This Is Why Google Missed Its Q2 Revenue Expectations

Google's revenues came in light in Q2 2013, at $14.11 billion instead of $14.4 billion. Here's why: The ongoing, historic decline in click prices is faster than the growth in total paid clicks.

As we've noted before, back in 2011, something significant happened to Google — the cost-per-click went into a seemingly permanent decline. (See chart below.) The total number of paid clicks that Google gets continues to go up, but Google gets paid less for each one. In other words, Google's rock is still rolling up the hill but it takes a lot more energy to maintain that momentum than it used to.

So what happened in Q4 2011? That was the point at which the number of people using Google on smartphones became so great that mobile ad revenue started to hurt Google's numbers.

For various reasons, mobile ads are cheaper than desktop ads. Obviously, people are using Google more on their phones than on their computers. And that's crimping Google's revenue growth. Google even changed its Adwords buying system back in February to make it harder for advertisers to buy mobile only campaigns. And advertisers are no longer able to buy tablet-only campaigns — they have to buy them as part of desktop and laptop campaigns.

It's also the case that as more people click, they generate more ads, and as the supply of clicks increases the price will go down — that's simply supply and demand. But notice that prior to Q4 2011, Google was able to generate both more clicks and higher prices. That was the result of a robust economy with lots of extra buyers bidding up prices. That environment, it seems, is history.