What Google At Peak Search Means for Marketers

For Q3 2023 earnings, Google reported a shortfall on cloud revenue and that their US core advertising / search business over delivered to make up part of the difference.

So how has Google become this dependent on non-advertising revenue streams to achieve future growth targets and how much longer can they go back to the US advertising well to cover these shortfalls?

The answers may come down to supply and demand around the specific resource that fuels Google’s advertising business, which is fundamentally the number of shopping and brand specific keyword search events executed by users on their platform. Google monetizes ad space served to people after they have searched for terms that indicate intent to buy products or services, such as “Toyota Camry lease deals near me”, “winter jacket”, “backyard fire pit”, “Caribbean cruise deals”, and so on.

The larger the supply of people searching for products, the more advertising space they have to monetize. For years Google was adding new users and, with that, a fresh new supply of ad space. As advertisers increased spend, there was also increased supply of search behavior. Supply and demand growing at the same time kept prices relatively stable in Google’s ad space auctions.

Advertiser demand for Google user attention has increased, but since 2016 (about the time that smartphones reached mass adoption), the supply of that attention targeting data from Google users has remained about the same. And over this time, Google US Advertising revenues have grown from an estimated $152 per user in 2015 to $379 per user in 2022, tracking to about $390 per user in 2023.

Today 91% of Americans have a smartphone and as this number grew so did Google adoption to what is now an estimated 276 million users. 9.6% of the 331 million U.S. population is either under 5 or over 85 years of age and likely not executing a large number of shopping searches, bringing the potential market closer to 299 million. Considering that Bing and Yahoo! account for 9.6% of the search market, that number is reduced further to about 287 million, which doesn’t leave very much room to grow.

It appears that where growth from new users has leveled off, increased spending per consumer has fueled Google.

There are also limits on the amount that advertisers can spend on Google advertising to sell those products and still maintain a profit. Keyword selection, budget allocation, bid amounts, geographies, etc. have been heavily optimized around these Return On Ad Spend (ROAS) metrics, and budgets are capped at whatever levels meet volume/profitability targets and no more.

The utility of targeting user search behavior continues far beyond the results page, when after clicking the consumer is ‘cookied’ upon reaching the advertiser’s website and added to a retargeting audience. In fact, the first strategy deployed by advertisers on Meta Ads is retargeting shoppers who visit an advertiser’s website. The more optimized the advertiser’s spend is with Google, the better their Facebook retargeting ads perform. However, because the size of the website audience is limited, they can only spend so much before crossing similar ROAS thresholds. Retargeting budgets are also capped, and lookalike audiences are created to expand and retarget consumers who have been to competitor websites for increased scale.

This means that Meta’s ability to optimize the volume/profitability balance for advertisers is almost entirely dependent on inbound clicks from Google to their advertisers’ websites, collected through the meta pixels installed on their advertisers’ websites.

The better performing the click in the Google search result, the better Meta ads will perform when that same user is retargeted, and there is a direct correlation between high Cost per Click rates on Google and high CPC rates associated with meta ads targeting those same users. These same dynamics play out in a similar way for YouTube who also experienced limitations on growth.

With the volume of online search behavior data supply reaching its peak in the US, it seems that it will also become increasingly difficult for both Google and Meta to sustain growth at the same rates without alternative lines of business kicking in.