Top tips: How will Google’s paid advertising evolve?

Google celebrated its 14th birthday last month and it seems reasonable to assume that the major growth phase for its core product – paid advertising – has now passed. But what of the future? Periscopix, a specialist pay-per-click agency, has researched growth rates on Google’s two major revenue streams – ads on its own properties, including search, and ads supplied to non-Google sites – since 2006.

Figure 1 shows the growth rates for these revenue streams since 2006. Together, they account for around 96% of Google’s revenues (excluding Motorola and investment income):
Revenue from ads carried on Google’s own web properties (including search) accounted for 69% of the total in the latest quarter (shown in blue)
• Revenue from ads supplied to non-Google sites accounted for a further 27% (shown in red)

Prior to 2008, growth rates were already slowing as the company grew and matured.
Throughout 2008 and into early 2009 the global economic downturn undoubtedly contributed to the rate of decline and resulted in a marked dip. Since then there has been a gradual recovery into 2010 through to the present.
In fact, performance over the last 2-3 years has been remarkable considering the size of the company (annual revenue from clicks now exceeds $40bn annually), Google’s dominant share of the global search market (around 91%*) and the generally subdued economic conditions in its key North American and European markets.
So what has been underpinning this growth? Figure 2 shows that the revenue generated from each click has barely changed in the last six years. Meanwhile the volume of clicks on adverts has increased by more than 250% over the same period.

Alas, Google does not provide a split the above figures into those relating to its own web properties and those relating to third party properties (or, even more usefully, into those relating to search and non-search, which is not quite the same thing). So from this point forward we can only speculate about underlying trends.
There are three main possibilities:
Growth in the overall web user population, resulting in increased use of Google’s own sites and other sites that carry Google advertising. Figure 3 shows the internet user population since 2005. The current annual growth rate is around 11% per annum and has been surprisingly consistent in recent years. Around 33% of the global population have access, so (on paper at least) there’s plenty of scope for this to continue for some years to come.
Growth rates vary enormously by country, with the highest growth found in lower income countries such as India, the Philippines and Mexico. Nevertheless, this is likely to account for a significant proportion of the increase in paid clicks achieved by Google in recent years.

1) Increases to Google’s penetration of the internet community. Google’s share of the search market has remained static at 90% (give or take a percent or so) since at least 2008**, so this seems unlikely. With regard to provision of ads to third party sites, Google is constantly seeking to increase its reach. However our own data suggests that this growth has been modest in recent years.
2) Audience behaviour is changing:
a. Internet users are doing more searching or have increased their overall internet use. As far as we are aware, there are no reliable studies indicating whether this is the case. However there are certainly countries where (for example) broadband penetration is growing quickly, so it would seem reasonable to assume that there is growth (although this is impossible to quantify).
b. People are clicking on ads more frequently than they used to. Again, there are no published data and even with a very large sample it is near-impossible to measure. Based on our own anecdotal evidence, however, we believe this to be true. Culturally, there is undoubtedly much wider acceptance of the inclusion of paid advertising in search results than was the case five years ago.
c. Changes in devices are influencing user behaviour. Internet use via mobile devices has been doubling annually in recent years and reached 8.5% in January 2012. This growth is undoubtedly increasing the accessibility of the Web. But does it mean that people are browsing (and searching) more than they used to? Maybe. Does it mean they click (or tap) on more ads? It’s certainly possible, but in the absence of published data we can only speculate.
Looking to the future
It seems likely that innovation – responding to how consumer behaviour is changing – will drive growth as much as an overall increase in the internet population. Google is constantly innovating, from providing storage (Google Drive) to measuring social influence (Author Rank) and creating social networks and search (Google Plus). But its core revenue is from ads, whether on Google’s own sites or those of third parties. Will it continue to blur the lines between paid and organic search results, and use social ranking to influence listings? There is considerable pressure on Google to refine and develop the AdWords cashcow, and the Google we see now is very different from the one we saw at the beginning of AdWords, where ads quietly complimented search results.
* Source: StatCounter
** Source: Internet World Stats
Source: http://www.periscopix.co.uk/