Google – is the sheen wearing off?

In its 10Q filing with the SEC yesterday, Google disclosed that its cost-per-click in the first quarter declined 14% year-over-year and 6% sequentially. Google asserted in the filing that “the decrease in the average cost-per-click paid by our advertisers was primarily the result of the strengthening of the U.S. dollar relative to foreign currencies,” but also reflected the way advertisers managed their ad costs in response to the downturn. “Specifically, we believe that as a result of the general economic downturn, advertisers, in aggregate, have lowered their bids for keywords in response to a decrease in the sales they are able to make per paid click,” the company said. During the same time period, aggregate paid clicks increased 17% year-over-year and 3% sequentially.

Google’s explanation that the drop in cost-per-click is a result of a drop in conversion rates seems plausible. It also implies that advertisers were already paying the most that they could afford. That is because if advertisers had room to increase bids (assuming the same conversion rates), then they would do so to try to increase market share as the overall market declined. Therefore, while the cost-per-click will probably see a onetime increase when the economy recovers, it is less likely to continue to grow at the torrid pace that it has over the past several years.

Where does that leave Google? With market share growth being limited and overall search volume growth slowing down, it just makes Google’s display and video initiatives more critical to its future.

About Ashu

General Partner with Foundation Capital. Areas of interest range from digital media, mobile and internet infrastructure to all things related to India. Currently on the board of TreeHouse, Aspire, Conviva, Agni and TubeMogul.
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