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:

what-is-google-tac — 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.

Resources for your business:

Handpicked case studies: