Change in property mix is impacting Google’s CPC
In the last part of this series, we discussed why Google’s (GOOG) (GOOGL) CPC (cost-per-click) metric declined. We discussed one of the main reasons for the decline—the change in the geographic mix and currency appreciation. However, the CPC declined severely for Google’s own websites—like Google Search and YouTube—compared to Google’s Network websites.
In 4Q14, the CPC metric declined by 8% on Google’s own websites. As the above chart shows, the CPC decline on Google’s own websites continues to be higher than Google’s overall CPC decline.
One of the main reasons for this CPC decline is the change in property mix. Google Search carries higher ad pricing than display ads—like YouTube ads. However, the problem is that Google’s search ad business is becoming saturated. Now, the bulk of Google’s revenue growth is coming from display ad businesses—like YouTube. This is putting pressure on the overall CPCs for Google’s own websites.
Search ads have higher monetization rates
Google’s search ads carry higher ad pricing than YouTube display ads. This is because the search ads appear on the search results pages when a user is looking for specific information through a search engine. As a result, these ads have higher user engagement. This commands higher ad pricing.
To give you an idea of the ad monetization rates, Google ads’ ARPU (average revenue per user) was around $45 as of 1Q14. For Facebook (FB), the metric was $7.20. It was $3.60 for Twitter (TWTR)—according to a report from Kleiner Perkins Caufield Byers.
Now, Google earns the majority of its revenue from search ads. In contrast, Facebook and Twitter earn the majority of their revenue from display ads. This indicates that ad rates are much higher for the search business than the display business.
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