Google has plenty of arrows in its quiver in battle with Facebook

Google's strong core advertising business means that it is fending off Facebook - for now, says Be Heard Group's Ian Maude.

Last week saw Google’s retort to Facebook’s fourth-quarter results. A strong performance in the December quarter resulted in a sharp jump in the share price of Alphabet, the new holding group, which briefly overtook Apple as the world’s most valuable public company.  

Wall Street’s glee was due to continued acceleration in Google’s core advertising business, with total revenue up 18 per cent year-on-year, the biggest rise since Q3 2014, to $21 billion.

Ad revenue from Google properties, which account for the lion’s share of income, grew 20 per cent. Revenue from Google’s network business, licensing and Google Play was also up. Losses from moonshots such as driverless cars rose but investors consider them acceptable, at least for now.

Crucially, the volume of paid clicks surged 31 per cent on a year earlier, assuaging fears that the transition from desktop to mobile might undermine search as a discovery tool.

Smartphone and tablet users can now search for and install apps and find in-app content directly via Google search, opening up a huge new market opportunity.

Average price-per-click (PPC) continues to fall, but should stabilise as mobile and video ad pricing increase and cross-device targeting and attribution improve.

One potential cloud on the horizon is the possible renegotiation of Google’s longstanding partnership with Apple, under which it is the default search engine on all iOS devices.

Reportedly, Google paid Apple $1 billion in 2014, equal to 34 per cent of gross revenue from the arrangement. Revenue on both sides will have grown substantially since then. If Apple decided to ditch Google for, say, Microsoft, the effect could be seismic.

Google is also building a strong platform in video and display. According to the company, time spent watching YouTube in the living room doubled in 2015 and in the US more 18-49 year olds watch YouTube on mobile than any of the cable networks. Overall, 80 per cent of views are outside the US.

Though the company doesn’t split out YouTube, Enders Analysis estimates it generated £390 million in the UK last year. This is likely conservative with TrueView skippable video ads becoming a hit with advertisers and agencies alike.

In total, Google generated more than £4.5 billion in gross revenue in the UK last year, up 17 per cent year-on-year. The vast majority of this is from advertising though Google pays out about a fifth of this in traffic acquisition costs and it also includes licensing, Google Play and so on.

Back in 2011 Google’s CEO Larry Page talked of the need to put "more wood behind fewer arrows". With seven brands – Search, YouTube, Android, Play, Maps, Chrome and Gmail – now reaching more than one billion active users, the company has a quiver full of arrows.

Ian Maude is group development director at Be Heard Group.

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