Google’s Mobile Strategy

According to a Gartner report released earlier this year, the worldwide mobile advertising market is projected to be worth $11.4 billion during the current year, compared with $9.6 billion estimated for the previous year. Gartner estimates the market to be worth $24.5 billion in 2016. The market is seeing strong growth driven by the increased adoption of mobile devices in emerging markets. The North American market is projected to grow from $3.18 billion last year to $3.83 billion during the current year and to $8.87 billion by 2016. But Asia remains the largest market with an estimated $4.33 billion last year projected to grow to $9.48 billion by 2016.
Google’s Financials
Google’s (NASDAQ:GOOG) Q1 gross revenues grew 31% over the year to $13.97 billion. Revenues excluding traffic acquisition costs grew to $11.01 billion, falling marginally short of the Street’s target of $11.12 billion. EPS of $11.58 was significantly higher than the Street’s target of $10.65 for the quarter.

Google Sites revenues accounted for 67% of the quarter’s revenues at $8.64 billion and grew 18% over the year. Revenues from Google’s partner sites grew 12% to $3.26 billion. Aggregate paid clicks to ads on Google and Network sites grew 20% over the year and 3% over the quarter, with cost per click falling 4% over the year and over the quarter. Other revenues from Google grew 150% to $1.05 billion. Motorola Mobile revenues accounted for 7% of revenues at $1.02 billion but continued to slide from $1.51 billion a quarter ago.

By region, revenues from outside of the United States accounted for 55% of the quarter’s revenues, compared with 54% a year ago.

Google’s Mobile Growth
Analysts were pleasantly surprised by the slowdown in the pace of decline of cost per click. Last July, cost per click fell 16% over the year; the decrease was attributed to the increasing mix of mobile ads to Google’s revenues. Cost per click is the fee paid by advertisers when a Google user clicks on one of their ads. Mobile ads typically see a lower cost per click, with estimates ranging from a price discount of 25%-50% over desktop advertisement. During the last quarter, cost per click for Google fell 4% over the year, suggesting less pressure on mobile ad prices. Google does not disclose the revenues it earns from mobile ads, but JMP Securities estimates it at 14% of the total ad revenues.

Google is also trying to increase revenues from mobile ads by trying out new services, known as enhanced campaigns. During the last quarter, they rolled out a new algorithm that automatically selects the advertising platform, that is, mobile or desktop instead of letting the advertiser select the media. The tool subsequently charges the advertiser based on the media used. Google attributes some of the 20% improvement in paid clicks to the effectiveness of this new campaign. They already sold 1.5 million ad campaigns in this new format.

Google’s Diversification
Google continued to make several small acquisitions during the last quarter as a medium of diversifying service offerings. They have been building fiber cities that will be able to receive Google’s high-speed Internet and television. As part of the drive, last week, they announced the acquisition of iProvo, the provider of fiber system in Provo, Utah. Provo will become the third fiber city in Google’s network after Austin and Kansas City. Provo’s fiber system cost $39 million to build, but it was sold to Google only for $1. As part of the acquisition, Google will upgrade the network to gigabit technology and complete network construction so that all homes in the iProvo network would be able to connect to Google Fiber.

Google Fiber is Google’s effort to build a country wide high-speed Internet service provider. They began work on the program nearly two years ago by testing it in Kansas City as their first fiber city location. But the program faced several delays. Earlier this month, Austin was selected as their second city, followed by Provo.

Last month, Google also announced the acquisition of Web application server, Talaria Technologies for an undisclosed sum. Palo Alto–based Talaria was founded in 2011 and offers a web application server that uses just-in-time principles. Their product, while still in beta stage, helped customers build and run websites more efficiently by enabling developers to “handle more users with fewer boxes, without changing a line of code.” Google will be able to leverage Talaria’s capabilities on their Cloud Platform and deliver a platform that will let developers use their preferred languages, and increase performance and cost efficiency of apps hosted on Google’s cloud. Some believe, the move will help Google compete with Amazon’s Web Service (AWS).

They also announced the acquisition of a Canadian startup, DNNResearch, for an undisclosed sum. Founded by University of Toronto professor Geoffrey Hinton and students Ilya Sutskever and Alex Krizhevsky, DNNResearch focuses on speech recognition technology research and does not have any product or service on the market. The acquisition is expected to help build talent for Google as they enhance their speech offerings. DNN’s neural network research can be used to enhance search results and also be applied for image-based searches.

Google’s stock is trading at $787.26 with a market capitalization of $259.64 billion. It touched a 52-week high of $844 earlier last month.