More On The Ad Bubble

Google UI Timeline

Two weeks ago a firestorm erupted over a seemingly insignificant change to the UI of Google's search engine. It was enough to get Google to backtrack. A week later Daisuke Wakabayashi and Tiffany Hsu had the details in Why Google Backtracked on Its New Search Results Look, including this informative timeline graphic of the history of such changes since 2007. Their explanation for why Google made the change was:

Users complained that Google was trying to trick people into clicking on more paid results, while marketing executives said it was yet another step in blurring the line between ads and unpaid search results, forcing them to spend more money with the internet company.

Well, yes, but follow me below the fold for the bigger picture.

Why was this change so important that Google had to push the envelope of the FTC's guidelines?

Josh Zeitz, another Google spokesman for the ads team, said the design changes were in line with guidelines from the Federal Trade Commission. In 2013, the F.T.C. made recommendations for how search engines should label ads, but stopped short of specific requirements other than that paid results should be “noticeable and understandable to consumers.”

Google’s recent changes adhered to some of the guidelines but ignored others. Google did not follow what the F.T.C. prescribed for “visual cues” with paid results marked by “prominent shading that has a clear outline,” by a “border that distinctly sets off advertising” from unpaid search results or by both. But the new ad icon met the F.T.C.’s recommendation for ad labels to appear before the paid result on the upper left-hand side.

Two years ago on Dave Farber's IP list my friend Chuck McManis provided a lengthy and informative response to a post discussing Hiroko Tabuchi's article entitled How Climate Change Deniers Rise to the Top in Google Searches. He wrote:

To put this in context,  consider the challenge of Google's eroding search advertising margins[1]. Google traditionally reported something called 'CPC' or (Cost Per Click) in their financial reports. This was the price that an advertiser paid Google when that advertiser's ad was 'clicked' on by a user. In a goods economy, it might equivalent to the 'average selling price' or ASP for the widget. But unlike a goods economy, Google could (and to date has) made up for this price erosion by increased ad volume.
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[1] The average price per click (CPC) of advertisements on Google sites has gone down for every year, and nearly every quarter, since 2009. At the same time Microsoft's Bing search engine CPCs have gone up. As the advantage of Google's search index is eroded by time and investment, primarily by Microsoft, advertisers have been shifting budget to be more of a blend between the two companies. The trend suggests that at some point in the not to distant future advertising margins for both engines will be equivalent.

Another way of looking at the erosion of Google's CPC illustrates the "advertising is a bubble" theme. Since ads are sold via an auction mechanism, advertisers are gradually figuring out that the value of an ad is less than they thought it was, so what they're willing to bid for it is less. They are still wildly optimistic about the value, as I discussed in Advertising Is A Bubble, but the trend is there.

Now, Tom Foremski elaborates on McManis' observation in The mysterious disappearance of Google's click metric:

Google's recent end-of-year 2019 financial report was a stunner: it included new financial details, but it removed several more.

For the first time, the revenues for YouTube and the cloud IT business were disclosed, but without any cost of operations, and Google removed key metrics that have been included for more than 15 years: How much money it makes per click (Cost-per-Click (CPC)) and the growth of paid clicks.

These monetization metrics are typically found on the second page of every quarterly earnings release from Google -- which underscores their importance in a 10-page document. Yet they are missing from the latest Google 2019 Q4 report with no explanation.

YoY drop in CPC each quarter

What does Google want to prevent investors focusing on?

The seemingly unstoppable revenue per click decline is the most concerning. Look at these past 19 quarters, but it's been going on for far longer.

Google has a rapidly deflating advertising product, sometimes 29% less revenue per click, every quarter, year-on-year, year after year.

As McManis pointed out, this trend started a decade ago, long before the chart starts in 2015 Q1.

Change in CPC vs. change in Clicks

Foremski's second chart shows that, up to now, Google has kept growing income despite falling CPC (the red bars) by growing the number of clicks (the blue bars). The mismatch between the red and blue lengths looks OK for Google, but the mismatch between their slopes doesn't. This is the reason why they keep trying to hide the fact that something is an ad, because they desperately need people to click on them.

Clearly, either the missing 2019 Q4 CPC number was bad, or Google can see bad CPC numbers coming,. Otherwise it wouldn't be missing. Foremski sums up thus:

what does this say about the effectiveness of Google's ads? They aren't very good and their value is declining at an astounding and unstoppable pace.

And points to the inevitable, Google doubling down on their decaying business model:

To survive, Google must find ways of showing even more ads. This is the future with Google -- more ads in more places. Or rather, more ineffective ads in more places. This is an unsustainable business model.

More and more of a less and less effective product is pretty much the definition of a bubble.