Declining Mobile CPC Drags Google Down

According to eMarketer’s latest report, Google had a 52% share of mobile advertising revenues worldwide in 2012. Globally, mobile advertising revenues are projected to grow from $8.8 billion in FY12 to $15.82 billion this year. eMarketer expects Google’s lead in the market to continue to grow to 56% as the company’s mobile advertising revenues climb to $8.85 billion. Facebook is projected to remain the second-largest mobile advertising provider, with revenues growing from $0.47 billion to $2.04 billion, amounting to 13% of the market share. Pandora takes a surprising third position with $0.4 billion or 2.5% of the mobile advertising revenues worldwide projected this year.

Google’s Financials
Google’s (NASDAQ:GOOG) Q2 revenues grew 19% over the year to $11. 1 billion, significantly short of analyst expectations of $11.37 billion. EPS of $9.56 grew 6% over the year but also missed the market’s projections of $10.78 for the quarter.

Revenues from Google’s sites grew 18% over the year to $8.87 billion. Revenues from partner sites grew 7% to $3.19 billion. Google’s traffic acquisition costs grew 16% over the year to $3.01 billion. The number of paid clicks rose 23% over the year and 4% over the quarter. Revenue from mobile device sales from the Motorola unit grew 18% to $998 million.

Google’s Mobile Worries
But analysts are worried about Google’s reducing cost per click (CPC). During the quarter, CPC fell 6% over the year, a trend that is likely to hurt both margins and revenue growth. The market was expecting a price drop of 3% over the year, and a quarter ago Google reported a 4% decline in the metric. The decline in CPC is attributed to the increasing share of mobile advertising, where rates tend to be lower by as much as 25%.

Google plans to counter the decline through the use of AdWords online ad system that will enable advertisers to launch campaigns on both desktop and mobile devices. The enhanced campaigns system lets advertisers choose whether they want to advertise on mobile phones, but it requires them to pay for ads on tablet devices if they want to advertise on PCs. All existing advertisers will shift to this new campaign this week. The shift is expected to help improve CPC for Google.

Google’s EPS is also being bogged down by the weak performance of their Motorola Mobility business. During the quarter, the segment posted a loss of $342 million, an increase from $271 million a quarter ago. Google continues to invest in the business and is planning a $500 million international marketing campaign to promote the launch of Motorola’s new flagship product, Moto X. Motorola’s first smartphone. Moto X, comes with features like hands-free controls, active alerts, and camera shortcuts and claims to be the first smartphone to be made in the U.S. as it is being assembled in a plant in Texas.

In addition, Google is also launching an upgrade to the Android OS with Android 4.3 and a second generation Nexus 7 tablet. Nexus 7 is expected to hit the market this week and will be priced higher than the current version at $229 for a 16 GB model. Feature upgrades about both the new OS and the new tablet are being kept under wraps.

Last month, Google also made the $1.1 billion acquisition of mobile mapping service, Waze. Waze’s social networking app gets drivers to sign up and connects them with each other to share information regarding traffic conditions and other road data. Besides mobile, the app will also help Google build its social business as Waze has more than 45 million users worldwide. Waze still has to earn revenues, but it received $67 million in venture funding for their operations.

Google’s stock touched a 52-week high of $928 earlier in July. It is currently trading at $896.60, with a market capitalization of $295.86 billion.