Google Q1 – Price of success

Mobile pricing is likely to stay low for a while.

• Google failed to beat expectations as pricing fell by more than expected due to the shift of spend from desktop to mobile.
• Q1 14 Revenues and adjusted EPS were $12.2bn / $6.00 compared to consensus at $12.3bn / $6.39.
• Profitability fell short as gross margin fell as a result of lower pricing while the cost of traffic acquisition continued to grow.
• The company pointed to some one off costs in R&D as result of recent acquisitions but this did not alleviate the concerns around pricing.
• The main problem is that, at the moment, an advertisement or search attracts a significantly lower price on a mobile device than it does on the desktop.
• There are two main reasons for this:
  • First: The small screen is less effective for marketing as there is less spare real-estate and acting on a marketing message is more complex and potentially expensive for the user.  
  • Second: Mobile payments remain in the stone age which means that impulse purchases in response to a piece of marketing happen infrequently.
• Hence, the return on investment for an advertiser when looking at sales from a mobile device from advertisements on mobile are lower than they are for the desktop meaning that they attract a lower pricing.
• Google is trying to change this in two ways.
  • First: By educating the marketers to the value of cross-screen marketing. i.e. an advertisement seen and acted on in mobile resulting in a transaction by the same user on another device.
  • Second: Improve mobile payments such that it becomes quick, simple and secure to transact direct from a mobile device.
• If Google can help fix these issues on the devices that it controls then there should be a convergence of advertising pricing between fixed and mobile.
• Given what will now be baked into expectations this would be positive for Google but it is going to take some time.
• The technology industry has been struggling for more than 10 years to get mobile payments to work and it is still struggling.
• Hence I do not expect this issue to be fixed anytime soon.
• However, if advertisers can be made to understand the value of cross platform, then some progress on pricing could be made in the short term.
• Hence long-term I think that mobile pricing will improve but this looks like an issue that will crimp growth this year.
• That being said, Google is in the best position of any ecosystem player to see growth from the mobile ecosystem.
• Hence it remains one my favoured plays alongside the more controversial contenders Yahoo! and Microsoft.