Tuesday, July 25, 2017

Traffic Costs Jam Up Google

Cost of getting users to click ads outpaces revenue growth, pressuring bottom line.

By Dan Gallagher
The Wall Street Journal
July 25, 2017

Google generates a lot of clicks. But they aren’t free—nor always cheap.

Second-quarter results from parent company Alphabet Inc.GOOGL 0.45% were a good reminder of both. Google showed an unprecedented ability to generate economic activity out of its massive internet search engine. Paid clicks, which measure the frequency that Google users click on advertisements, surged 52% year over year. That is the biggest jump in at least seven years—notable considering the company’s advertising revenue base has grown nearly fourfold in that time.

But that growth comes with a cost—$5.1 billion in this case. That is what Google expended for the quarter in traffic acquisition costs, which was also a record high. More important, traffic acquisition costs, which rose 28% in the second quarter compared with last year, outpaced revenue growth for the first time in five years.

Traffic acquisition costs are what Google pays to drive people to its ads. For example, Google pays Apple when iPhone users search with Google. These costs have been rising as more of the company’s traffic comes from mobile devices.

Operating income would have hit a record $6.9 billion if not for the record-setting $2.7 billion fine from the European Union. But that represents growth of only 15% year over year—the company’s slowest in two years.

Alphabet’s shares slipped 3% Monday following the results, reflecting both the earnings deceleration and the stock’s 26% run so far this year. Investors shouldn’t panic, as Google is still an unmatched profit machine relative to most of its internet peers. But it is worth remembering that growth has its price.

Article Link To The WSJ: