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Google shares drop as declining ad prices hit profits

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Google’s known for surprises, but today’s wasn’t a good one. The company’s quarterly report got filed early with the Security and Exchange Commission, while the stock market was still open. Google’s plan was to wait until the stock market closed for the day,as usual. Once the report — and Google’s 20 percent decline in profits — became known, the company’s shares fell about 9 percent before trading was suspended.

What was in the earnings report? “A big surprise is there’s probably about $200 million-plus of costs that we did not expect,” says Ben Schachter, who follows Google at Macquarie Securities. He says those costs include data centers. As people use the internet more often, in more places — thanks to smartphones — Google has to buy more and more data routing gear, and pay for the electricity to run it.

And all those smartphones? Advertisers won’t pay as much for ads on them, says Colin Gillis at stockbroker BCG Partners.

“They’re worth about 50 cents on a dollar compared to traditional wired Internet,” Gillis says.

That notion harkens back to an old-school print ad way of thinking. Advertisers don’t see why they should pay the same amount for a teeny ad on your tiny phone screen as they would for one that shows up much bigger on your laptop. Roger Kay at Endpoint Technologies says Google’s suffered because of that.

“They haven’t been able to convince people to pay more for what amounts to a smaller ad,” Kay says.

Even though the ads on a mobile phone are smaller, they cost Google just as much on the back end — in data servers, power and personnel — to get them in place.

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