Analysis: What's the future for Google's plunging $12.7bn AdSense business?

Analysis: What's the future for Google's plunging $12.7bn AdSense business?

Summary: Distracted by self-driving cars and "moon shots" investors have pushed $GOOG to new highs while ignoring problems in its core advertising markets.

TOPICS: Google
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Google's latest quarterly financial report shows problems in its AdSense network, which was responsible for 29% of last year's $43.7 billion in revenues. 

It means a lot less money for Google's network of publishing partners, such as the New York Times. 

Foremski's Take: $GOOG's Q3 report showed zero growth for AdSense compared with 22% yearly growth for its AdWords network. 

Not only has yearly growth come to a stop but AdSense revenues have shrunk every quarter this year (see chart below).




The continuing plunge in AdSense is in sharp contrast to robust 20% revenue growth in 2012, which outpaced AdWords' growth of 19%.

AdWords/AdSense mismatch…

This large gap in the performance of Google's ad networks is unprecedented. Historically, they have mirrored each other's growth (below). 

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In Google's Q3 conference call with analysts, CFO Patrick Pichette said, "advertising policy changes" were to blame for the change in AdSense performance.

With three quarters of sequential decline in revenues the future of the ad network is uncertain — especially since it shares about 80% of the revenues with its network but keeps 100% of AdWords revenues.

The AdSense network has large, legitimate publishers but it also has smaller sites filled with spam, or content stolen from other sites. Google has been criticized for aiding such content theft by allowing pirates to profit from their actions through AdSense, and then sending them traffic through search — effectively making Google an accessory.

The AdSense network has been very important to Google in the past and helped it successfully IPO in 2004 at a time when the stock market was skittish about investing in tech companies with volatile revenues.

AdSense publishers doubled Google's advertising revenues and stellar growth of 194% — compared with just 88% for AdWords — helped the IPO tremendously, showing potential investors that business was strong and very hockey-stick in direction.

AdSense boosted the IPO…

Google's IPO was one of the most successful in history and it sparked a new interest in tech stocks, which led to a boom in startups.

But is AdSense shrinking because of Google's war on spam and pirates? Or, is it reflecting deeper issues with online advertising that could become serious problems with Google's advertising business?

AdWords grew 20% but how much of that is due to "advertising policy changes" imposed early this year that require customers to buy mobile ads even if they cannot monetize that channel? It increases costs for advertisers and their cost of conversions so it could backfire for Google if some accounts that were not performing that well now get pushed into closure. 

"Mobile is killing media."

There are serious issues with online advertising affecting the entire industry. Google has reported declining value from clicks on its ads. And the shift to mobile ads is accelerating the decline, because it produces a fraction of the revenue of desktop ads. 

Matt Sanchez, CEO of San Francisco based ad network Say Media, recently warnedthat,  "Mobile Is Killing Media."  

Digital publishing is headed off a cliff … There's a five fold gap between mobile revenue and desktop revenue… What makes that gap even starker is how quickly it’s happening… On the industry’s current course, that’s a recipe for disaster.

Google has been pushing to diversify. It used to get 98% of its revenues from advertising but in Q3 16% came from other sources, such as enterprise IT,  and mobile phone sales. 

However, those businesses aren't as profitable as advertising. Its smartphone business lost a whopping $1.08 billion in 2012, and losses this year total $645 million. 

Search v AdSense...

The decline of AdSense says more about Google's ability to fight spam with its indexing algorithm than anything else. It should not be sending traffic to spam and scraper sites in the first place.

The fact that Google can't monetize AdSense is blot aqgainst its algorithm. It should be able to distinguish legitimate sites from the sites that scrape them but it often doesn't.

Distracted by moon shots…

The stock market has enthusiastically welcomed Google's Q3 report by boosting its shares to new highs. Maybe investors were distracted by the self-driving cars and "moon shots" to pay attention to the long term negative trends in Google's core.


Topic: Google

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  • Before and After

    Google treated their Adsense publishers really horribly over the last few years and it's led to a lot of distrust when it comes to choosing ad networks. The emergence of (recently acquired by Bing/Yahoo) and their friendly approach to customer service has endeared them to every new content publisher they acquire. I suspect that their similar, if not better earnings opportunities play some role in the Adsense decline.

    Before Google would suspend accounts without notice and provide little to no explanation for the action. The appeals process was shrouded in mystery and if your protest failed you were relegated to a lifelong ban from the program. Also, you could only hope to get your account reinstated if you did a good enough job calling them out in a public forum.

    I find it interesting that recently Google changed their position on ham-handedly serving up participation death sentences by creating a "Policy Violations" area in their admin. There publishers now actually have an opportunity to correct mistakes they've made before being given the axe.

    My feeling is that it's too little too late and they've opened the door for a worthy competitor in
    • true

      It's surprising the author does not take into account "ad blindness."
      1. People are becoming more averse to clicking on ads.
      2. Ad blockers are becoming more widespread and effective.

      I think there are many more very important reasons why Adsense revenue is dropping. Attributing the whole thing to spam is...
  • Poor content, poor revenue might have gotten more traffic and revenue if it had been updated more than once this year. Adsense is not responsible for poor or virtually nonexistent content.
    Mark Pierce
  • Good read

    Overall, your article was quite entertaining but...

    You said and I quote "The fact that Google can't monetize AdSense is blot against its algorithm. It should be able..." I don't know what world you're living on. $12 billion dollars from a product is not monetization?