Google’s “Mobile First” Approach Not Clear in Its Results

Google recently announced its second-quarter results. Total revenue grew 24 percent over the year to $6.82 billion, with 23 percent growth from each of the two largest businesses — Google Web sites ($4.5 billion) and AdSense ($2.1 billion). Other sources of revenue, which include Android, grew 39 percent year-on-year to $258 million. This was lower than in the first quarter, mostly because of the closure of the Nexus One online store. Operating income grew in line with revenue to $2.37 billion, maintaining Google’s 35 percent operating margin.

Although this represents solid growth on an already healthy business, stock markets had been expecting more and Google’s share price fell in the wake of the results.

Google’s growth in the second quarter was driven by two main factors — continued strength in the trend toward digital advertising and growth in bigger campaigns, which Google is increasingly well positioned to serve thanks to its recent display advertising deal with Omnicom and the rise of advertising on YouTube. YouTube is becoming a must-have inclusion in a campaign, with high-profile FIFA World Cup campaigns from Coke, Nike, Visa, Sony and others.

The main countries called out for high performance were Brazil, India and Russia, though Google reiterated its view that (for Google at least) the recession is over and most areas are doing well.

Android sits in the 4 percent of revenue categorised as “Other” and as such faces two challenges.

The first of these is that it needs to grow somewhat faster than the two core businesses to have a significant impact. This is happening, though, and Google gave a few interesting figures:

  • Android activations grew from 65,000 a day at the end of 1Q10 to 160,000 a day in late 2Q10.

  • In Android Market, the number of apps has grown from 30,000 at the end of 1Q10 to 70,000.

  • The volume of searches carried out on Android devices grew 300 percent in 1H10, which is broadly in line with the growth in shipments, according to our estimates.

Google is learning about the differences in mobile advertising. It has increased click-through rates by improving the format of mobile search ads. For example, adding a local address resulted in an 8 percent rise in click-throughs; adding a phone number meant a 6 percent increase. Improvements like this are seen as crucial to unlocking major revenue growth from mobile advertising.

Android’s second challenge is that AdSense covers various advertising channels, including mobile, and the data is not broken out. Google mentioned that AdSense for mobile is growing well, but declined to give the figures. Including mobile here means that it is very difficult to estimate the real financial impact of Google’s mobile activities.

Under questioning about what level of investment the firm is making in Android, Google made the rather chilling statement that “in terms of the company, the costs of Android are not material”, and admitted that it’s probably not investing enough.

However, it said that one of the key areas it is working on is a wider variety of billing options (currently Google Checkout and billing through T-Mobile USA are the only options on Android Market). We expect to see more partnerships with operators for operator billing, especially in countries where credit cards are not widespread. This will be very important as Google broadens out its range of services to include books and, potentially paid-for video, games and music.