Google has reported another strong financial quarter but a major decline in the cost-per-click rate for its ads highlights what could become a big problem for the search giant in the future.
Despite Google being a company with a very wide array of products including software, hardware and shoot-for-the-moon ideas like driverless cars and wearable technology, it still relies on people clicking on ads for the vast majority of its revenue.
That revenue was up 35 percent (year-on-year) for the three months to the end of June but looking deeper into the figures, we see that the cost-per-click rate - which is a key analyst indicator - dropped by 16 percent year-on-year.
According to Google, the decline in ad prices was down to foreign exchange rates, but there is another theory being proposed by analysts. "The reality is when your click prices are going down, it means that advertisers are paying less for your inventory," Colin W. Gillis, a technology analyst at BGC Financial told the New York Times.
The cost of online ads is only a fraction of the cost of print ads, and similarly the cost of ads on mobile platforms like smartphones and tablets is a fraction of the cost of desktop ads. According to analysts at Stifel Nicolaus, clicks on mobile ads cost only 40 percent of the price of desktop ads.
Google dominates the mobile ad market, with eMarketer saying it has 95 percent market share for search ads and 52 percent market share for all mobile ads. While this may seem like an enviable position, the move towards mobile will mean diminishing returns from ads in the future.
As smartphones and tablets become more powerful and people begin to use them for work as well as play, the market for mobile ads is going to grow, a fact reflected in a rise in paid clicks of 42 percent, compared to the same period last year for Google.
However a growth in mobile ads will be mirrored by a decline in online ads, which means Google will be looking at lower margins in the future which could spell trouble for the search giant.