Traffic acquisition costs soaring
In 2Q17, Alphabet’s (GOOGL) Google was hit with higher TAC (traffic acquisition costs) than in 2Q16, due to the company’s aggressive mobile push. It is more costly for Google to acquire traffic on mobile than on computers, so the shift to mobile implies that the company’s TAC will continue to rise. To acquire mobile traffic, Google pays partners such as smartphone makers and phone carriers to bring users to its search engine, which is a key component of its advertising business. For example, Google pays Apple (AAPL) to make it the default search engine in iPhones.
Rising TAC cutting deeper into revenue
In 2Q17, Google’s TAC rose to $5.1 billion from ~$4.0 billion a year earlier, thanks to payments to traffic partners such as Apple. As a result, TAC cut deeper into Google’s advertising revenue. At this time of intense competition from Facebook (FB), Twitter (TWTR), and Snap (SNAP) for advertising funds, Google may need to spend more to grow its traffic, and this will impact sales and profits. The chart above shows Google’s TAC trends.
How to lower TAC burden
By expanding its smartphone business, Google could lower its TAC, as it would rely less on outsiders to bring traffic to its search engine. Therefore, if the acquisition of HTC’s hardware engineers enables Google to grow its smartphone market share, the company’s cost structure and earnings could be boosted. Google paid $1.1 billion to acquire about 2,000 hardware experts from Taiwanese smartphone maker HTC.