New figures from Alphabet Inc. this week confirmed a huge fear that has besieged the Internet giant for years: Google’s online search business is losing pace.
In its 2019 financial report, Alphabet split its advertising revenue into three items for the first time: Search, YouTube and a network company that manages advertisements on other websites. Search sales increased 15% in 2019, a slower pace than 22% in 2018.
«This search gap is real,» wrote Mark Shmulik, an analyst at Sanford C. Bernstein, in a note to investors after the results. To keep the growth even at this lower level, Google will need to generate more revenue from its Maps service, image search and shopping search ads, he said.
Google search is one of the most profitable businesses ever created, helping the company accumulate a cash mass of more than $100 billion. Google went from operating in a garage in Silicon Valley to a trillion-dollar giant that dominates digital advertising, online videos, maps and email.
The search grew rapidly as more people connected online in search of information. Smartphones also increased usage and revenue grew after Google uploaded more ads on top of mobile search results. But there are limits to the growth of such a large business.
Google can only include a certain amount of ads on your website without diminishing the quality of search results. On mobile phones, ads often fill the entire screen, forcing users to scroll down if they want to see free listings. Over the years, Google has used several settings to extract more clicks from search ads. But there may also be limits to that. Recently, it changed the way ads are tagged, prompting some people to say they were trying to blur the boundary between ads and free results. The company backed down quickly.
Now fewer people are joining the Internet in the most lucrative search ad markets. From 2017 to 2019, the number of Internet users in Europe grew 10%, while in North America growth was only 2%. In Asia, the online population increased 19%, according to data aggregation company Statista. Google worked on a censored search service for China, the world’s largest Internet market, but ruled out the project after some Us employees and politicians criticized the effort.
Some of the most valuable search ads, those for specific products that people can buy, face competition, especially from Amazon.com Inc. Nearly half of product searches begin on Amazon now, Shmulik wrote of Bernstein in a research note earlier this year. That prompted Google to create new types of shopping ads, but it hasn’t reversed the slowdown in growth. Searches for decoration and costume ideas also increasingly occur on social networks like Pinterest and Instagram. In addition, millions of people search for music on Spotify’s mobile app, not Google.
«This gap in search has been developing for many years and is not well understood,» Shmulik wrote.
Google is working hard to collect many of these more specialized searches. However, Bernstein’s analyst still estimates that revenue growth will slow down. After increasing 19% annually from 2015 to 2019, Shmulik estimates that Google’s search revenue will rise between 13% and 15% annually over the next few years.