What's Causing Google's Average Ad Price to Decline?

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Google's ad prices continue falling, declining 11% last year.

SOURCE: GOOGLE

Google hit the jackpot with Android. The Alphabet may only have generated about $31 billion directly from ads and apps in Android since its creation, but it's benefited from the growth in Internet-connected devices. Last year, Google said more web searches were conducted through smartphones than desktop computers.

But while Google's advertising opportunities have grown considerably, the average amount Google receives per ad has declined significantly in that time. Last year, Google's average ad price declined 11%, accelerating the decline from 2014's 5% decline.

Other Internet companies have staved off a decline in ad prices. Facebook , for example, has been able to grow its average ad price while expanding ad impressions. So, what's causing Google's average ad price to decline?

Google sites down 15%
Average ad prices on Google-owned sites was down 15% year over year. In Alphabet's 10-K report, the company points to the biggest factor impacting its average ad price as growth in YouTube engagement ads. YouTube ads typically carry a price lower than Google's search ads since they lack the intent behind search queries.

YouTube continues to grow rapidly, too. Time spent watching YouTube in the living room doubled in 2015. In the second quarter, the company reported total watch time was up 60% year over year and accelerating. Mobile watch time doubled.

In 2014, YouTube was estimated to generate about $4 billion in revenue for Google, which was around 9% of total revenue from Google-owned properties. As YouTube watch time increases, and YouTube adds more advertising to its platform, that percentage will increase, and drive average ad prices down further still.

Meanwhile, Facebook is moving heavily into the video advertising space. But unlike Google, investors see video advertising as beneficial to average ad prices. Facebook only uses display advertising, whereas Google has cornered the market on premium search-based ads. As such, video ads are having opposite impacts on their average ad prices, but are equally additive to total revenue.

Google network members down 3%
The decline in average ad prices as Google network members websites slowed to just 3%, down from 6% the year before. Google pointed to "ongoing product and policy changes designed to reduce lower quality inventory on AdSense for Search" as the primary reason ad prices continued to decline.

Naturally, less competition for ads leads to lower ad prices. But Google also experienced a decline in total paid clicks on network member websites. That may have been caused by a shift to mobile, as websites typically display fewer ads on mobile due to the smaller screen size. Last year, Google changed its search algorithm to favor websites optimized for mobile.

What's more, Google is facing more competition for display ads on the mobile web. In particular, Facebook recently expanded its Audience Network platform to include display ads on mobile websites. With Facebook's dominant presence on mobile, some websites may opt to use Facebook's ad platform leading to further reduction in Google ad engagements on its network partner websites.

So, while ad prices may remain fairly steady for the foreseeable future barring any more product changes, Google has increasingly strong competition for the ad network market.