What's next for Google, ask analysts

Google is still pulling in money hand over fist, but Wall Street is hungry for the company's next act. On a conference call with analysts on Thursday, after Google reported its third-quarter earnings, the questions came fast and furious: How will Google match Apple's new payment system? Can YouTube topple television? Is Google serious about trying to challenge Amazon on same-day delivery?

The problem was that in the earnings report, the internet giant showed signs that its ultraprofitable business in search advertising was starting to slow.

In almost every way, Google has become a victim of its own success. Its search engine remains dominant in desktop computers and mobile phones, and businesses like YouTube and the Google Play store are growing quickly. The company churns out billions in quarterly profit and has a $60-billion cash hoard.

The thing that worries investors, though, is that the company's golden goose - its search engine - is showing signs of age. Paid clicks on advertisements increased 17 per cent in the third quarter compared with the same quarter last year. But in the second quarter, paid clicks were up 25 per cent from a year earlier.

"Google's core search business is the best internet business model ever created," said Jordan Rohan, founder of Clearmeadow Partners, a strategic advisory firm focused on internet companies. "Every other business Google is in looks pedestrian by comparison."

Another concern for analysts is the cost per click, the average price the company is paid each time a user clicks on an ad. The cost-per-click measurement has fallen for several years as people spend more time on mobile phones, which have smaller screens and are harder to place ads on.

In the third quarter, the cost-per-click measure again fell, down 2 per cent year over year and flat from the second quarter.

Google executives grow annoyed with analysts' fixation on clicks and cost per click. Mobile advertising is still pretty new, they point out. It accounts for about 11 per cent of ad spending in the United States, according to the research firm eMarketer. Even mighty Google is trying to figure it out.

"I think we just need to keep innovating and experimenting here to get it right," said Omid Kordestani, Google's chief business officer. Google does not release figures for mobile ad revenue separately from desktop ad revenue, so it is hard to know exactly how Google is doing in this area.

Mobile is likely to be one of Kordestani's chief business problems. During the conference call, the company announced that Kordestani, a longtime Google executive who stepped into the role after the departure of Nikesh Arora for SoftBank, will be in the job permanently.

Despite its challenges, Google remains a fast-growing business. Third-quarter revenue increased 20 per cent, to $16.5 billion.

And the company is making money in many new kinds of ways. Google reported that "other revenue," a large portion of which is Google's Play Store, increased 50 per cent from the same quarter of last year, to $1.8 billion.

But research-and-development costs have soared, to $2.7 billion from $1.8 billion from the same quarter a year ago.

"People are certainly concerned about the expenses," said Ben Schachter, an analyst with Macquarie Securities. "Revenue growth is slowing while the company continues to hire a significant number of engineers. As long as the core business holds up, that's fine, but if the core slows dramatically, that's a problem."

Net income in the third quarter was $2.8 billion, down from just under $3 billion last year. But excluding the cost of stock options and the related tax benefits, Google's profit was $6.35 a share, compared with $5.63 in the third quarter of 2013.

Over all, the earnings were somewhat short of expectations. The stock closed on Thursday at $524.51, down 1 per cent, and it was down about 2 percent in after-hours trading.

Over the past year, Google has begun several programs to nudge advertisers to buy more mobile ads. The most significant, Enhanced Campaigns, forced advertisers to think about mobile by having them bid on ads across several devices at once instead of creating different campaigns for different devices.

Google also faces continuing problems in Europe, where it is being buffeted by slow growth, unfavourable currency movements and tax and regulatory problems that inspired a top German official to call for the company to be broken up.

Google's long-running efforts to settle accusations by the European Commission that the company's search results favour its own sites over those of its competitors have been delayed by the objections of powerful European publishers and American rivals including Microsoft and Yelp.

Google has dispatched its executive chairman, Eric E Schmidt, to mount a public relations offensive.

This week, in a Berlin speech that cited various inventors along with Mark Twain and Jennifer Lopez, Schmidt praised the success of Google's competitors but suggested that their antitrust complaints were an impediment to global technological progress.

Meanwhile, several European Union countries, including Britain, France and Germany, have questioned Google's tax structure in Europe.

And Ireland's government said it would close the "double Irish" provision that allows a number of companies, including Google, to reduce tax payments by making royalty payments for intellectual property to a separate Irish-registered subsidiary that, though incorporated in Ireland, typically has its home in a country that has no corporate income tax.

©2014 The New York Times News Service