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Google Earnings Q1 2011: Good or Great?

Google is scheduled to announce its 2011 first quarter earnings this Thursday and the general consensus is that they will post strong results with revenue after traffic acquisition costs predicted to rise in the neighborhood of 25% year over year.  RKG's data on the subject suggests that's not an unreasonable estimate. What is working in Google's favor? Going Organic Maybe the biggest change Google has made over the past year has likely been a subtle one to the average user and that's exactly how Google wants it.  Through a series of tweaks to their search engine results page and ad offerings, Google has slowly, but surely blurred the lines between its paid and organic listings. A couple of months ago, RKG's Joy Barberio pointed out ten examples of this including the merging of line1 ad copy with the copy headline, which began in February of this year.  We have found this specific change improves ad click-through rates, as was surely Google's intention.  By making paid ads more organic in appearance, Google has reduced the barriers for some users to click on ads and, in RKG results, this has helped drive a 9% CTR increase YoY in Q1. Ad Offerings Going hand in hand with the above, Google has also been on a tear in the past two years rolling out new ad offerings and tweaking existing ones.  A number of these, like Product Extensions, mirror facets of the organic results, but shift the SERP real estate balance in favor of the paid links. In the Fall of 2010, Google began fully migrating an existing ad product, Product Listing Ads (PLAs) from its affiliate program to AdWords.  In many cases, this resulted in the bid management of PLAs being picked up by PPC advertisers who were better suited at segmenting and bidding on PLA traffic.  This has increased the competition for the PLA space and that is only likely to continue as Google refines its offering and more advertisers come on board in earnest. Mobile At this stage, any growth in mobile search usage serves to benefit Google over its chief competitor, the Bing/Yahoo Search Alliance.  With a mobile search share of 94% by RKG figures, Google is utterly dominant in a sector that has shown tremendous growth in the past year.  The one downside for Google in this area is that advertisers have a difficult challenge in assessing the value of mobile traffic directly and observed sales per click for mobile is only 10-20% of that for desktop.  This puts downward pressure on CPCs, which are already 41% lower than desktop for a keyword with identical settings. Google benefits from being the default search provider on the ubiquitous iPhone, which still generates the highest share of mobile paid search clicks for RKG clients.  At the same time, Google has smartly created a strong hedge against a falling out with Apple with its Android mobile platform, which is increasingly eating away share from its competitors. Economy As the old adage goes, a rising tide lifts all boats, and while no one would mistake the current economic environment for the boom times of the late 1990s or even for a few short years ago, economic indicators have generally improved in the past year and shoppers have shown increased willingness to open their wallets.  Retail sales ex-gasoline were up 8% YoY in February following a 7.1% increase in January, a result which drove retail sales above the pre-recession peak. For advertisers this means increased traffic and better conversion rates allowing for higher bids and click costs.  In Q1 of this year, we see Google's average CPC take increasing 8%. RKG Results Ultimately, given that it comprises nearly 97% of Google's total revenues, spending on Google.com and Google's network will dictate how well Google's earnings turn out this week.  Across our client base, we see Google ad spend increasing 27% YoY in Q1 driving an 18% increase in paid clicks.  Historically, our figures don't always show a consistent correlation with Google's reported revenue haul, but our numbers suggest there may be some upside to the current consensus and a YoY revenue increase of 33% is not out of the question. Despite these positive signs, there's still a chance that Google will disappoint.  For one, online traffic measurement firms have generally shown a decline in Google's overall search share in recent months.  Hitwise just released a report showing Bing powered search share increasing 5% from February to March and Google declining 3%.  These figures have to be taken with a grain of salt, but if you're a Google investor, you'd certainly prefer if those figures were reversed. The re-ascendance of Larry Page to the top of the heap at Google has also raised eyebrows if not doubts about Google's fortunes.  Page has already shaken things up in Google's management and has tipped his Facebook-targeting hand by tying employee bonuses more closely with Google's social strategy.  This could just be prudent forward thinking, but it may suggest Google feels it has squeezed about all it can out of search as it stands currently. The good news is we'll all find out very shortly!
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