Google (Alphabet) lost more than 6% in the after-market as it announced its quarterly results.
– Slow growth in search ads.
– Negative growth for YouTube.
– Only segment with substantial growth is Google Cloud.
We are operating profits substantially down due to higher cost of sales.
Google’s business model through the economic slowdown.
From last quarter’s results, some interesting data hints at how the Google business model is changing through this economic slowdown.
– Google search generated $39.5 billion in Q3 2022, up from $37.9 in Q3 2021.
– YouTube ads generated $7 billion in Q3 2022, down from $7.2 in Q3 2021.
– Google network generated $7.87 billion, down from $7.99 billion in Q3 2021.
– Google other revenue streams (hardware, YouTube subscriptions, Google Play) generated $6.89 billion in Q3 2022, up from $6.75 in Q3 2021.
– Google Cloud generated $6.8 in Q3 2022, substantially up from $4.9 billion in Q3 2021.
While revenue slew down, it still recorded growth.
Yet Google’s net profits dropped from $13.9 billion in Q3 2022 to $18.9 billion in Q3 2021.
What did happen there? There’s a change in the company’s cost structure.
Based on the following data points:
– YouTube ads have slowed in advertising revenues as advertisers decreased their budgets. However, it grew in terms of subscription revenues.
– Google Play revenues which include sales of apps and in-app purchases and digital content sold in the Google Play store, decreased. Thus, signaling slower consumer spending.
– Google hardware was primarily driven by an increase in smartphone sales. Thus, signaling that Google is on the right track with the new Pixel smartphone.
– CPC within Google’s advertising machine has decreased by 5% due to a decrease in ad spending at the CPC level.
– While paid clicks have increased by 8%, driven by further mobile adoption.
– Impressions have gone up by 3%, driven by Google Ad Manager and AdSense, while there was a decline in impressions related to AdMob.
What’s going on?
– less advertising budget: it’s clear that companies are prioritizing the paid budget much more efficiently compared to last year. Thus, slowing down mobile advertising a bit.
– TikTok effect? I wonder how much of this is also due to mobile advertising moving away from Google-Facebook and into TikTok.
– more organic and display: more organic traffic is driving more revenues for network remembers (display ads) through Google Ad Manager and AdSense.
– mobile traffic is worth less this year: we can see this from YouTube ads revenue decrease (primarily driven by mobile) and a reduction in revenue from Google AdMob.
– Google finally launched a portfolio of successful Pixel products (after trying for years).
– Much higher traffic acquisition costs: as mobile advertising slows down, desktop advertising traffic becomes more expensive, thus driving the additional cost of acquiring traffic for Google higher.
– Hardware is changing the business, driven by smartphone sales. This, in the short term, reduces profit margins but creates new opportunities.
– Business productivity tools in the cloud drive the cloud revenues, yet it also increases server costs, thus reducing profitability in the short-term.
Related Business Models Case Studies
Google Organizational Structure
Google Traffic Acquisition Costs
Read Next: Google Business Model, How Does Google Make Money, Google Other Bets, Moonshot Thinking, YouTube Business Model.