SAN FRANCISCO -- For more than a decade, Google's search ad business has seemed almost magical in its ability to mint money.
But the magic is beginning to wear off, as people's changing digital behavioron mobile phones and even on desktops threatens Google's main business.
The company pleased analysts and shareholders when it announced better-than-expected third-quarter financial results on Thursday. Still, the report revealed that as its desktop search business matures, the price advertisers pay when they click on ads has continued to fall.
"Google's core desktop search business was probably the best Internet business ever created," said Jordan Rohan, an Internet analyst at Stifel Nicolaus. "Every other business they're in, whether it be mobile search or tablet computers or YouTube, just doesn't look as good from a margin perspective."
Google's core business, selling ads on Google.com and other sites its owns, increased 22 percent year over year. It is a notable rate after four quarters of sub-20 percent growth, though still below the 35 percent growth rates of two years ago. And the price that advertisers pay each time someone clicks on an ad decreased for the eighth quarter in a row, according to data collected by BGC Partners. It fell 8 percent from the same period last year, largely because mobile ads cost less than desktop ones.
"Google makes 90 percent of its money in the Web world, and it's in the wrong place," said George Colony, the chief executive of Forrester Research.
Google reported third-quarter revenue of $14.89 billion, up 12 percent from a year ago. Net revenue, which excludes payments to ad partners, was $11.92 billion, up from $11.33 billion. Net income rose to $2.97 billion, or $8.75 a share, from $2.18 billion, or $6.53 a share. Excluding the cost of stock options, Google's third-quarter profit was $10.74 a share.
The results exceeded the expectations of analysts, who had predicted revenue of $14.82 billion and earnings, excluding the cost of stock options, of $10.35 a share. Analysts said they gave more conservative estimates this quarter, because they had an increasingly negative sentiment about Google after several quarters in which its results did not live up to their expectations.
Shares jumped more than 6 percent in after-hours trading.
Included in the results was a $248 million operating loss at Motorola Mobility. Google has drastically cut costs at Motorola and introduced the Moto X phone, yet its losses are expanding.
Google is still the leader in online advertising, earning 41 percent of all digital ad revenues and 53 percent of mobile ad revenues, according to eMarketer. Yet the advertising business is changing under its feet.
People are spending vastly more time on mobile devices, and a third of clicks on Google are now mobile, according to the Search Agency, a digital marketing firm. Clicks on computers last quarter were flat, while clicks on tablets increased 63 percent and clicks on phones more than doubled, the firm reported.
The problem is that mobile ads cost between half and two-thirds as much as desktop ads, and they lead to purchases just a quarter to a third of the time. The disparity is because advertisers have not yet figured out the best format for mobile ads, it is harder to track their effectiveness and it is more cumbersome for consumers to buy things on small screens.
Meanwhile, digital advertising is also changing on computers. Ads are becoming more personalized, like social ads that include endorsements from a person's friends, and automated, like programmatic advertising, which are bought by computers in real-time and target individuals instead of broad audience groups.
As the ad landscape changes, Google has been introducing new tools for advertisers. It offers programmatic ad buying for display, video and mobile ads. Last week, it announced a change that would allow it to show people's social networking activity, like photos and comments, in ads across the Web.
And over the last few months, it has introduced new mobile ad tools, like one to track consumers across devices and tell marketers whether a consumer makes a purchase on a computer after researching it on a phone.
Advertisers and analysts have also been abuzz about Google's enhanced campaigns program, which became mandatory in July and requires advertisers to buy mobile ads when they buy desktop ones. Yet according to reports from a wide variety of advertisers, the program has not yet significantly increased the amount they are spending on Google ads.
Meanwhile, Google's ad innovations have brought a backlash from privacy advocates and some consumers. In recent weeks, Google faced an uproar over its plan to use personal information in ads and lawsuits over personalized ads in Gmail.
Still, analysts say the privacy challenges have not affected Google's financial results so far. "It's just noise," said Colin Gillis, a technology analyst at BGC Partners.
This article originally appeared in The New York Times. First Published October 17, 2013 2:00 PM