Alphabet (Google) business model evolution

Google business model is changing over the years. Even though advertising is still its cash cow, Google has been diversifying its revenues in other areas. While in 2015 90% of Google revenues came from advertising, in 2017, advertising revenues represented 86%. Other revenues grew from about 10% in 2015 to almost 13% in 2017.

It is critical to notice a few important aspects about Google business model:

  • monetization strategy: how the revenue composition is changing
  • profitability: how operating margin is evolving
  • cost structure: how the TAC rate is changing

Evolution of Google monetization strategy

Google monetization strategy has been changing over the years. Even though Google still follows an advertising business model at its core. Alphabet (this is how Google got rebranded) has been diversifying its revenues in several areas.

Revenue breakdown 2015

Google properties 52,357
Google Network 15,033
Other revenues 7,154
Other Bets revenues 445

Revenue breakdown 2016

Google properties 63,785
Google Network 15,598
Other revenues 10,080
Other Bets revenues 809

Revenues breakdown 2017

Google properties 77,788
Google Network 17,587
Other revenues 14,277
Other Bets revenues 1,203

It is interesting to observe how Google revenue composition is changing over the years. Advertising revenues changed from 90% in 2015, to 86% in 2017.

Evolution of Google profitability

At its core, Google has been a highly profitable company since its IPO. Indeed, when investors looked under the hood of Google the found a company which was highly profitable, it was growing at lightspeed, and it was meant to dominate the digital space.

Operating Margin Evolution

Operating income Revenues Operating Margin
2013 15,403 55,519 28%
2014 16,496 66,001 25%
2015 19,360 74,989 26%
2016 23,716 90,272 26%
2017 26,146 110,855 24%

Over the years Google managed to keep its operating margins pretty high. Indeed Google‘s operating margins or the percentage of revenues that are represented by operating income has gone from 28% in 2013 to 24% in 2017.

Google cost structure evolution

One key ingredient of Google success is its ability to keep the traffic acquisition costs at a level that guarantees its search pages a proper distribution (each day people perform more than three billion queries through Google search algorithms) while being able to monetize its pages:

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%.

Evolution of Google TAC Rate

TAC to distribution partners (as % of Google Properties Revenues) TAC to Google Network Members (as % of Google Members Revenues)
2013 7.90% 68.10%
2014 8.10% 67.80%
2015 7.80% 68.10%
2016 9.20% 69.90%
2017 11.60% 71.90%

It is critical to distinguish between the acquisition costs of Google on its search pages and that outside its search pages. Indeed, to get traffic on its search pages, Google has to close deals with partners to guarantee a continuous stream of traffic. Instead, to allow businesses part of the Google AdWords (now Google Ads) platform to be featured within web properties part of Google AdSense, Google shares its revenues with the publishers that allow Google to place banners on their properties. Therefore, Google has way higher costs in a percentage of segment revenues on its members’ properties, than on its properties.

Keeping this distinction in mind is critical to have a deep understanding of the Google business model.

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