Google's $8 billion mobile ad run rate: The fine print
Google boasted about a $8 billion mobile ad run rate, but the comparison to a year ago is a bit like comparing apples and oranges.
Specifically, Google's mobile advertising segment jumped from having a run rate of $2.5 billion by the end of Q3 2011 to roughly $8 billion last quarter. However, it's important to look at the details because there is more to understand with this sudden increase.
During the quarterly conference call on Thursday afternoon, CEO Larry Page first mentioned the leap for the mobile ad team:
This time last year I announced our run rate for mobile advertising hit $2.5 billion. That seemed like a pretty big number even for Google. But now we built up additional mobile revenue from users paying for content and apps in Google Play. Including these new sources grossed up, I can announce our new run rate for mobile is now over $8 billion. That's quite a business.
Before diving into the financial details for the quarter, Google's chief financial officer Patrick Pichette followed up with an important detail about the $8 billion annual run rate:
The new run rate is different from the one we gave you a year ago and more specifically, last year it included only our gross revenue from mobile ads. But this year in this new number, we also added the gross revenue from the mobile sales of Google Play content and finally, it also includes the consumer spending on the Play apps.
The most important point in that note is that last year's run rate only included "gross revenue from mobile ads." Thus, Q3 2011's reported run rate did not include any revenue from the Android Market/Google Play and related mobile digital content.
If Google did include that last year, the difference between 2011 and 2012 could have been a lot closer. While $8 billion is an impressive number, it's important to keep this figure in perspective.
UPDATE: When asked later in the call about Google Play content revenue, Pichette explained further, but refused to offer specifics about the non-mobile ad margin profile:
On the $8 billion, so let me give you just a bit more information on it. But clearly we don't break down each of the categories. We just wanted to kind of give you a sense of proportion. A point that's important is of the three categories I gave you: ads continues to be the bulk of it, the vast majority of it. And then on the case of the Google Play, it's important to note from a modeling perspective that the -- everything that's content that is whether a book, a movie -- content is actually booked on our books on a gross basis. Everything that is tied to apps is booked on a net basis. But it's still a huge kind of number in all cases. So without giving you -- I just wanted to give you that so you don't start thinking there is $8 billion that is booked in. Two of the three are there. The third one is done on a net basis just because of our accounting rules. The vast majority is still ads.
The bottom line is that mobile ads still account for the "vast majority" of that $8 billion figure.
But then that could mean that Google Play content didn't actually have much to do with that sudden increase, which would represent a huge jump for the mobile ad unit. Nevertheless, unless Google offers more specifics, it's a difficult call to make.
More coverage about Google's Q3 earnings statement: