Google's Most Important Business Has A Huge Problem

Google stock has been flat for a couple of years, and we've decided to take a closer look at why.

One metric that people who are pessimistic about Google like to talk about is the declining amount that Google can charge for each click on its search ads.

When Google reported its earnings for the fourth quarter of 2014, it said that cost per click was down 3% from the same quarter a year before.

Worse, Google said the rate of decline was accelerating.

Why is this happening?

We asked two experts on the intricacies of Google's search advertising business: Danny Sullivan, the founding editor of Search Engine Land, and Ginny Marvin, one of Search Engine Land's reporters.

The following is what they told us, in paraphrase.

After the iPhone came out in 2007 and Android came out in 2008, Google executives realized that the number of people connecting to the internet on mobile devices would soon surpass the number connecting on desktop computers.

The trend was bad news for Google, because at the time it made almost all of its money from selling desktop search ads.

So in March 2013, Google made a decision. It told advertisers: If you buy ads from us, they will show up on desktop and mobile — we aren't going to distinguish between the two platforms. It was a quick-and-dirty way for Google to become a huge player in mobile advertising. For the most part, advertisers took in this news and continued to run their normal campaigns, and soon Google dominated the market.

But eventually Google had a new problem on its hands.

Most of Google's advertisers are companies trying to sell products to users who are looking for those products via Google. When a user clicks on one of their ads, that user goes straight to the advertiser's online store.

Because Google told its advertisers not to worry about creating campaigns specifically for mobile or for desktop, Sullivan and Marvin say that most of them continued using the same online stores that they had when their ads appeared only on Google's desktop search-results pages.

These stores were not very easy to use on mobile. As a result, shoppers who came to them via mobile search ads were not completing as many transactions as they had when they came through desktop search ads.

For advertisers, the value of a person who came to their online stores through a click on a Google ad was lower. The price that advertisers were willing to pay per click also came down.

Down went Google's cost per click.

Marvin says that for the past few quarters, the value of traffic from Google's mobile search ads has slowly been increasing, but that the number still stands well below desktop.

The scary fact of the matter for Google is this:

The company can have the most modern and mobile-friendly apps and software on the planet (some say it does, citing Android and Google Maps as proof), but as far as Google's business goes, it won't matter until Google's millions of advertisers develop online stores that people want to use in the smartphone era.

The threat for Google is that, while Google's millions of advertisers slowly modernize, consumers will learn to shop on the internet in ways that do not include Google at all.

There is already plenty of evidence that they are happy to skip web search altogether and go straight into apps or to Amazon.com. And that may be enough of an explanation for why Google's stock price has been flat for so long.

But there are other questions about Google that need to be answered.

Is the company's CEO, Larry Page, interested in attacking these kinds of problems?

More on that soon.

We're taking a closer look at Google, which seems to have gone flat as a company. We'd like to hear from Googlers and ex-Googlers. Email nicholas@businessinsider.com or jdonfro@businessinsider.com.

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