In 2018, 85% of Google’s revenues came from advertising. Those revenues represented over $116 billion. Thus, understanding Google’s powerful advertising money-making machine is critical to understand Google (now Alphabet) current business engine.
For that matter you need to understand two key elements:
In a media business (yes Google is a media company as of 2019) those two elements are critical to building a business that makes sense. This might seem trivial also for starters.
Yet, in a large organization like Google, which has built an empire on its advertising machine, understanding its dynamic can make you understand how a whole industry (that of digital media) works.
Indeed, if you have a website, you have two issues. First, you need to bring qualified traffic to it. Second, you need to be able to monetize that traffic at a higher rate compared to its costs.
For that matter, you’re a “traffic arbitrageur” as you make money on the difference or delta between the price to acquire traffic and the revenues in selling that traffic back.
Thus, going back to Google’s advertising business there are two primary traffic sources:
Distributors and partnerships
Network members
Each of those traffic sources gets monetized differently. Indeed, the traffic coming from distributions and partnerships agreements get driven to Google’s main pages, to be monetized with its paid advertising machine, called Google Ads.
Not all traffic that goes through Google gets monetized directly, as a good chunk of it consists of traffic that goes through websites that rank organically on it. Some of those sites that rank organically on Google are part of its network, so they sell impressions on banners placed by Google on their sites.
To recap:
Google main properties traffic comprise traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, and other Google operated properties like Gmail, Google Maps, Google Play, and YouTube
For instance, in 2018 Google properties revenues increased by $18.5 billion compared to 2017. The growth was primarily driven by increases in mobile search and growth in YouTube video advertising,
For that matter, Google takes into account – to measure the success of the monetization strategies on its properties – two key metrics:
Paid clicks change
And cost-per-click change
For instance, in 2018 the cost-per-click for business advertising on Google decreased by 25% according to Google’s annual report for 2018. However, the business continued to grow substantially as more paid clicks were placed on Google.
Why did that happen? Some of the reasons might be a higher budget invested by companies on Google. Also, Google is also monetizing more efficiently its other properties (like YouTube). Yet it might even be because Google is shrinking its organic traffic reach, in favor of paid listings:
In short, it seems Google is becoming more polarized.
On the one hand, Google offers paid listings, that are taking more and more space, especially on mobile devices. On the other side, Google is eating up organic traffic by offering direct answers to its users. This should not be a surprise.
As Google highlighted in its annual report for 2018, “our products have come a long way since the company was founded two decades ago. Instead of just showing ten blue links in our search results, we are increasingly able to provide direct answers — even if you’re speaking your question using Voice Search — which makes it quicker, easier and more natural to find what you’re looking for. You can also type or talk with the Google Assistant in a conversational way across multiple devices like phones, speakers, headphones, televisions and more.”
Indeed, Google’s mission “to organize the world’s information and make it universally accessible and useful” is also its North Star.Â
Google network members traffic comprise traffic coming from members part of AdMob, AdSense and Google Ad Manager.
It is essential to have clear in mind the distinction between two ways two consume content:
Mobile: as mobile has become a predominant way for people to surf the web. People using mobile don’t search as much as people using a desktop, as they mostly spend their time through apps. In that scenario, AdMob helps apps developers monetize their in-app advertising
Desktop: on the desktop not all traffic landing on Google’s pages will be monetized directly. Some of that traffic will be monetized via an impression-based system as users land on sites part of the AdSense network
In 2018 Google Network Members’ revenues increased by $2.4 billion from 2017. The growth was primarily driven by strength in AdMob and programmatic advertising buying.
Instead, Google AdSense revenues declined. Additionally, the growth was favorably affected by the general weakening of the U.S. dollar compared to certain foreign currencies.
Understanding Google traffic acquisition costs
Another key element is about its traffic acquisition costs:
TAC stands for traffic acquisition cost, and that is the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google percentage of revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.
To sustain its traffic, Google spent over $26 billion of its revenues! There is a clear distinction between the way Google acquires traffic at two levels:
Google’s properties: Google has partnership agreements worth billions with browsers and other distributors
Google network members: Google primary shares its revenues with websites part of AdSense and Apps part of AdMob
In 2018, Google traffic acquisition costs (TAC) increased substantially due to changes in partner agreements. Also, the swift change toward mobile also resulted in higher TAC because on mobile users are channeled through paid access points more frequently. This, of course, is good for Google which makes way more money from mobile, but it also increases its traffic costs.
Also, browsers (are still an essential mobile access point) will want more money from Google to close exclusive deals with them.
Instead, when it comes to the increase in the Network Members TAC rate, this is happening through the fact that more and more publishers part of the AdSense network is switching to programmatic advertising to manage more efficiently their advertising inventory.
Caveat:Â a weakening U.S. dollar in 2018 played in favor of Google’s advertising revenues coming from the outside the US. That has affected Google’s overall advertising revenues.Â
What’s going on with Google advertising business?
AdSense revenues are losing against AdMob (in-app advertising). This might be part of a broader content consumption change as more people experience the web through mobile devices and apps
Other revenues touched over $19 billion, as much as revenues coming from network members revenues
YouTube might be contributing to Google main properties revenuegrowth with its video advertising
Google might be eating up the organic traffic in favor of more paid listings
Google might be eating up the organic traffic in favor of direct answers to its users
TAC rate on Google’s properties are going up as more people are experiencing the web through mobile, which has more paid access points than desktop
This is also good as Google’s properties revenues are substantially increasing
More and more publishers part of the AdSense network are monetizing via programmatic, which changes the logic of monetization
Google advertising business remains a cash cow, with high margins and strengthening mobile monetization
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
