Google is slashing prices of its European shopping ads and an analyst says it could wipe out hundreds of millions of dollars in revenue
- Analyst Colin Sebastian says that Google has begun to offer deep discounts on shopping ads in Europe.
- The reduced prices could lead to as much as a 3% decline in ad revenue, according to Sebastian.
- The discounting is part of the company's effort to comply with a competition directive from the European Union.
- Last year, the EU found that Google had tweaked its search engine to favor the company's comparison-shopping service.
Google is slashing the prices of its shopping ads in Europe and the discounting could take a bite out of the company's revenue.
The discounts are a side effect of the EU's privacy ruling against Google, and according to a new report by Baird Equity Research analyst Colin Sebastian, Google's ad revenue could be more than a half a billion dollars lighter as a result.
In June 2017, the EU announced it would fine Google $2.7 billion and order it to comply with a competition directive after determining that the company had violated antitrust laws. As part of the effort to comply with that directive, Google began cutting prices on ads, Sebastian said in his research note.
"In a downside scenario, we estimate there could be a 2-3% temporary impact to advertising revenues," Sebastian wrote.
Ad sales are Google's core business and responsible for the overwhelming share of the company's revenue. In 2017, Google generated more than $95 billion from ad sales.
REUTERS/Francois LenoirEuropean Competition Commissioner Margrethe Vestager
Sebastian noted that the first round of ad price cuts, "highlighted by 20% discounts on Cost Per Click ads in Google Shopping," started in May. That's when Google launched the comparison shopping partner program in Europe.
Another round of price cuts
But Google cut prices again more recently, according to Sebastian.
Due in part to a lack of adoption by European retailers, Sebastian wrote that Google recently began offering promotional discounts called "Matching Ad Credits," which serve to reduce ad prices an additional 20% to 30%.
The crackdown on Google was a result of the EU's claim that Google tweaked its search engine so that its own European comparison-shopping service appeared more prominently than its competitors in search results.
Margrethe Vestager, the EU's competition commissioner, who seems to have adopted a zero-tolerance position when it comes to US tech companies, ordered Google to change its business practices.
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As part of Google's compliance effort, the blog Search Engine Land reported in February that Google Shopping had begun to display ads from rival shopping engines in Europe.
It's not all bad news for Google, according to Sebastian.
The reduced ad prices could prompt retailers to spend more. He also said that adoption so far is light.
"To-date, many retail advertisers have not opted into the program which could limit the impact," Sebastian wrote. "Over time, we assume Google would like broad up-take such that pricing reverts to higher levels, while the company also complies with the EU."