Google Stumbles as Slump in Ad Rates Deepens

SAN FRANCISCO — Google views the computing shift to smartphones and tablets as a golden opportunity, but the Internet search leader's second-quarter performance served as an unsettling reminder that it poses a nagging financial challenge, too.

The report released Thursday showed Google's average ad rate fell from the previous year for the seventh consecutive quarter. In an unexpected turn, the decline deepened for the first time in a year.

The average ad rate, or "cost per click," fell 6 percent during the three months ending in June. The magnitude of the declines had eased in each of the previous three quarters, raising hopes that the worse was over. Instead, things deteriorated from the 4 percent decline in ad rates during the first three months of the year.

The regression undercut Google's earnings and revenue. Both fell below analyst forecasts, spooking some investors. Google's shares fell $37.18, or 4 percent, to $873.50 in extended trading after the results came out.

Other unwelcomed developments also loomed over the quarter.

Excluding the costs of stock given to employees, Google's operating expenses climbed 27 percent from last year to $4.25 billion. That increase renewed concerns that Google is pouring too much money on far-flung projects, such as the development of driverless cars and balloons equipped with Internet-beaming antennas, instead of focusing on its main business of Internet search and advertising.

Motorola Mobility, a slumping cellphone maker that Google bought for $12.4 billion 14 months ago, also remains a headache. The subsidiary lost $342 million in the latest quarter, widening from $199 million a year earlier, when Google owned Motorola for only part of the reporting period. Motorola now has lost a total of $1.7 billion under Google's ownership, despite layoffs and divestitures that have whittled Motorola's workforce to 4,600 people, down from 20,300 at the same time last year.

Although he wouldn't forecast when Motorola might start making money, Google CEO Larry Page told analysts on a Thursday conference call that he is excited about the upcoming release of a new phone called Moto X. Page provided no further details about the phone, which he and other Google employees have been testing.

If Google backs the Moto X with an expensive marketing blitz, it would drive up the company's expenses again later this year.

Mobile ads, though, were the biggest issue on investors' minds.

Although the problem isn't as severe as at other companies, including computer makers such as Dell Inc. and Hewlett-Packard Co., Google is still having trouble navigating a technological transition driving more online activity on to smartphones and tablets. Those devices pose a financial challenge for Google Inc. because their smaller screen sizes fetch lower ad rates than the marketing pitches made on traditional desktop and laptop computers.

Google is in a far better position to prosper from mobile computing because it makes Android, the most widely used operating system on smartphones. The software also is gaining traction on tablets challenging Apple's pace-setting iPad. Google is expected to unveil the next generation of its Nexus tablets running on Android next week.

Android typically features Google's search engine and other services, such as maps and Gmail, giving the Mountain View, Calif., company more opportunities to show ads.

Now, Google is taking steps to persuade advertisers to pay higher prices to connect with consumers on mobile devices at times when they appear to be mulling a purchase or may be in a merchant's neighborhood.

Google is trying to drive up prices more quickly by changing the way it sells ads to prod more marketers into buying spots on mobile devices at the same time they plan campaigns aimed at PCs. About 6 million advertisers have already switched to Google's new pricing system. All marketers will be forced to adopt the new approach, known as "enhanced campaigns," by the end of the month.

In Thursday's conference call, Page described the switch to enhanced campaigns as the biggest change that Google has ever made to an online advertising platform launched more than a decade ago.

"I think we're still in the very, very early stages of that," Page said. "We changed a tremendous amount for how our teams operate, how our advertisers operate, how everyone buys those ads, what the users see, and we've done it pretty well."

Wedbush Securities analyst Shyam Patil said he believes Google is headed in the right direction in mobile advertising, despite the second-quarter slip in price.

"They are going to come up with the right solution, although now I am not sure if it is going to happen this year," he said. Patil also said he expects Google's stock to rebound quickly because too many investors believe the company's remains among the best bets in technology.

Google earned $3.2 billion, or $9.54 per share, in the second quarter up 16 percent from $2.8 billion, or $8.42 per share, a year earlier.

If not for the costs of employee stock compensation and charges tied to Motorola, Google said it would have earned $9.56 per share. That missed the average target of $10.80 per share among analysts surveyed by FactSet.

Revenue rose 19 percent to $14.1 billion, from $11.8 billion.

After subtracting Google's ad commissions, revenue stood at $11.1 billion — about $275 million below analyst projections.

After a Strong Recovery, China’s Economy Unexpectedly Stumbles Again

HONG KONG — Brightly hued men’s underwear in a rainbow of colors is no longer selling well in Europe for the Zhongtian Garments Company in Xiamen, China. Exports are down 30 percent in the last year.

Children’s guitars with bodies resembling cats and cartoon characters are losing their charm for Yuesen Musical Instrument Factory in Huainan, China. And at the Yuzhongniao Outdoor Products Company in Jinjiang, domestic sales and exports alike are declining this year. The Canton Fair, China’s biggest export event, ended on Sunday with few new orders. “We are not even getting many people browsing this time,” said Alice Hong, Yuzhongniao’s sales manager.

After a powerful recovery through the autumn and winter from a V-shaped downturn last summer, China’s economy is unexpectedly faltering once again. Exports are weak. The country’s domestic economy is still growing mostly because of huge increases in lending by state-controlled banks and a surge in off-balance sheet lending. Consumer spending is rising, but not fast enough to offset weakness in other sectors.

That combination has prompted growing concerns among economists and business executives about the sustainability of even 7.5 percent growth in China in the coming years, the government’s current goal after three decades of double-digit growth with only a few interruptions.

The latest sign of trouble came on Wednesday, when China’s General Administration of Customs announced export and import figures for April. On the surface, they looked fairly respectable: exports were up 14.7 percent from a year earlier, and imports were up 16.8 percent.

But April 2012 was an exceptionally bad month for Chinese exports and imports — indeed, dismal trade statistics for that month were the first sign that economic weakness during the preceding winter was turning into a precipitous decline.

This April’s trade figures appeared even weaker when economists looked closer and found that the export growth had been largely propelled by growth in exports to Hong Kong, up 57 percent, and to special customs zones in China for export later, up even faster.

Since Hong Kong’s own data has not been showing large increases in imports from China so far this year, the Chinese government has already opened an investigation into whether exporters are overinvoicing for shipments. Overstating exports can allow companies to evade currency controls and move money into China to profit from the gradual appreciation of the renminbi against the dollar.

Louis Kuijs, an economist in the Hong Kong office of the Royal Bank of Scotland, estimated that with the exclusion of overinvoicing, export growth came to only 5.7 percent.

Over the last few years, economists have tended to pay less attention to China’s exports because they were declining as a share of the country’s total economic output, because of weak overseas demand. But newer research suggests that China may still be dependent on exports.

The reason is that multinationals have been rapidly localizing their purchases of various items like computer chips and auto parts in China instead of importing them from other Asian neighbors. So while total exports may not have been rising quickly in recent years in China, the Chinese content in each dollar of exports has been increasing.

Mr. Kuijs estimated that 20.7 percent of China’s economic output came from exports last year, a figure that had bottomed out in 2009 at 19.7 percent.

In a bad sign for exports in the months ahead, the Canton Fair announced this week that export orders placed at this year’s spring session had fallen 1.4 percent from a year ago. It was the latest sign that steeply rising blue-collar wages in China and a gradually appreciating currency are starting to erode the country’s international competitiveness; foreign investment in China has also begun to level off, while surging in lower-wage countries in the region, like Cambodia and Vietnam.

Li Yong, the general manager at Yuesen Musical, said that many Japanese, Taiwanese and Korean companies in his industry had recently moved to Indonesia as costs climbed in China.

Hilda Wang contributed reporting.

The Media Equation: In Boston, CNN Stumbles in Rush to Break News

It’s a common impulse, although less common than it used to be. The news audience has been chopped up into ideological camps, and CNN’s middle way has been clobbered in the ratings. The legacy networks’ news divisions can still flex powerful muscles on big stories, and Twitter and other real-time social media sites have seduced a whole new cohort of news consumers.

But the biggest damage to CNN has been self-inflicted — never more so than in June, when in a rush to be first, it came running out of the Supreme Court saying that President Obama’s health care law had been overturned. It was a hugely embarrassing error.

Still, when big news breaks, we instinctively look to CNN. We want CNN to be good, to be worthy of its moment. That impulse took a beating last week. On Wednesday at 1:45 p.m., the correspondent John King reported that a suspect had been arrested. It was a big scoop that turned out to be false.

Mr. King, a good reporter in possession of a bad set of facts, was joined by The Associated Press, Fox News, The Boston Globe and others, but the stumble could not have come at a worse time for CNN. When viewers arrived in droves — the audience tripled to 1.05 million, from 365,000 the week before, according to Nielsen ratings supplied by Horizon Media — CNN failed in its core mission.

It was not the worst mistake of the week — The New York Post all but fingered two innocent men in a front-page picture — but it was a signature error for a live news channel.

CNN has been in the middle of a rehabilitation ever since Jeff Zucker was appointed at the end of last year to run CNN Worldwide. Until now, the defining story in the Zucker era had been a doomed cruise ship that lost power and was towed to port, where its beleaguered passengers dispersed. This week, CNN seemed a lot like that ship.

It’s clear after a busy week that Mr. Zucker can hire all the talent he wants, broaden the scope of their coverage and freshen the look of the joint, but if the network continues to whiff on the big stories, all of that will be for naught. Two people I spoke to at the network, which featured a lot of good work and tireless reporting when it wasn’t getting it wrong, called the error “devastating.”

Twitter and commentators vibrated with umbrage — “Breaking News Is Broken” suggested a headline on Slate — all asking some version of how can this keep happening.

Here’s how: As a general practice, wall-to-wall live television reporting is perilous. Maybe instead of the constant images of police tape, television news should frame their own coverage with a virtual version, indicating that viewers proceed at their own risk.

Despite the suggestion otherwise, people who are on the air talking about the news cannot report while they are doing it. Producers make hundreds of decisions on the fly. The incrementalism and vamping required to fill the hours — “Again, as we have been saying, Anderson ... ” — makes everyone desperate to say anything vaguely new.

Throughout the week, I saw anchors and reporters staring at their phones, hoping a new nugget might arrive to give them something to say. (Memo to television executives everywhere: news is a better product when presenters look at the camera.) And the live environment means that at a certain point, the bosses have to quit shouting into the ear piece, trusting their staff and crossing their fingers.

Several people involved in reporting the Boston bombing case said the story presented particular challenges. In a large-scale assault on public safety, the audience wants to know everything, right this second. Yes, they want you to be accurate, but the implicit promise of a 24-hour news service is that it will happen quickly.

The pressure to produce is ratcheted up accordingly. Editors and producers begin leaning on their reporters, and they, in turn, end up in the business of wish fulfillment, working hard to satisfy their audience, and meeting the expectations of their bosses. It creates a system in which bad reporting can thrive and dominoes can quickly fall the wrong way.

In the instance of the Boston story, the scope of the crime, the number of victims and the fact that it smacked of terror on American shores provoked a vast law enforcement response at the federal and local level. A multiagency array of command centers and responsibilities created a target-rich environment for reporters. But it also created an unwieldy patchwork of sources, all operating in the fog of war, albeit a domestic one.

E-mail: carr@nytimes.com;

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