Why lower search advertising growth affects Google

Google’s revenue growth comes from businesses other than search advertising

Earlier in this series, we discussed how Google (GOOG)(GOOGL) has been able to consistently manage its revenue growth at around 20% despite increasing competitive threats from Facebook (FB) and Amazon (AMZN). Although this revenue growth is impressive, the point that you need to note here is that the bulk of the revenue growth has come from YouTube and Google Play Store.

According to a report from eMarketer, YouTube’s net ad revenue has grown over the last few years. It accounted for more than 5% of Google’s overall net ad revenues in 2013. This contribution has increased from 2.2% in 2011. Similarly, Google reported that the revenue growth from its “Other” division was a healthy 50% in the last quarter compared to the corresponding quarter a year ago. This division’s growth was driven by Play Store, which implies that Google’s growth increasingly comes from businesses other than search advertising.

The issue with revenue growth coming from other businesses is that these are less profitable businesses than Google’s search advertising business. Let’s see why that is.

Why lower search advertising growth affects Google

Search advertising has higher monetization rates

Google’s search advertising business is highly profitable because it commands higher ad rates. This is because a user coming to Google’s search platform is looking for something specific. So the advertisements can easily target a user’s specific search query. However, this isn’t the case with display ads.

Let’s consider the monetization opportunities that Google’s search advertising business offers. Google ads’ average revenue per user (or ARPU) is around $45, while the same metric for Facebook (FB) is $7.2 and for Twitter (TWTR) is $3.6, as of 1Q14. This insight comes from a report from Kleiner Perkins Caufield Byers, as the chart above shows. This indicates that ad rates for Google are about six times higher than Facebook’s and 12 times higher than Twitter’s.