has taken a few new initiatives that have helped to improve revenue for search for the first quarter of 2010. We estimate that the search advertising business constitutes about 67% of the $725 Trefis price estimate for Google's stock.
Higher Revenue per Search Expected
Revenue per search (RPS) for Google has declined from about $45 per 1,000 searches in 2006 to around $35 per 1,000 searches in 2009. However, we believe that revenue per search will increase from here on and reach around $44 per 1,000 searches by the end of our forecast period. Google reported that paid clicks increased by 15%, while cost per click increased by 7% for the first quarter of 2010 when compared to the last year's quarter.
Below we explain the three reasons why we believe RPS for Google will continue to increase and the possible upside to Google's stock if RPS were to increase more than we forecast.
Three Factors Driving Higher Revenue per Search
New Features Like Search Funnel Will Help Advertisers Improve Click-Through Rates
: Google has recently launched a reporting feature called Search Funnel, which will track user search history and click patterns before they click on certain ads. This data is made available to advertisers to give them insights about user search behavior and help them to improve their advertising strategy for maximizing conversion rates.
For example, a user searching for a digital camera may click on an ad from Canon before clicking on an ad for a Sony camera. The user's search and click pattern will help Sony improve its advertising strategy and maximize conversions for click through to their site. Higher conversion rates will make advertising on Google more valuable to advertisers, which in turn will encourage them to spend more on Google advertising and drive up Google's revenue per search.
2. More Interactive Ads Will Increase Click-through Rates
Google is incorporating more interactive ads for search results. For example, a user searching for a movie will be shown an ad that will give the option to watch the movie trailer. During Google's earnings call, the company provided the example of searching for the movie
and seeing an ad to watch the trailer within the search results page.
Another example is images of consumer products in the sponsored search results section. Interactive and other nontext ads will help Google improve click-through rates compared with its traditional text-only ads.
3. 'Click to Call' for Smartphone Searches Will Benefit Click-through Rates
During the last quarter, Google launched the "Click to Call" feature that enables a smartphone user to call a vendor directly by clicking on an ad link shown beside the Google search result rather than clicking through to a Web site and searching for the number. For example, a smartphone user searching for a restaurant might want to call and make a reservation to the restaurant without necessarily going through its website.
10% Upside to Google's Stock if RPS Exceeds $50 by 2016
Although we forecast that the revenue per search for Google will increase to around $44, there could be an upside of $70 (10%) to the $725 Trefis price estimate for Google's stock if the company manages to increase its RPS to above $50 per 1,000 searches by the end of Trefis forecast period.
You can modify our forecast for Revenue per Search above to see how Google's stock would be impacted if RPS were higher than we forecast.For additional analysis and forecasts, below is our complete model for Google's stock.
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