Growing Ecommerce – The Retail Growth Podcast

Google's $155 Billion Backlog: The Real Cost of Advertising

• Smarter Ecommerce • Season 4 • Episode 16

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Q3 earnings are in, and the consolidation is real. Hosts Mike Ryan and Chris dive into the gravity-defying numbers, confirming that Google's core ad revenue is up a strong 12.6% year-over-year (YoY), and their massive Cloud backlog sits at $155 billion USD. 

Chris states that Google is not the "bee-headed chicken" but remains the dominant "American eagle". The focus then shifts to Amazon, which has truly become a services business (Cloud and Ads), with its retail component no longer the core driver of its wealth.

But the big story isn't the growth—it's the crisis. Mike and Chris reveal a dangerous surge in ad costs: CPCs in PMAX and Shopping are up an alarming 30% year-to-date (since week one of the year), with Shopping CPCs specifically soaring by 36% YoY. Chris warns that this kind of inflation is a "real threat" to Google's business model because it is "forcing especially small and middle businesses out" of the auction. 

They discuss whether a competitor like OpenAI could challenge Google by offering "massively discounted CPCs" to eat into market share. Finally, Mike introduces the free smec Market Observer tool that helps online retailers benchmark their CPCs and check competition levels from giants like Amazon and Temu.



About smec (Smarter Ecommerce):

At smec - Smarter Ecommerce, we specialize in transforming business goals into optimized ad campaigns. With over 16 years of experience in Google & Microsoft Ads, our intelligent software and expert services help retailers achieve superior results.

We're committed to giving you the tools and insights needed to stay ahead in the ever-evolving world of digital advertising.

Make sure to follow smec - Smarter Ecommerce for more performance marketing insights:

SPEAKER_01:

Welcome to another episode of Growing E-Commerce. We are your hosts, Mike Ryan and Chris. Chris. Chris, in a return to form in a three-piece suit, just the way we would expect.

SPEAKER_02:

I have I and I told you this is my my way to be somehow different to you because uh in in all other areas I feel so much under pressure. Man, overdressing is my way of telling you I'm ready today.

SPEAKER_01:

Alright, Chris. Good. I'm I'm ready too. Sh damn. I didn't expect I was counting on the other on the opposite. So we've got a couple of topics in mind today. Let's, you know what? Let's let's jump into some numbers first. Q3 numbers are all fully reported by now. And you know, yeah, actually But underwhelming, honestly. Underwhelming, Chris. No, no, no.

SPEAKER_02:

What does it take to impress you? It's crazy. So to be precise, ladies and gents, earnings calls have been or are in the books a couple of weeks past now, and the numbers s I would say stay very solid, even if even if with some time to reflect on it. I think the the one major takeaway, I mean, depending on which which companies we want to talk about, but I think one major takeaway is that the consolidation of revenue growth and first and foremost earnings is is in full swing. These three, four, five dominant companies, they are ruling the world for better or worse. But it's it's it's absolutely mind-blowing what what numbers they put up again. For sure. The EU commission says for worse, but I I that's been there. You as a proud American have probably a different view. By the way, I'm I'm I'm I have a different view as well. I mean, I I like what what these companies are doing for the most part. Yeah. They are driving innovation. And the numbers are crazy, honestly speaking.

SPEAKER_01:

Yeah, I mean, absolutely. I've got the advertising figures up here. And for Google, YouTube has a subset of Google, Meta, and Amazon. But yeah, I mean, let's talk about Google first, because in the past we were saying that what were they up? They were like up 11.2 or something. 11.7? Yeah, okay. Sorry. Yeah. And we're saying that's a bit of a narrative violation. Or you know, is it this Kodak moment we're talking about? Is is Google just the chicken running around with its head cut off and it hasn't realized yet? But we're now at another quarter of gravity-defying results, if that's if that hypothesis were true. Because we're up even stronger 12.6% year over year.

SPEAKER_02:

It's and again, we are talking about revenue levels. Yeah. It's yeah, the core product is is is rolling. And I think uh Google is not the bee-headed chicken. I think they're still the American eagle dom dominate dominating the space. And honestly speaking, rightfully so. The things they did in their core product or with the core product, which is Google Search, it's it's just good. AIOs are working. I I like AI mode. I'm I'm I'm getting used to it. Yeah. Yeah. And and the other players, let me let's face it, whether we talk about Microsoft, Perpecy, OpenI, they're doing their stuff, but it's it's not not as disruptive as as we thought. I think it's not as fast as we thought. And the numbers show a clear tell a clear story.

SPEAKER_01:

For for sure. And and YouTube is up even stronger, 15%. Yes. And yeah, and let's let's face it, they're the cloud business.

SPEAKER_02:

I mean, this this is where where Google for me always shines the most. And what I get is of course the the the analysts and and and the street talking about the Wall Street, they're looking at the core product because it's the backbone. But the f the growth story, you know, can be found in in AI, Google Cloud. And what they are doing there is absolutely absolutely mind-blowing. I mean, I've I have one number with me. So the cloud grew more than 30% again. But the most interesting thing is they have a back backlog of future revenues in the cloud department of 155 billion US dollars. It's just the backlog. I mean, the the the insane. That's that that's the revenue they can count on. Yeah. It's it's really insane. And what I read again, and this is really interesting for me, that I mean if if you assume that the cloud business is more or less kind of a standard service for for small and big companies. And though the question is always this this is driving the analysts uh in in their take on on these big AI-driving companies such as Amazon, Google and Co. What is the differentiator in the cloud business? And what Google is doing better than others is that they really smartly embed Gemini into their cloud services. And it's it's really I mean, we are working with with Google very closely. They are doing a great job here. And the numbers again reflect it. So no one trick pony. It's certainly no codec moment. And I think Google is not just here to stay. I think they will dominate the space.

SPEAKER_01:

Yeah. And I I even think, you know, meanwhile, Amazon's cloud strategy has come under increasing scrutiny. That was such a big story of the big past several years, but they seem to be lagging a bit on AI integrations, like you mentioned. AI services in there, like we were talking recently about there's any number of AI services that Google powers through cloud to, besides their workplace integrations. It's it's super cool. Like we were we mentioned a couple episodes that using Google Cloud, you can actually have virtual try-on on your e-commerce site. It's crazy. So these are areas where they really excel. Amazon, I want to, I mean, I want to call out, they are, by the way, this is since a longer time, but just a reminder, they are really not at their core a retail company anymore. They've become a services business. So the cloud services being a huge component of that, and the advertising services. But together, that's well over 50% of their wealth.

SPEAKER_02:

Well over fifty percent. And of course, high margin driving, as well know. I mean, this is of course uh I think Amazon is is is rock solid, don't get me wrong. But I think they're in in the in the midst of this transformation. I don't think they are this this classic retail uh company anymore. I'm I'm absolutely with you. For me, the big question is who is is getting the the big pie, uh the big part or portion of the pie, which is the cloud business. Yeah, and and this I think is the the the massive growth story for for for these for these uh megacap companies. And as of today, I just don't see what what differentiation potentials Amazon will have down the line. Because I think the biggest challenge is for them, as far as I know, they really have no proprietary technology with regards to a core LLM product. So I think it it just makes makes it harder for them to really be as HL as as powerful in embedding services because Google can you know they can tailor make this, whatever the strategy is, and you see it now. And uh so that's why no financial advice. But honestly speaking, also in the cloud business, I uh uh Google is perfectly set up to rule that space as well. Yeah, totally. And and five years ago, completely different story.

SPEAKER_01:

Yeah. Uh that that's right. But they've really they've executed. And Gemini is not only integrated in their products, by the way, but it's now powering Siri, as we found out. I don't know what powers like Rufus on Amazon's side, to be honest. But that'll be interesting to watch. I think Amazon does, they're making some very narrow plays that are that make sense for them, like Project Starfish is this way of applying AI to product knowledge or product graphing to create like this ultimate map of of items and item information. So these they've got cool stuff in the works, but yeah, I agree. I'm missing a bigger picture.

SPEAKER_03:

Yeah.

SPEAKER_02:

I think, and to our listeners, you probably have have still you know our our discussion about I mean let's we can we can talk about the numbers all day long. The numbers are great and the revenues are there. The question is how sustainable these numbers are. And of course the the question backs how no, how how much of a a bubble is is implied here or implicit here. And this is probably the one risk these companies have that they they they can't find sustainable enough monetization strategies with regards to their AI businesses. Do you know why I'm smiling right now, Chris? Because I changed my my my my take on this. Yeah. I just I just read a bit more and I'm I'm I'm not worried, but of course, I mean if if you if you look at the the burn rates, especially of uh of certain players on the market. Yeah, I mean I think this this can't run like this forever. Yeah. But again, the difference is if you look at Google, for instance, yeah, they are such a healthy company, you know? They are it just doesn't matter what what CapEx they are they are they're calling. By the way, I think they want to invest roughly 250 billion next year.

SPEAKER_01:

Yeah, but it's not it's not about if Google is healthy or not. We're getting off topic here, but let's just let it run for one minute. Thank you, dear listeners for and viewers for bearing with us. But it's not about if Google is healthy or not. Every everyone knows Google is healthy. Is OpenAI a sustainable business model, or will open AI fold? And if open AI folds, will NVIDIA fold? And if NVIDIA folds, what do you hear what I'm saying? It's a different thing. I hear what I'm saying. That's what I'm saying.

SPEAKER_02:

I think NVIDIA we'll make sure that OpenAI doesn't fold.

SPEAKER_01:

Yeah. Well, OpenAI, I think was our like, you know, we're kind of too big to fail. Maybe we would maybe need a bailout if something did happen.

SPEAKER_02:

Prob probably they became too big to fail. They didn't. But but I hear you. I mean again, I think I think uh we should talk about that that bigger discussion of how healthy you know the whole economy is and what drives the economy right now, which is cloud AI, for sure. And I mean I'm I'm I'm with you. I I I I think I I would still be be the bull in our discussion and you rather the bear. But I know where you're coming from. This monetization strategy, this is where I think, of course, this is the challenge, especially for Open AI.

SPEAKER_03:

Yeah.

SPEAKER_02:

For sure. Yes, they're still burning massive loads of money. For sure. However, their next call calls were all rock solid, whether you talk about Meta, Amazon, Google. Yeah. And it it's it's really fascinating to see these numbers.

SPEAKER_01:

I I mean I wanna let's use that as a transition. Let's return to Google for a minute.

SPEAKER_02:

The reason why they earn so much money.

SPEAKER_01:

Yeah, the reason why they earn so much money.

SPEAKER_02:

What do you think it is?

SPEAKER_01:

Well, they sell these little things called clicks, Chris. What is a click, actually? What do I get out of a click? Actually, that's a topic for you know, I wanna I want to talk about on another episode, I want to talk about demand gen campaigns. And we can maybe there's a little tension in there, what is a click because it comes up. But but something that that we were talking, I think on the last episode we were talking about really themes that are hot with our clients right now. And one of those, shame on me, I haven't really looked at Google's CPCs in a while. I it's just it's often there's nothing there. I was here for you. I yeah.

SPEAKER_02:

No, really, because this was a great discussion we had. And by the way, you you are right that it varies from industry to industry because this is this was the statement that I w I think I was was too bold by by stating the CPC currently is just a shit show. It doesn't matter where you look into. You're right, there are significant differences. Yeah. But I think overall.

SPEAKER_01:

Yeah, and that that well that's like it spurred me uh to follow up on this because like often it's it's just basically nothing to see. It often broadly matches Google's reported numbers for CPC. It often broadly matches inflation. Uh but we were seeing some weird stuff that CPCs were exploding. So I looked at a lot more data and I found that something is going on. So it's often overhyped. But this year to date, we're seeing b basically CPC inflation. If you look at what has happened since week one of this year, upwards of 30 percent. And it and right now I'm talking about PMAX in and shopping. And especially since June, this has gotten out of control. And as in year-over-year terms, this has gone from about eight percent to again also upwards of thirty percent year over year.

SPEAKER_02:

Yes. And at the last time I checked, uh in the real inflation, I think it's not at 30 percent, right? No. So exactly. So there's something going on, and I mean just just because we you know, we're talking about these these little things we call clicks and 30 percent, 20 percent. But at the end of the day, and this is a crazy thing, and um man, we when we talk about our clients, because there's always this discussion, okay, what can we do better, you know, within the campaigns. Does does m does make this campaign structure more sense than others? And how do we score the products better? At the end of the day, if you look at an environment where the average CPC rose 30% year to date, uh theater is parypus. Is if everything else stays the same down your fund, it means you have a 30% hit to your bottom line. Yeah. 30% and uh we talked about that when I was at Dublin and I was talking to high-level Google reps. I I told I told him, look, I think your product portfolio is as powerful as ever. But this CPC inflation, no, it's a r I think it's a to a certain degree a threat to the business model of Google because it it it will it will force especially small and middle businesses uh uh out, right? They are forced out of Google. And I think this this uh this lack of diversified results on the Google Surp will maybe also you know have a negative impact on the overall perception of the Google product, which is mainly Google Google Paid Search. So I think this is a real thing, and I don't know what Google can do about it, but 30% is insane.

SPEAKER_01:

I know, and I I don't it's I don't know the causes for this yet. I mean I'm I might be able to find out some or form some hypotheses. I might not be able to when I look at this further. But what I can say is that this is not equal between PMAX and shopping. So PMAX has higher CPCs in general, and I can't also I can't perfectly isolate yet the the shopping CPCs within PMAX because of how it's built, but it's mostly shopping groups. I think 90%, right? What are you having to do? That's like the that's like the median, yeah. And and the but but I think PMAX CPCs are up about, if I remember, about 18%, and then shopping is up about like 36%. So shopping has really been accelerating and coming closer to the level of PMAX CPCs. And I don't know exactly what is going on or why. Yeah. But yeah, it's like you said, this is this is overall, this is kind of a macro trend within an advertising channel. This is it's a it's a weather event. Everything else that you can do becomes subject to these things, you know. If the value per click is not also increasing proportionately.

SPEAKER_02:

But we have I mean, uh we have some numbers here, right? I mean, you you will you will talk about these numbers that in general the click Google produces for the retailer is is the the click price is in general positively correlating with the value. So I think Google is doing its shop there. For sure. But I I don't know if it it it can offset an average 30% CPC increase. It's and by the way, Mike, if we if we if we if we stay on the topic, um I think I a couple of days ago I had a very interesting call with the founder of uh I think the leading online shop, online retailer for for classes, sunglasses. And uh what what came across, and by the way, no big surprise here, we talked about the CPC inflation, that it it's really th threatening, not threatening, but it's hurting the business, right? And they were actively, Mike, by the way, you were part of the discussion we had, they were actively asking, okay, when when these alternatives really become an alternative? Like what other search products are out there I can really, you know, offset. Okay, so like open as an alternative. Open up, for instance, right? I mean, uh and I think this is what Google also have to to look at. I mean, yeah, right now, yeah, you're stuck to Google because there's just no alternative.

SPEAKER_01:

Yeah. Yeah. Microsoft, yeah. Microsoft is small, TikTok search is small. Still still small.

SPEAKER_00:

Yeah.

SPEAKER_01:

And basically, there's no there's no margin pressure on Google. But i I mean, you know, when you look at something like a 30% increase, I don't think that Google is is just massively patting their margins all of a sudden. It's there's no need to, by the way. No, it's it's it's an it's an and I've always said like when they work on their margin improvement at at cost per click, they're looking at these low density auctions where there's there's not enough competition to support high CPC. So they want to induce or they want to find a way to increase those. And that's a huge long tail of of search queries for them. So it's very important for them. But these I I don't I don't think that's what's happening here. I I and yeah, when will an a viable alternative become available? I I don't know.

SPEAKER_02:

We we don't know. But I again I think that technology is there now, potentially there now, to to have these new disruptive approaches be just a bit faster than Google and and and get get some traction, talking about OpenAI here now, ChatGPD in in particular. And for me, the big question is if and I I assume the the strategy responsible people at OpenAI that they probably have a clue about the CPC inflation. And the question is how deep is the watch of of OpenAI and why not offer massively discounted CPCs, especially for the beginning. Yeah. I mean, why not? Because I I bet my my ass off if if if people they love Google, I'm talking about our clients, but the CPC inflation is a real thing, and if there are alternatives out there where you just get massively discounted CPCs, they will they will give a shot at that. One 100%. For sure.

SPEAKER_01:

It's it's definitely a way to to draw some budget over. And I mean the question is always like how will advertisers view open AI? Will they will they really take budget from Google and move it over there? Will it be additive? But it's it's absolutely by having an attractive price point that could be that could be good for them. Whether or not like again, they need that to finally start monetizing.

SPEAKER_02:

So it it are they are an impression cooker for sure, yeah. But I think they're they're if I had to say something about the strategy to to really eat into market share of Google, I think the CPC inflation is one or the CPC in general is one one hell of a argument or value proposition. Yeah. The likes of ChatGPT could really, you know, push into the market and and maybe yeah, finance this discount for a certain level. Interesting times. One thing is for sure the CPC inflation is a real thing. And Mike, I would love if you could spend some time on on digging a bit deeper. Maybe there are some hypotheses. Super interesting uh for the listeners.

SPEAKER_01:

Yeah, for sure. I've I've got my homework. I'll see if I can if I can see what else is going on. I mean, a broader one hypothesis that I that I have in a general sense is that we know that organic visibility has been challenged, not so much for e-commerce yet, so that's why I wonder about this. But I think that it certainly this will happen and it will put pressure on people to advertise, it will increase their advertising dependency. And it seems that even play paid click-through rate also declines in the presence of AI content and AI services. And so, you know, if more people are piling into the auction and the click-through rates are going down, then it will have this effect. Yes. This is one possibility.

SPEAKER_02:

But that big picture, we we should have a c a close look at. I mean, by the way, Mike, we didn't talk about that before, and but is this the point in time where you should also talk about the market observe, or is it Oh yeah. Oh yeah, yes. Yeah, yeah, we should. No, because it's it's interesting. I mean, maybe again, because it doesn't matter, but there's there's no money to say the market observer yet. So it's a it's a it's a it's a it's a free tool. But Mike, shed some light on it because I think it helps the online retailers to benchmark their CPC development to the market. Because this is the the major question everyone has. My CPC grew year to date 25%. What's going on? Is it just me or is it Yeah, exactly.

SPEAKER_01:

Thanks for for reminding me, Chris.

SPEAKER_00:

It was it was smooth as very smooth, right? We don't need to re-record anything. We're leaving it in. That's the proof that we didn't this is this is the proof. This is an unscripted podcast, ladies and gentlemen.

SPEAKER_01:

But by go ahead. And we're leaving it in. I'm I'm making eye contact with Kevin right now, with our producer Kevin. So Yeah. Okay. Market Observer. It's a great product. Yeah. What what what can it do? Basically, this what we have so when when I work on data analysis, I'm manually pulling data often and um and then I'm doing data clean and stuff like that. But we also have an alternate pipeline that doesn't have that dependency on me or anything like that. It's called Market Observer. It's totally free. And you basically you can see we've we're relaunching it. We've we've actually improved it a few times over the years, but we're adding some more metrics in there, um, like competition levels from Amazon, Timu, Sheehan, eBay is on there. So we're helping you see what's happening with their impression shares, the percentage of advertisers that face competition from these huge, from these huge advertisers. And we also look at things like cost per click, per campaign type, shopping, PMAX, and search are all in there. And then other like the funnel metrics are in there, impressions, clicks, conversions, so you can see what's happening with the overall volume. And then we get into the rates and ratios too, like click-through rate, conversion rate, ROAS. It's all in there. The other cool thing is that many of these metrics were in there in the past, but they were you could only see the year-over-year data. So it's per year-over-year percentages, you couldn't see the absolute values. And now we're actually showing you the absolute values as well. So you I I hesitate to use the word benchmark because these are these are fictive averages or medians. And you know, there's some industry segmentation you can do, there's some campaign type segmentation you can do, so you can approach a benchmark, but it's certainly helping you understand at a market level what's going on.

SPEAKER_02:

And this and this is the thing, and and you know, it doesn't always have advantages being big, but here, you know, that the the volume and the number of clients we have gives us the possibility to, I think, to be very close to a real market benchmark, right? In in in in terms of the most relevant KPIs for for for your funnel. So it's really helpful to understand what's going on, whether it's for internal discussions, to put positive pressure on your vendors. I I would highly recommend it. And like again, it's it's totally for free. Say it one more time, Chris. For now. No, but it's a it's a real cool product.

SPEAKER_01:

I would highly recommend it. We we are keeping it free, even though we incur some some cloud costs and we contribute to Google's results. Yeah, we can true we were a contributor to Google's results. And if you use market observer. But you know, we are able to we're able to handle those costs and so we make it available for free. It's a great product. Really look into it. Yeah, definitely.

SPEAKER_02:

Are we rolling? I mean, time up or Where are we on time? Twenty sow?

SPEAKER_01:

Yeah. Should we call it? We and do we do three episodes? Yes. All right. And we call it. Because then we have roughly 30 minutes each? Yeah, definitely. You know what? Lex next episode we can do I Max. The AIMAX and Demandin. Do these two first look things? And then we've got other content for a third episode.

SPEAKER_02:

Perfect. All right. Then yeah, I mean, where where did we end up? What did we say?

SPEAKER_01:

What would we We told people we were shilling for Marcus's server?

SPEAKER_00:

That's where we left, Chris.

SPEAKER_01:

So should should we see it again? Uh it's for free. That that you can like It might change. As as like the cam is turning off, you can get one more in there. So I think that's gonna do it for today. I enjoyed it. Yeah, me too, Chris. I always do. Thanks everyone for listening. Yeah, let's go into the outro. Yes. Are you ready, Chris?

SPEAKER_02:

Man, I'm I'm always ready.

SPEAKER_01:

I'm always no, I mean, are you ready to do it?

SPEAKER_02:

No, man. Come on. Uh put you on the spot. Not today. And not the next time. Maybe, maybe, maybe, maybe maybe, maybe there I think the Christmas episode would be would be a good thing where I do the intro and outro. I try to go all in.

SPEAKER_01:

Chris and I have been between us. We've been really looking forward to our Christmas episode. We're maybe gonna wear Christmas sweaters or something like that. For sure. Let's see. And we we have to be creative here. But uh, we're not there yet. A couple of weeks or some weeks to go. The stage is yours for the outro. All right. This has been another episode of Growing E commerce brought to you by Smarter E commerce. To learn more, visit smarter e commerce.com. Thank you very much for joining, and we'll see you next time. See you next time.