Investors will notice a few changes on Alphabet’s (NASDAQ: GOOG) (NASDAQ: GOOGL) upcoming first-quarter earnings report. It will include unrealized capital gains on both public and private equities in accordance with a new accounting standard. Nest’s results will be folded back into the Google division. And it’s changing the way it reports revenue for its Google Network Members’ properties.
Instead of reporting change in paid clicks and cost per click, Alphabet will now report change in impressions and cost per impression. The idea is to give investors a more accurate portrayal of the business from the point of view of how Google sells most of its ads on its Network Members’ websites.
Alphabet’s second-biggest business
Ads on Google Network Members websites brought in a total of $17.6 billion in gross revenue last year. That’s a 12.7% increase over 2016.
While paid clicks are climbing slowly — up 3% for the full year last year — cost per click has fallen. The average ad price fell 13% year over year for the full year, and it was down 19% in the fourth quarter.
A 3% increase in clicks with a 13% decrease in price per click somehow adds up to 12.7% revenue growth? Something’s missing.
The shift to the mobile web has changed the characteristics of effective advertising. Instead of asking a person to take action immediately by clicking through the ad, marketers can often have more success simply displaying a branded message. Mobile is still hard for marketers to convert browsers into buyers, and direct-response ads, which ask customers to take a specific action, are usually more effective on desktops.
As a result, marketers are more often buying banner and video ads on Google Network websites. Those ads don’t generate very many clicks, and as such marketers pay per impression. So, clicks grow much more slowly than traffic and cost per click becomes practically irrelevant. The new reporting standard should provide much greater insight into the health of Alphabet’s second-biggest business.
What about Google properties?
A growing portion of Google’s owned properties also sell ads primarily on a cost-per-impression basis. YouTube, in particular, sells some of its ads on a cost-per-impression basis. And there’s opportunities for Google to sell local advertisements in Maps or Waze on a cost-per-impression basis as well.
For now, Google will continue to report the same change in paid clicks and cost-per-click metrics. With much of its revenue still coming from search advertisements — where clicks are essential — that makes sense.
But the move to impression-based reporting for Google Networks advertisements paves the way for Google to break out results from YouTube, which has weighed on Google properties’ average cost-per-click results. Including YouTube in the results distorts the actual progress of Google’s core search advertising business. If Alphabet wants to provide an accurate reflection of its business, as is the case with its recent reporting change, it behooves the company to separate YouTube’s results as well.
Alphabet says both search and YouTube are benefiting from the growth of mobile, and that’s certainly the case when they’re combined. Google properties’ revenue increased 22% last year. But how much of that growth actually came from the growth in mobile searches and how much came from YouTube is impossible to tell for certain.
Offering a more accurate reflection of its Network business may be the first step toward providing greater transparency to Google’s owned properties business. For now, though, investors will have to do with only the former.