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| Google 4Q08 Results: Good News for Investors, Good News for Internet Advertising, Says IDC by Caroline Dangson, IDC On Thursday, April 17th, Google delivered a much brighter-than-expected 1Q08 earnings report, despite a comScore report about declining numbers of paid advertising clicks and fears from Wall Street about the impact of the weak economy on its business. To everyone's surprise, Google reported an operating income of $1.56 billion on revenues of $5.19 billion - which represents a 42 percent revenue growth over first quarter 2007 ($1.53 billion) and a 31 percent rise in operating income ($329 million). The sunny earnings report sent shares soaring 17% to $527.78 Friday morning, with shareholders recouping the losses experienced over the past two months. Google said the number of paid clicks increased approximately 20% over the first quarter of 2007 and approximately 4% over the fourth quarter of 2007. This was much better than the comScore report that had projected that Google's paid clicks rose only 1.8% compared to 1Q07 and declined 9% since 4Q07. ComScore explains that its data does not include Google's international clicks and AdSense clicks - a fundamental component to Google's reported number. When comScore released these numbers earlier in the week, Wall Street reacted, believing the report to indicate that the economy and changes that Google had made to its search ad ranking algorithm were poorly impacting Google's business. That's because advertisers only pay Google when a consumer clicks on the ads. While the absolute number of clicks is up, it is true that the growth rate of clicks has declined each quarter for the past year. For example, in 4Q07 paid clicks were up 30%, down from 52% in 1Q07 and 61% in 4Q06. This growth rate deceleration is what worried investors. But as Google's earnings report demonstrates, the number of paid clicks does not directly correlate to revenue growth, most likely because average revenue per click increased (see below). Google confidently stated the trend of declining paid-click growth rate is not macroeconomic. Google CEO Eric Schmidt explained several factors affecting the reported number of paid-clicks including, improved quality of reporting measures; timing of deals, partner activity and product rollout; and maturity of the U.S. market. For one, Google added many partners to AdSense last year which boosted the growth rate of clicks, but Google has not added as many partners this year. Two, Google says it has been working on cleaning up its AdSense for Domains program. There have been several complaints of Google billing advertisers for 'fake clicks' under this program. Three, Google did not deny that advertising rates had risen as a result of quality improvements. All in all, a declining growth rate for paid clicks does not necessarily impact revenue growth. What IDC believes shareholders should be concerned about however is Google's continuing dependence on search ads. Strategically, we see stronger growth in display, rich-media and video ads in the future. Google claimed that they are working to roll out more display ads on YouTube and social networking sites such as Orkut and MySpace. Still, perhaps more than 95% of Google's ad revenue currently comes from search. IDC is not seeing the progress expected of monetizing the large ad inventory of social media sites like YouTube, Orkut, MySpace, Blogger and others on the Google network. Google remains optimistic, claiming that it is applying new technologies such as Analytics and the Conversion Optimizer demographic targeting to its social networking sites to enhance advertising, but IDC feels Google is slow to build the advertiser ecosystem here. Google admits that its acquisition of Doubleclick has not significantly contributed to revenue in Q108, and IDC believes Doubleclick is too small of a network to have a meaningful impact in the next three quarters. Google gave the excuse during Thursday's earnings call that it takes time for advertisers to realize the value its social networking sites offer. IDC is inclined to disagree with Google's statement. We believe it's the lack of brand safety that discourages brand advertisers from running ads against user generated content, an issue that is not going to go away anytime soon for orkut and YouTube. YouTube, just by its nature, will most likely always have some degree of illicit and stolen copyrighted material. YouTube faces two major lawsuits from Viacom and now France's largest commercial broadcaster TF1 for profiting from clips illegally uploaded on YouTube from these companies by users. Even with its challenges, Google is reporting great revenue numbers for the preceding quarter, growing 14 times as fast as the overall economy. Not only is this good news for Google, but also for the Internet advertising sector at large. It indicates that the Internet will be resilient even in a weakened economy. Even if there is a pullback in overall advertising spend, IDC believes Internet advertising will continue to grow with advertisers shifting money from traditional media to new media. write your comments about the article :: © 2008 Computing News :: home page |