Google’s traffic acquisition costs (TAC) are climbing.  Both Google’s ad revenues and they money they are paying to partners and distributors are growing, and investors aren’t really thrilled with this issue.

Ruth Porat, the CFO of Alphabet, explained to investor questions recently that Google’s increasing traffic costs are part mobile and part programmatic growth.  These two things have different payment structures and higher TAC.  In 2016, Google’s ad revenues were at $90.3 billion, while its TAC was $16.8 billion (other cost of revenues was $18.3 billion).

Alphabet cost of revenues, including TAC

Source: Google 10K filing 2016

According to Bloomberg reports, the worry among investors is the that increasing TAC will squeeze margins and make Google less profitable.  Alphabet, in its 10K filing from 2016, they said this about the rising TAC:

In this multi-device world, we generate our advertising revenues increasingly from mobile and newer advertising formats, and the margins from the advertising revenues from these sources have generally been lower than those from traditional desktop search. We also expect traffic acquisition costs (TAC) paid to our distribution partners to increase due to changes in device mix between mobile, desktop, and tablet, partner mix, partner agreement terms, and the percentage of queries channeled through paid access points. We expect these trends to continue to put pressure on our overall margins.

According to Bloomberg, it was estimated by financial analyst, Mark Mahaney, that each percentage point of TAC growth for Google/Alphabet represents about $300 in decreasing profit.  Last year, Google’s advertising revenue was 21 percent.  As of Q2 2017, it was 22 percent.

But, in the past, TAC was higher as a percentage of overall revenues.  it was 26 percent of ad revenues in 2010, and 27 percent in 2009.  Google’s ad revenues are a lot higher now, and so is the money it pays to partners.

The increase in Tac is due partially to distribution and rev share payments, which Google is making to Apple and various Android ecosystem partners.  By year end, it’s estimated that they’ll be approaching $10 billion, up from about $3.5 billion only five  years ago.

Another possible wild card that could impact TAC is regulation.  Google said in its 10K filing late last year, new litigation or regulations could impact Google’s performance and increase costs:

  • The General Data Protection Regulation (GDPR), coming into effect in Europe in May of 2018, creates a range of new compliance obligations and increases financial penalties for noncompliance significantly.
  • Court decisions, such as the “right to be forgotten” ruling issued by the European court, which allows individuals to demand that Google remove search results about them in certain instances, may limit the content we can show to our users and impose significant operational burdens.
  • Various US and international laws restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors.
  • Data protection laws passed by many states and by certain countries outside the US require notification to users when there is a security breach for personal data, such as California’s Information Practices Act.
  • Data localization laws generally mandate that certain types of data collected in a particular country be stored and/or processed within that country.

The UK government, according to Reuters, is thinking about regulating Google and Facebook as traditional news publishers, with all the associating burdens and potential liabilities.  More and more of the population is getting its news from these sources, although they themselves are not generating the news.

Source –