Google Inc (NASDAQ:GOOG), (NASDAQ:GOOGL) released an earnings report that impressed the market on Thursday afternoon, but not all of the company’s numbers were positive. The firm’s Cost Per Click, or CPC, is a key measure of the quality of its advertising, but the metric contracted in the second quarter. Though analysts were expecting the declines, it’s still a worry for those following Google business.
There are several reasons for the decrease in CPC at Google Inc (NASDAQ:GOOG), (NASDAQ:GOOGL), and each has been highlighted by management since the decline began. The two biggest contributors are the shift to mobile and the growth of the company abroad. The internet has always been a predominantly American market, but Google’s growth will not be constrained by national borders.
Google international business harms ad strength
Google Inc (NASDAQ:GOOG), (NASDAQ:GOOGL) now manages to earn most of its revenue from the world outside of North America. In the second quarter earnings report the company showed that 58% of its revenue came from overseas in the three month period.
International revenue isn’t just the biggest part of the Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) ad machine, it’s also the fastest growing. Year on year increases in the international numbers hit 28%, was revenue from North America grew at just 14% year on year. CPC in international markets isn’t as healthy as those in North America, and that’s impacting the Google bottom line.
Despite the lower efficacy of the company’s ads abroad, Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) is an international company. Its purview and ambition mean that it’s going to have to improve its CPC in international markets drastically before competitors catch up.
Advertising was, for the most part, a locally specific business through the twentieth century, and there is nothing that suggests it has to go international in the internet era. CPC is a measure of advertising effectiveness. Nobody is close to Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) right now, but the company’s dominance of world advertising could theoretically be beaten by local competition
Another factor taking away from Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) CPC is the company’s transition to mobile. Mobile advertising hasn’t quite been perfected at this point and, though Google is the strongest player in the market at the time being, the market is young and immature and competitors like Facebook Inc (NASDAQ:FB) are in a strong position to take a portion of the company’s business.
Using CPC as a measure of the average effectiveness of Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) ads misses some of the nuances of the company’s business. A Cantor Fitzgerald analysis of the company’s second quarter earnings report increases a target on the company’s Class-A to $650, and discounts any problem with the company’s CPC.
The market is expanding and Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) is still the king of digital ads. The strength in the company’s on-site ads, which accounted for 69% of its revenue, shows that even if its network fails, the company’s core strength is still in properties it owns. Google is strong, and, according to the analysts that authored the report, “Google remains one of the best plays on global online advertising growth.”