Google and Facebook Have the Same Big Problem: Small Screens

In ten years, Google might dominate the car business and Facebook might dominate the everything-else business. But in 2012, they are firmly in the putting-ads-on-screens business, and both are having a Norma Desmond Crisis: The companies are big, but the screens are getting small.

Google announced today that it missed its third-quarter earnings expectations by half a billion dollars. One obvious target of blame is the Motorola unit, which itself lost half a billion dollars in the same three months. But Google has a more serious phone problem on its hands.

Eyes are moving from desktops to mobile devices, where real estate is tighter and ads are cheaper. When you click on a Google ad on a laptop, Google makes $1. When you click on a Google ad on a mobile device, Google makes $0.50. As Chris Mims explains, that's one reason why Google's average cost-per-click declined 15% last quarter from the year prior.

This isn't a Google problem. It's a phone problem.

Just look at Facebook, where overall revenue per 1000 page views dropped 60% between 2009 and 2011, according to MSN Money. As mobile's share of screen-time grows, any company in the ad-serving business will find it harder to grow revenue per impression fast enough to keep up with spending. Just this month, we saw Google's "traffic acquisition costs" (where Google pays a site to show its ads) claw deeper into revenue. At Facebook, the all-important average revenue per user (ARPU) metric is growing slower than investors expect from a breakout tech company. "If you can't show wild ARPU growth in developing countries and you can't show wild ARPU growth in developed countries," Alexis Madrigal wrote, "how do you make the argument that you're going to show a ton of revenue growth overall?"

This isn't scaremongering. Google and Facebook employ some of the brightest engineers, designers and ad people in the world. They'll continue to figure this out. But in the meantime, smart phones usage isn't shrinking. Screen sizes are.



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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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