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Google Still Searching for Answers To Its 'Mobile Problem'

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GOOGLE MOBILE EARNINGS
AP

About 1.3 million Google Android devices are activated every day.

But while Google's mobile business is booming, it is still looking for a way to generate significant revenue from displaying ads to mobile users, analysts say.

That is one reason why the company's third-quarter earnings, reported Thursday, fell short of analysts' expectations, sending its stock down as much as 10 percent, analysts said.

"As mobile continues to grow, Google needs to improve monetization or its growth is going to slow down," Colin W. Gillis, a technology analyst at BGC Financial, said in an interview. Gillis said Google has a "mobile problem" because of the relatively cheap prices it is forced to charge for mobile advertising.

Google owns almost the entire market -- 95 percent -- for mobile search ads, according to eMarketer, which researches digital marketing.

In Thursday’s conference call with investors, Google chief executive Larry Page said the company is “seeing tremendous innovation in advertising, which I believe will help us monetize mobile queries more effectively than desktops today."

But for now, advertisers are unwilling to pay premium prices for mobile ads because consumers are less likely to make purchases on mobile devices, according to Clark Fredricksen, vice president at eMarketer. For instance, analysts estimate that ads on smartphones can cost about 40 percent less than those on traditional computers.

For that reason, the price that Google was able to charge advertisers for each click fell 15 percent last quarter -- the fourth consecutive quarter that it has declined, according to Gillis.

In a note to investors, Brian Nowak, an analyst at Nomura Equity Research, said the cheaper prices that Google charges for mobile advertising would hurt the company's short-term revenue.

“We expect these gaps to eventually close over time, but as we have written in the past, advertising dollars don’t move overnight,” he said.

As users rapidly adopt tablets and smartphones, many companies are grappling with how to generate advertising revenue from them. But while mobile commerce is still small, it is starting to grow, Fredricksen said. And as consumers start to make more purchases on their phones, Google will be able to charge advertisers more for mobile ads in a market it already dominates.

"Google is extremely well-positioned to capitalize if mobile ad prices rise," he said.

Analysts also cited other reasons for Google's disappointed earnings, including losses at Motorola Mobility, which the company acquired in August, and the fact that the company's results were accidentally leaked early, sowing confusion in the markets.

Google shares closed down 8 percent at $694.37 on Thursday. On Friday, Google shares were down 3 percent in afternoon trading.