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Google's Earnings Disappoint. Once Again, Mobile's to Blame

Eric Schmidt, chairman of Google

Photograph by Chris Ratcliffe/Bloomberg

Eric Schmidt, chairman of Google

Can anyone play this game?

Today, Google (GOOG) reported second-quarter earnings that fell short of analysts’ estimates. You can read about the details here, but the takeaway is basically that Google is part of an elite club of otherwise-wildy successful companies (Facebook (FB), Yahoo! (YHOO), Twitter) with highly capable, well-educated employees who can’t seem to get a handle on mobile advertising for love or money.

The figure that really got people twitchy was Google’s cost-per-click (CPC) rate, which fell 6 percent. CPC rates are an indication of how much an advertiser pays Google every time a user clicks on an ad on one of Google’s sites. Mobile has been driving those rates down: An ad served up from a mobile search can cost 40 percent less than one coming from a desktop PC, according to digital-marketing firm Covario. Thursday’s report from Google shows that trend continuing. For the first quarter of 2013, the CPC drop was 4 percent; analysts had been expecting a smaller, 3 percent drop for this quarter, not a larger one. The stock’s price dropped more than 5 percent in after-hours trading.

One might presume that mobile ads—which appear in a device that you carry with you and use right before and during purchases—and which can do things a desktop computer can’t (a smartphone usually knows where you are, for example) would be more, not less, valuable than desktop ads. But that hasn’t been the case.

It’s not as if we haven’t heard this story before. Facebook was initially battered in its initial public offering over concerns about its mobile future. (The company worked to assuage those fears in subsequent quarters.)

From the beginning, Google’s mobile strategy has been predicated on a very large-scale bankshot. Google gives away its operating system, Android, for free, because the company wants as many people using the Internet as possible. The more people online, the more searches. The more searches, the more revenue for Google. But if the rates for those searches continue to fall, how long can that strategy last?

Google has hedged its bet by purchasing Motorola Mobility. If the mobile-adverising market continues to disappoint, Google may lean more on Motorola to make money the old-fashioned way: Manufacture devices for X dollars and sell them for more than that. If you leave advertising out, there is money to be made in mobile. Just ask Apple (AAPL) and Samsung (005930:KS).

Grobart is a senior writer for Bloomberg Businessweek and the managing editor of Bloomberg Digital Video. Follow him on Twitter @samgrobart.

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