How Mobile Is Reshaping the Search Business

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The rise of mobile devices isn't just impacting the PC business. Mobile is reshaping the search industry as well. 

The rise of mobile

There's no question that the future of search advertising is on smartphones and tablets. According to The Search Agency, the U.S. share of paid clicks from mobile devices nearly doubled in 2012. Tablets were the fastest growing segment last year now accounting for nearly 10% of paid clicks.

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eMarketer estimates U.S. mobile ad spending will increase 90% this year from $1.2 billion in 2012 to $3.5 billion in 2013. By 2016, mobile ads will account for 42% of search spending. 

Will the rise of mobile devices spell the end of traditional desktop search? That was the fear last summer when desktop searches posted the first year-over-year declines on record. But the most recent data points no longer support that theory. Last March, core desktop searches hit a record 20.4 billion queries. While mobile is gaining traction, it's definitely not pushing out core search. 

Rising click rates

The rise of mobile has wreaked havoc for margins in the search business because advertisers pay less per click from a smartphone or tablet device.

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Industry observers closely watch the cost-per-click metric which measures the rate advertisers pay when a user clicks on an ad. Google (NASDAQ: GOOG), an industry bellwether, started to see its average cost-per-click rate decline in late 2011 with the rapid shift to mobile. Comps hit a low last summer when cost-per-click rates declined 16% YoY.

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However, we've seen cost-per-click rates slowly bottoming out over the past couple of months. The appetite for mobile search is steadily growing as we've seen rates rising for tablet ads. 

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Who's best positioned?

In the competition for mobile ad dollars, Google maintains a sizable advantage. In this space, the company commands a monopoly-like (ooh, that's a touchy word) 90% of search spending dominating through success of its Android operating system. With such a lead, it's clear Mountain View, California will capture most of the industry growth. 

But don't count out Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) just yet. The Bing alliance between these duos has been gaining market share in both desktops and mobile search.

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Over the past year, Bing has made noticeable market share gains for three reasons:

Social Networks:  Bing partnered with Twitter and Facebook, two of the world's largest social networks. This gives Microsoft access to more social data improving search results. 

Gaming: Microsoft integrated Bing with its popular Xbox and Kinect entertainment systems. If Microsoft can get gamers to use Bing, it will capture a highly sought after demographic for advertisers. 

Smartphones: According to recent data from Kantar Worldpanel, Microsoft's Windows captured third place based on February smartphone sales. Windows has made sizable market share gains against rival BlackBerry driven by strong sales from Nokia's Lumia 920 handset. 

Foolish bottom line

Investors should keep a close eye on three key trends going forward. 

Cost-per-Click rates: While comps have been improving in recent quarters, investors want to see continued increases in mobile advertising rates as it becomes a bigger part of the market. 

Yahoo!: If CEO Marissa Mayer can engineer a turnaround at Yahoo!, it could further erode Google's position in the search business. The company is trying to encourage users to visit more frequently by making Yahoo’s online services easier to use and more engaging. 

Rising Costs: According to Morgan Stanley, Google could pay Apple over $1 billion in 2014 to remain the default search engine on iOS. For comparison, Google only paid $82 million for the same spot in 2009. Rising traffic acquisition costs could eat into the company's profits. 

Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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