Just What Costs are Included in Google’s Traffic Acquisition Costs?

Google’s Q3 2013 earnings report includes an important section titled “Traffic Acquisition Costs”. Google has offered a definition of these costs. The Google definition of Traffic Acquisition Costs is very specific to the “network” component of their revenue. Google’s network affiliates receive payments based upon operational terms governed by contract.

So these costs should directly correlate to the “network” segment of any quarterly earnings report for this business. For Q3, 2013, the “network” revenue component posted a decline in revenue by approximately 1%, but the “Traffic Acquisition Costs” declined by approximately 1.3%. Is it safe to say the network affiliates are under some pressure? How else to account for a reduction in these costs exceeding the commensurate drop in revenue production for this component?

If this is the case, then analysts may want to dig a lot deeper into these numbers. If Google benefits more from its search revenue component, which operates wholly on its own websites, and, further, Google appears to be making very serious efforts to accelerate the efficiency of its network business, then perhaps the value of its pay-per-click and pay-per-thousands of impressions products has deflated more than otherwise appears to be the case. Personally I think this view, that the standard Google ad products are not delivering on their expectation, is the case.

I would add to the above information some observations on the amount of effort Google is expending to ensure the success of SMB advertiser campaigns. Via its “Engage” agency program, Google has been maintaining human support resources, accessible to any advertiser, via telephone contact, for several quarters. This program, alone, likely adds a cost component of some magnitude to their advertising products and, therefore, diminishes the profit margin.

Finally, it would be good to get some ideas as to the costs of the Analytics product. This product has a hefty price tag for enterprise customers, but the free version, which appears to be the method by which most users avail of this product, requires a lot of infrastructure and periodic systems development.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

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