate aging and its causes. “It’s hard to spend meaningful amounts of money, relative to Google’s scale, on things that are speculative,” Mr. Page said. “You should probably be asking me to make more significant investments.”
A closer look at Google’s revenue growth showed that it was largely driven by growth in some parts of Europe, Brazil and Japan, and by selling apps on Google Play, which returns little profit to the company.
“Over all, Google’s doing exactly what it should be doing, investing in emerging markets and in mobile technologies,” said Jordan Rohan, an Internet analyst at Stifel Nicolaus. “While we’re not seeing any profits related to that today, it’s inflating the revenue number and will someday lead to a more profitable business.”
Yet in Google’s core business — the sale of ads — the price that advertisers pay each time someone clicks on an ad decreased for the eighth quarter in a row. It fell 8 percent from the same period last year, largely because mobile ads cost less than desktop ones.
Google is still the leader in online advertising, earning 41 percent of all digital ad revenue and 53 percent of mobile ad revenue, according to eMarketer. Yet the advertising business is changing under its feet.
People are spending vastly more time on mobile devices. Clicks on Google on computers last quarter were flat, while clicks on tablets increased 63 percent and clicks on phones more than doubled, according to the Search Agency, a digital marketing firm. At the same time, computer ads are becoming more personalized and increasingly automated.
As the ad landscape changes, Google has been introducing new tools for advertisers. Last week, it announced a change that would allow it to show people’s social networking activity, like photos and comments, in ads across the Web. It is trying to capture TV ad dollars, including with two new products — Chromecast, a device for watching Web video on TVs, and Google Fiber, the ultra-high-speed Internet and TV connection now available in Kansas City, Kan.
Google’s ad innovations have prompted criticism from privacy advocates and some consumers. In recent weeks, Google faced an uproar over its plan to use personal information in ads and lawsuits over personalized ads in Gmail.
Google reported third-quarter revenue of $14.89 billion, up 12 percent from a year ago. Net revenue, which excludes payments to ad partners, was $11.92 billion, up from $11.33 billion. Net income rose to $2.97 billion, or $8.75 a share, from $2.18 billion, or $6.53 a share. Excluding the cost of stock options, Google’s third-quarter profit was $10.74 a share.
The results exceeded the expectations of analysts, who had predicted revenue of $14.82 billion and earnings, excluding the cost of stock options, of $10.35 a share.
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