Three Things That Search Marketers Can Learn From Google’s Q3 Earnings Report

AEGoogle’s Q3 earnings release, coupled with a report from Adobe, suggest that Google’s US search business is slowing, and as a result, Google is increasing margins by raising its prices and cutting its search partner network. This has significant implications for advertisers as well as the digital advertising ecosystem at large.

As users transition to lower-priced mobile searches, Google is keeping its US search business profitable by reducing organic search traffic, increasing the click-through-rate (CTR) on paid search, and jacking up the cost-per-click (CPC).

1. Advertisers Are Paying For Clicks That Used to Be Free

Google’s US revenue is up 14.7% year-over-year because the CTR for US ads grew18%, according to Adobe. The increased clicks on paid ads come at the expense of lost organic clicks.

Google is reducing real estate for organic search listings on its search engine results page (SERP) and increasing space for paid search ads. As a result, users click on paid results instead of organic listings. This means that advertisers who want to stay above the fold must now pay for clicks that they once received for free.

The fact that Google is reducing organic SERP real estate to generate more paid clicks hides an underlying weakness in its core business. Search volume is decreasing as user search moves to increasingly specialized apps and websites.

2. US CPC Increases Hidden By Mobile and International Growth

Not only is Google replacing free clicks with paid clicks, it is also charging advertisers more for brand clicks- at least in the US. Combined with the reduction of organic clicks, it appears that Google is strong-arming brands into buying more clicks on their own brand terms and then charging them more for those clicks.

Google’s Q3 earnings report cites a 4% decrease in CPC year-over-year. However, this figure includes international and mobile traffic, which are both priced lower due to lower advertiser performance. When you combine Google’s earnings report with the Adobe study, you get the true picture: CPCs for US advertisers are actually going up, especially for brand terms, which used to drive organic traffic.

3. Google is Buying Fewer Clicks From Publishers

Increasing CTRs and CPCs on its core search property allows Google to move more of its revenue onto its owned and operated properties, where it keeps 100% of revenue. This shift comes at the expense of Google’s publisher partners.

Google’s overall revenue grew more than twice as fast as the amount it paid publishers (4% v. 1.6% quarter over quarter). Google is protecting its own margins by diverting revenue away from publishers. This has been a consistent trend since Google went public. For the fifth straight quarter, Q3 2014 marked the lowest percent of total revenue Google has ever paid to publishers: 22.8%.

Investors may see the TAC ratio as a positive, however search insiders should see this as evidence that Google is exiting the search partner advertising business, especially for mobile traffic, because it has more supply than it can sell.

What Does This All Mean?

Google’s desktop search query volume is in decline because users are searching on mobile and direct brand sites. By increasing click volume, Google is generating growth by squeezing its advertisers.

This is a wake up call to search advertisers that Google is no longer the one-stop shop for all search traffic. Smart marketers will continue to spend with Google, but they will also start allocating larger portions of their search budgets to alternative search options, especially for mobile.

After all, if users are searching elsewhere, perhaps marketers should be buying elsewhere.

Adam Epstein is the President & COO at adMarketplace, the first programmatic marketplace for search partner advertising. Adam joined the company in 2003 and became President & COO in 2006. Before becoming an Internet entrepreneur, Adam clerked for a US District Court judge and was an attorney at Schulte Roth & Zabel LLP in New York.