google-business-model

Google Business Model (2022 Update)

Google is an attention merchant that – in 2021 – generated $209 billion (over 81% of revenues) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $28 billion segment), and Google Cloud ($19 billion).

Google Revenue Breakdown 2021
Google Search & other $148.95B
Google Network Members’ $31.7B
YouTube ads $28.85B
Google other $28B
Google Cloud $19.2B
Other Bets

$0.75B

Google is a platform, and a tech media company running an attention-based business model. As of 2021, Alphabet’s Google generated over $257 billion in revenues.

Over $209 billion (over 81% of the total revenues) came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites).

They were followed by over $28 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), and by Google Cloud, which generated over $19 billion in 2021.

While Google, now Alphabet, has been diversifying its business model for more than a decade. Its main revenue stream is Google’s search engine, which generated about $149 billion in revenue in 2021.

Followed by the network members’ websites (the sites that adhere to Google AdSense for a revenue share on top of the advertising revenues generated on their properties).

And YouTube Ads, which generated about $29 billion (this excludes YouTube Prime Memberships, which are comprised of the other revenues). 

Among the bets which Alphabet has placed over the years, there are ventures in the seld-driving industry, robotics, sustainable/renewable energies, and more! 

Key Facts  
Founders Larry Page & Sergey Brin
Year & Place Founded September 4, 1998, Menlo Park, CA
Initially Called BackRub, in 1996
Year of IPO 8/19/2004
IPO Price $85.00
Total Revenues at IPO 961.8 million by 2003, prior to IPO
Name change On October 2, 2015, Google became Alphabet, the parent company
Total Revenues in 2021 $257.6 billion
Alphabet Employees 156,500 full-time employees, by 2021
Revenues per Employee $1.65 million
Google Revenue Evolution – in $ millions 2020 2021 Change
% of total revenues in 2021
Google Search & other 104,062 148,951 43.1% 57.8%
Google Network Members’ 23,090 31,701 37.3% 12.3%
YouTube ads 19,772 28,845 45.9% 11.2%
Google other 21,711 28,032 29.1% 10.9%
Google Cloud 13,059 19,206 47.1% 7.5%
Other Bets 657 753 14.6% 0.3%
Total Revenues 182,351 257,488    
Year Traffic Acquisition % (Analysis by FourWeekMBA)
2002 23%
2003 37%
2004 39%
2005 34.9%
2006 31.5%
2007 30.1%
2008 28.1%
2009 27%
2010 25.9%
2011 24.1%
2012 25.1%
2013 24.2%
2014 22.6%
2015 21.3%
2016 21.2%
2017 22.7%
2018 22.95%
2019 22.32%
2020 22.31%
2021 21.75%
Year Traffic Monetization Multiple (Analysis by FourWeekMBA)
2018 4.4x
2019 4.5x
2020 4.5x
2021 4.6x

Contents

Google Business Model Short Description 

We describe the Google business model via the VTDF framework developed by FourWeekMBA. 

Google Business Model Description
Value Model: Business Productivity.
Google’s mission statement is to “organize the world’s information and make it universally accessible and useful.” Alphabet’s main value model is built on top of offering a set of free tools for business productivity, from search to productivity apps (like Google Docs).
Technological Model: Platform, Ad Marketplace.
Google is a platform business model, leveraging a free tool for search, and an advertising marketplace for ads.
Distribution Model: Vertical Integration of Data.
The company is vertically integrated by following each step of the data supply chain, from data harvesting to data repackaging and its exchange within Google’s proprietary advertising marketplaces.
Financial Model: Traffic Monetization Multiple.
The company acquires traffic to its properties, through branding, deal-making, and a vertical supply chain. This traffic is monetized many times over into its advertising machine (in 2021, Google generated 4.6 times its traffic acquisition costs).

Alphabet’s Google Business Model Today

Google’s Alphabet is one of the most successful tech players of our time. While Alphabet now is a vertically integrated company that goes beyond Google’s search engine. In reality, the Google search engine still plays a key role in the overall organization. In fact, Google is the main asset that provides resources to Alphabet to keep investing in new areas, keep integrating its supply chain, and also placing bets in completely new and unrelated areas. 

Google’s parent company, Alphabet, released its end-of-year financials. Looking at its financials is important for various reasons and some of them are:

  • Assessing the digital advertising landscape.
  • Understanding how Google’s advertising machine works at scale.
  • How consumers’ behavior is shifting in this new digital landscape.

Let’s dive into them.

Google’s profitability

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Google’s profitability has slightly improved in 2021, thanks to the fact it managed to increase its revenue faster than it increased its operational costs, as traffic on its platforms increased substantially during 2020-2021. We’ll see in this in-depth analysis why that’s the case.

First of all, for the first time in its history, Google generated over $257 billion in revenue. And the company almost reached a two trillion market capitalization. For some context, when Google IPOed in 2004, it recorded almost a billion in revenues, and it was worth about $23 billion, as it popped at its IPO date to $85 per share (On February 2nd, 2022, a Google stock is worth $2,958.22).

At the time, in 2004, Google had just managed to scale its advertising machine comprised mainly of Google AdWords (today Google Ads) and Google AdSense. At the time the advertising machine was primarily based on Internet traffic from desktop devices. That was a completely different world.

As we’ll see throughout this analysis, today most traffic comes from mobile. And Google’s mobile ads platforms (Google AdMob) play a key role. So let’s dive a bit into the main financial segments of Google.

Google’s main segments in 2021

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In 2021, the Google advertising machine generated over $209 billion in revenue. This represented an over 42% growth, year over year! This is a massive improvement for a company worth almost two trillion. In a market landscape that is no anymore in favor of digital advertising. How did Google pull this off?

We’ll see this shortly. But for now, let’s emphasize a few key points.

Today the Google advertising machine is comprised of three main products:

  • Google Search/Properties: This represents the set of products that Google owns, from the search engines to all the other vertical platforms that the company operates (Google Discover, Google News, Google Travel, and more). In 2021, this segment generated over $148 billion!
  • YouTube: This is of course one of the most successful business acquisitions ever done. It was acquired by Google for $1.65 billion in 2006. It’s important to notice that Google was able to integrate YouTube and scale it up. A feat that not every other company would have been able to achieve. At the time YouTube was getting sued for various copyright infringements (the platform is comprised of user-generated content, often posting copyrighted materials) that would have most probably bankrupted it if it had stayed a startup without Google’s backing. By 2021, YouTube has become an advertising machine generating over $28 billion (this doesn’t count the YouTube memberships, which are reported separately).
  • And Google Network Members’ properties: this is the set of publishers that decide to opt into Google’s advertising network (either AdSense for desktop, or AdMob for in-app advertising). Here Google shows advertising on the network members’ properties, thus splitting the revenues with them. In 2021, Google’s network members generated over $31 billion of revenue.

As we’ll see understanding the difference among these segments helps us understand how Google manages its cost structure for each segment.

What determines the growth of each segment?

  • Google’s search advertising has been driven by growth in search queries. In fact, since the pandemic hit, more and more users started to use Google’s products. This trend has continued. However, most of it was driven by mobile users’ growth. This is an important aspect, as it shows that Google’s main driver of growth is based on mobile traffic. This changes the way the company needs to prioritize its product developments efforts, its ad formats served to users, and also how it experiments.
  • YouTube growth was driven primarily by improved ad formats. This means that Alphabet (as it’s evident to anyone going on YouTube) has ramped up the advertising operations on YouTube. In short, on YouTube now there are way more ads than before. This “improved ad formats” is the result of YouTube’s extreme stickiness with users, which enables Alphabet to play with its ad formats.
  • Google’s network members’ properties were primarily driven by AdMob. In short, the mobile advertising platform, powered up by Android devices through the Google Play store, was the main driver of revenue growth in 2021. This shows how Google has shifted also its focus on the mobile advertising platform.

Let’s see how, a little bit more in detail, ad monetization changed for Google.

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In 2021, two main factors determined the improvement in ad monetization by Google.

First, Google recorded an increase in paid clicks (driven by an increase in user adoption and search queries primarily on mobile devices).

Second, this also drove more paid clicks in AdMob through the Google Play store.

Third, as we saw Google is testing various ad formats (we can argue it’s showing more ads) both on Google’s products and YouTube, which slightly improved monetization.

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Among the other revenues, instead, Google Cloud also recorded an important growth thanks to the Google Cloud Platform.

Let’s look now at the other side, the cost structure.

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When it comes to Google its cost structure is pretty straightforward. In order to keep its operations profitable, it needs to be able to generate traffic at much lower costs, than it can monetize it. In 2021, Google traffic acquisition costs (the spending needed to run the servers, for its main products, and the deals in place to enable the distribution for its main products) were over $45 billion.

With respect to advertising revenues, its traffic acquisition costs were 22% of its advertising revenues in 2020. In 2021, instead, the traffic acquisition costs decreased to 21.7% compared to its revenues. This might seem a little different. Yet, Google managed to lower its traffic acquisition costs, nonetheless its much wider users adoption.

This shows that a lot of that adoption was organic, and based on strong deals the company has in place.

The other cost of revenue instead was mainly driven by improved content acquisition costs and costs in data centers.

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In terms of profitability, it’s interesting to notice, how, at a wider scale, Google Services has huge margins. That’s because as we saw in the previous paragraph, Google managed to improve monetization for users, it saw mobile users’ growth, while it managed to lower its traffic acquisition costs!

This combination led to an improved marginality.

However, it’s also interesting to notice how the Google Advertising machine is the only one running at positive margins.

Where instead, both the Google Cloud platform and the other Google Bets run at negative margins. Important to distinguish here.

The Google Cloud platform is critical for the future success of the Google AI platform.

When it comes to the other bets those instead are breakthroughs that Alphabet is pursuing with a long-term perspective. Those are money-losing bets for now but might turn into something interesting in the coming decade.

Key highlights from Google’s Alphabet business model in 2021

  • Google’s Alphabet has become a two trillion-dollar company in 2021. Back in the early 2000s, the company had started to build its advertising machine. This journey culminated in 2004 when the company had managed to put together the various pieces (Google AdWords and Google AdSense) of its advertising machine, thus scaling up its revenues on top of a growing search platform. Indeed, in 2004 Google generated almost a billion dollars in revenues, and it was worth about $23 billion as it IPOed. In 2021, the company passed the $257 billion mark!
  • Among the biggest drivers of its revenues were the increased adoptions from users as the pandemic hit. This trend continues from 2020-to 2021. The increased search query traffic was primarily due to mobile users. Therefore, Google had to push more experimentations through its mobile platforms.
  • YouTube, driven by mobile traffic growth saw also an important growth. Alphabet here pushed through more ad formats, and more advertising to monetize it further. Thus, taking advantage of the increased mobile traffic as a consequence of the pandemic.
  • The above led to increased profitability, given the ability of Alphabet to reduce/or keep its costs stable as traffic increased. And yet its ability to keep monetizing the traffic through increased ad spending, but also by serving more ads on its platforms.
  • Google ads platform remains the strongest segment of the company, with massive profitability.
  • Google has negative margins on its Cloud Platform and its further bets. However, both play a critical role in the future (Google Cloud Platform in the next five years, while the other bets in the coming ten-fifteen years).

The Google Advertising Machine 

google-traffic-acquisition-cost-fourweekmba
The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case to keep it stable. In 2021 Google spent 21.75% of its total advertising revenues (over $45.56 billion) to guarantee its traffic on several desktop and mobile devices across the web.

When you look at a business model like that of Google, which is primarily a software/digital/tech company, it’s easy to fall into the trap of thinking it’s an asset-light business.

Indeed, a software company is asset-light compared to much more traditional industries (for instance manufacturing) but they do have massive expenses to guarantee their distribution strategy.

For instance, in 2021, Google spent over $45 billion in traffic acquisition costs, which comprise costs incurred to cut distribution deals with other companies (like the multi-billion deal Google has to be the default search engine on Apple’s Safari), and many other deals, together with the money paid to partners to bring traffic back to the Google’s properties. 

Now, keeping this number stable over time, is critical, to assessing the health of the advertising machine. In fact, on top of the traffic that Google generates, the company is able to monetize it many times over. 

For instance, in 2021, Google spent over $45 billion in traffic acquisition costs, but it generated over $209 billion in advertising revenues. 

This means that Google was able to monetize its traffic 4.6 times its traffic acquisition costs. 

googles-traffic-monetization-multiple
Companies like Google have to cut distribution deals and split revenues with content partners to bring traffic back to their main properties online. For instance, in 2021, Google spent over $45 billion in traffic acquisition costs, but it generated over $209 billion in advertising revenues. This means that Google could monetize its traffic 4.6 times its traffic acquisition costs. An increased monetization multiple over the years is a good sign. It means that Google was able to keep its advertising machine competitive. On the opposite side, a negative monetization multiple means the advertising machine is losing traction.

History of Google

In a paper entitled “The Anatomy of a Large-Scale Hypertextual Web Search Engine,” two P.h.D. students had introduced the concept of indexing the growing number of pages on the Internet:the-future-of-google

At the time, they didn’t like the advertising business model. Indeed, they highlighted: “We expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.

So how did we get to the Google of today? 

The birth of the PC standard, the commoditization of hardware, and software as a premium industry 

Back in the early 1980s, IBM was looking for a way to break into the computer market. The key players in the computer space were Tandy, Commodore, and Apple, which by the late 1970s, controlled most of the market.

However, the computer market at the time was much small, more skewed toward business niches, and computers were still quite expensive. 

IBM set to change all that, with an approach, it had never experimented with before. IBM brought together a team of 12 technical people, to work on a personal computer. A computer that could be sold at a low price point, to make it scale to the masses.

However, rather than developing every single piece of the puzzle. IBM went for an open system approach. Where it let other companies develop various parts of the personal computer. 

Among these companies, in the early 1980s, IBM reached out to a young Bill Gates to create the operating system for its personal computers. This would be the beginning of Microsoft! 

Where IBM created a new category, the PC, Microsoft surfed it. Indeed, by the early 1990s, IBM had lost the lead on the PC market, since many other players had entered the space, by commoditizing the hardware (the price of PCs was lowered substantially by competition, and so were margins).

On the other hand, Microsoft came out in the 1990s, as the undisputed leader, as it offered the underlying operating system that powered up most of the PC market.

And on top of that, over the years Microsoft launched a set of applications, that run on top of its operating system (what would evolve into the Windows Office Package), Microsoft created a suite of premium software services, and it built a distribution power that would be used later on to also try to take over the next wave of the Internet. 

The commercial killer application of the Internet: browsing

Back in the mid-90s, the Internet was taking over. However, the Internet was still quite limited, it comprised a few million users and its killer commercial application turned out to be browsing. 

As we saw, on the one hand, Microsoft had become the standard software company for the PC market, dominating most of the market. And the Internet did develop on top of the PC industry. There were though other players who dominated the first wave of the Internet.

In fact, by the late 1980s, and the early 1990s, internet service providers had taken off. Those comprised companies like AOL, which was among the major players by the early 1990s.

Those, though, offered access to proprietary services, at a fixed, monthly price. And beyond a certain threshold of data consumed, users could pay additions, on top of their subscription. 

These proprietary networks weren’t the Internet. In fact, by the early 1990s accessing the Internet was still extremely technical, hard, and primarily for geeks and early adopters. 

Things started to change swiftly when browsers came to market. The first major browser, Mosaic, turned out to be an incredible success. The group of students behind the development of Mosaic, would leave and build a company on their own: Netscape. 

Netscape would represent the first major Internet player. It dominated the browser market, and it turned out to be the commercial killer application of the Internet. Finally, the Internet, which was hard to access before, was easy to access now, thanks to the browser.

As Netscape became a success it also created a sense of urgency for Microsoft to start moving fast, in developing its own browser. Thus, Microsoft licensed the first version of its browser from the NCSA. NCSA was a research unit at the University of Illinois Urbana-Champaign, which enabled the development of Mosaic. 

In short, to kick off its browser, Microsoft took the code of Mosaic, which had been developed by the team, who later had developed Netscape, the main Internet competitor of Microsoft at the time.

That is how Microsoft launched its browser: Internet Explorer. 

Microsoft bundled its browser within its Windows package, thus leveraging its dominant position to quickly kick start its Internet operations. The strategy worked out successfully. In 1994-5 Netscape had the most market shares in the browser industry. By 1997-8 things had shifted. 

Thanks to its firepower, Microsoft’s Internet Explorer had taken over most of the shares of the browser industry. In fact, while initial users might have cared about the technical aspects of the browser, preferring the Netscape approach to Microsoft. 

Later on, as the Internet user base grew exponentially, the additional users coming in were looking more at a frictionless experience, than anything else. And having Internet Explorer available by default on their PCs, just made it straightforward for them, to use it. 

This strategy worked so well, that it also attracted the attention of regulators, that by the early 2000s, engaged in an antitrust case against Microsoft. This was the context of the late 1990s when we had the so-called “browser wars.”

The commercial killer application of the Web: search

Once browsers had become established, this industry opened up the way to a whole new set of players. Among them, were search engines. While search engines had developed throughout the 1990s, the real commercial breakthrough came when Google (initially called BackRub) came late to the game and yet it dominated it. 

Launched as an academic project in 1996, it became a company by 1998. Google, which entered the search engine market relatively late (it was the 18th search engine to launch on the market), also gained traction quickly.

With the right product, which improved many times over existing alternatives, with the right distribution (as we’ll see Google managed to secure key deals, like the one with AOL), and the right venture capital deals (Google was backed by Sequoia Capital and Kleiner Perkins) the company took off. 

To be sure, initially, the path wasn’t straightforward, and Google’s founders, by 1999, were still looking to go back to their PhDs (in short, they still considered Google as an academic project) and looking to sell it for less than a million dollars!

In the meantime, other players, like GoTo.com (renamed Overture), dominated the market. Yet when Google came to market, it turned out to be an incredible solution, more advanced than existing alternatives, and able to index an exponentially growing number of web pages. 

Google represented the epitome of Web 1.0 which developed on top of the browser market. And it eventually found into advertising the business model that made it scale. Between 2001-and 2004 Google built the advertising machines (Google Ads and AdSense) which enabled the company to skyrocket its revenues, to these days. 

The major innovation was the fact that Google managed to mix paying results with organic results. And at the same time, also offer a score for paying results. Thus, being featured on top of paid results wasn’t just a matter of how much budget you poured in (as it happened with other players like GoTo), but there was a quality score, determined by various factors which by time to time also ranked paid results. 

Google became the king of Web 2.0

In the end, Google became the epitome of a second wave of the Internet, which would be called – in hindsight – Web 2.0. A web made of user-generated content, algorithms at scale, and platforms. 

Google, which initially had grown thanks to a great product, a few great distribution deals, and the right source of capital and network (on the board of Google there were legendary venture capitalist John Doerr, and Google’s co-founders were very closely connected to Al Gore) managed to become the king of Web 2.0.

All the while, Microsoft could not stop Google from conquering most of the search market shares, as it had done previously with the browser market, by taking over market shares from Netscape. 

Indeed, by 2004, Google’s advertising machine was complete, showing the strongest digital cash machine ever created (Google enjoyed and still enjoys margins never seen before).

And over the years, Google would successfully vertically integrate its supply chain! Thus, becoming the de facto standard, especially on mobile devices, where it controls the underlying operating system (Android), the browser (Chrome), the marketplace (Google Play), and the search engine, plus a suite of free apps offered on top of these devices, by default!

In 2021, Google generated over $257 billion in revenues, whereas Microsoft generated $168 billion. 

Below is an in-depth overview of these early years, with a person that lived through the deal that created the Google that we know today! 

How much is a brand worth? 

Putting a $ amount on a brand is very hard.  For a financier, a brand is something valuable but not essential. In fact, a financial analyst would take a practical approach. For instance, by looking at assets on a balance sheet (like patents and trademarks) and computing the overall value of those. Yet this would neglect the value of the interactions between those “intellectual properties” and the minds and people tied to the business.

For an accountant that is just a headache. That is why accounting methods have neglected it for hundreds of years and still do. In fact, often it’s possible to put a $ amount on a brand only when a company gets sold. Whatever surplus is left after the sales, accountants put it under the umbrella of “goodwill.” Almost like someone trying to hide dust under the carpet; when there isn’t a better place where to dump that. 

For an anthropologist, the brand is all that is. In fact, he would go on to say how the value of your business over time will be based on how hard you worked in persuading people to believe in your company’s myth. The stronger the myth, the stronger the brand. 

I like a holistic approach based on the one thing – I argue – that captures the value of a business in the long run: its business model!

The rise of attention merchants and asymmetric business models 

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Google was not the first search engine on the Internet. Quite the opposite, it was a latecomer, in a search industry already dominated by several players. Yet Google, not only was an incredible tool, with an incredible tech stack. It also innovated in its business model. 

A key innovation Google brought was to build what I like to call and define an asymmetric business model.

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

To understand this, watch the video below: 

The information at users’ fingertips

When Google went public in 2004, Larry Page and Sergey Brin put together a letter that clarified:

Sergey and I founded Google because we believed we could provide an important service to the world-instantly delivering relevant information on virtually any topic. Serving our end users is at the heart of what we do and remains our number one priority.

Our goal is to develop services that significantly improve the lives of as many people as possible. In pursuing this goal, we may do things that we believe have a positive impact on the world, even if the near term financial returns are not obvious. For example, we make our services as widely available as we can by supporting over 90 languages and by providing most services for free. Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying. We strive to provide users with great commercial information. (Source: abc.xyz)

Google has created the most powerful search engine that proved to be the most reliable alternative for users. In fact, each day billions of queries go through Google. People ask any question. From very practical questions like “how to tie a tie” to more existential ones like “why am I like this.” Users all around the world can rely on Google’s AI-powered algorithm to read and understand their queries.

Without that focus on providing a superior product, Google wouldn’t have become what it is today. However, that is the first part of the equation.

The long-term value is in the business model

how-does-google-make-money
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2021 Google’s advertising generated over $209 billion (beyond Google Search, this comprises YouTube Ads and the Network Members Sites) compared to $257 billion in net sales. Advertising represented over 81% of net sales, followed by Google Cloud ($19 billion) and Google’s other revenue streams (Google Play, Pixel phones, and YouTube Premium).

We are often bound to believe – especially in tech – that is all about the product or service you offer. I want to show you why that is not the case. 

Take Apple, 63% of its revenues come from the iPhone. Therefore, you might think that is what makes this company profitable in the long run. That is an oversight. What makes Apple sustainable in the long run it’s the hardware and software ecosystem it created around those products. 

Take Google. You might think that since Google is the best search engine out there, that is why it makes 88% of its revenue from advertising. However, for how marvelous Google’s search algorithm is, what makes Google the tech giant that is today; is its business model

AdWords and AdSense together create a win-win-win. Companies can sponsor their products for much cheaper, and track their results with no effort. Online publishers can easily monetize – something is better than nothing – their content. Users get relevant answers to any question they might have.  A great product is a little part of the equation. The rest is about business modeling

In fact, a business model is what helps companies capture value in the long run. If you do not have a business model, you might not have a business.

Google PPC in a nutshell

Back in 1999, it was already clear that Google was the best search engine out there. It wasn’t clear though how it was supposed to make money. In mid-1999 Page and Brin met Bill Gross, founder of GoTo.com search engine.

Gross had an idea. Rather than rely on the old advertising model based on CPM or cost per mille – in short, advertisers would get paid on the number of impressions of an ad.  Gross thought of a new model, based on CPC or cost-per-click. A company would pay for an advertisement only if a user found it so relevant to click.

At the time Page and Brin were still reluctant about using ads to monetize Google. Yet the company was burning cash, and by the year 2000 investors were getting nervous. When Page and Brin were approached again by Gross, which proposed to merge the two companies, Google’s founders declined. 

Why? Because they didn’t want their search to be associated with a company that mixed paid advertising with organic results. Today Google generates over 88% from advertising, of which CPC is the primary driver.

In 2002 Gross sued Google for allegedly stealing its cost-per-click model.

Google AdSense in a nutshell

In 2003, Google’s employee Paul Bouchet developed a feature that allowed the matching of words sent through Gmail with keywords bidden by advertisers. That generated ad profits with the CPC model. 

Sergey Brin thought why not to apply this model to websites. That is how they kicked off AdSense. In short, Google for the first time allowed small businesses and blogs to generate ad revenue on their own. In return, Google got one-third of the revenue generated. As Danny Sullivan put it at the time in the USA Today “it basically turned the Web into a giant Google billboard.”

Therefore, any “Web property” was a good candidate to become a Google partner and generate profits for their content independently from advertising middlemen.  What’s the take here? I believe there are two main ones.

First, a business model well designed can make a business go from zero to a billion, just like it did with Google. Second, at times when a company grows at the size of what Google is today, it’s hard to remember that back then it was a disruptive force that “democratized” the web, allowing small blogs and small businesses to make money online!

A win-win-win Business Model

AdWords and AdSense combined made Google among the most powerful tech companies in the world. Of course, Google managed to get there because it was backed by great service, a search engine able to have you find any kind of information in a web made of billions of pages.

Yet, without such a powerful business model search engines today wouldn’t exist. Also, most if not all of Google’s existing applications (Google docs or Gmail to mention a few) wouldn’t exist if it wasn’t for the stream of revenues generated over the years by Google’s business model.

Google Business Model

In other words, a well-designed business model has to create value for the stakeholders and not just for the shareholders. Google allows each day to billion people to find the answers they need. Businesses can enhance their revenues through AdWords by tracking their spending, conversion, and opportunities. Content creators can easily monetize their content by allowing Google to show targeted ads within their “web properties.”

That is how Google went from zero to over eight hundred billion of market capitalization!

What will Google’s business model look like in the future?

As of 2021, Google still got over 81% of its revenues from advertising. However, it is important to notice how other areas of the company are growing pretty quickly. For instance, the other part of the business focuses on App purchases through the Google Play store, the Google Cloud offering, and the Hardware product.

This shows how Google is investing in other areas that might well represent its main way of monetizing in the years to come. Another critical aspect to look at is Google’s “other bets” a set of risky, yet visionary attempts of Google to shape the future of humanity via technology. Will any of those be the next big hit?

Google Business Model Canvas Analysis

google-business-model-canvas

The business model canvas can be used as a tool to dissect and understand others companies’ business models, and how they are positioned in the marketplace.

In this article, we’ll look at the Google business model canvas. Keep in mind that the business model canvas is just one of the frameworks you can use to build, design, or assess a business model.

Also, a business model canvas will capture where a company is or where it will want to be in the future. Thus, we’ll look at where Google’s business is at the time of this writing.

While a business model does create a long-term competitive advantage, being able to innovate it over time is critical. If Google itself doesn’t want to be disrupted, it will need to evolve its business model.

This might imply a complete change in a few years on a few things that comprise its business model according to the business model canvas like key partners, distribution channels, and customer relationships.

While the vision of a company might stay the same, other things like value proposition might change substantially.

Google key partners

Each day billions of people get online, and they “google things up.” For many of those people, Google is de facto the web. Yet it hasn’t always been this way. There was a time, back in the late 1990s when the web was called AOL.

Indeed, probably more than half of the traffic on the internet went through this portal. When Google launched, while it had figured out a great product and search engine, it didn’t have a business model yet.

For instance, by reviewing some of the thoughts of Google founders Page and Brin, it seems clear that they thought advertising wasn’t well suited for a search engine:

the-future-of-google

In the paper, they pointed out their “mixed feelings” about the advertising business model. As they believed any search engine based on the premise of advertising in a way went against its primary mission.

However, over time Google figured out a way to show advertising in a way that would not affect user experience.

Since the beginning traffic going through Google‘s digital properties (its search pages) has been a critical ingredient for its long-term success.

That is also why initially Google made a deal with AOL to be featured as a primary search engine on its portal, which gave it massive visibility. 

AOL on its hand was offered such a good deal, and it also saw search as a secondary feature, that it couldn’t say no to Google. Therefore, while we give for granted the billions of queries – that each day – go through Google.

We miss the fact that Google had to build up a vast distribution network that each day guarantees this traffic. This isn’t a simple network, but rather a massive infrastructure worth billions of dollars each year.

What does this infrastructure look like? There are a few elements:

Partnership agreements

One example is the multi-billion dollar deal with Apple to have Google featured as a default search engine on Safari. Traffic doesn’t come from thin air; it comes from physical devices.

As the web has shifted from desktop to mobile devices, Google has developed its distribution strategy (for instance via Google Chrome).

However, a vast array of devices (take iPhones or iPads) are operated by Apple IOS operating system and its internet browser (Safari). To be featured on those devices Google pays a substantial amount of money.

Open handset alliance

As pointed out above mobile users have grown massively in the last decade. This implies that whoever takes hold of mobile content consumption can build a sustainable business model for years to come.

With other 84 technology and mobile companies, Google forged the Open Handset Alliance. In fact, in 2005, Google acquired Android (what would become the prevailing operating system for mobile).

Just a few months after the launch of the iPhone by Steve Jobs, Google announced its Open Handset Alliance. The aim was to build “the first truly open and comprehensive platform for mobile devices.”

The business model behind the Open Handset Alliance is a simple one. Google provides its free of charge, the operating system for mobile devices, Android, and in exchange for many apps, like Google Play and Google Chrome come pre-installed.

AdSense network

It wasn’t just traffic the critical ingredient for Google’s success. It could offer relevant and high-quality content compared to any other portal, or search engine.

On the one hand, Google had figured out how to offer relevant ads by introducing AdWords with its quality score.  On the other hand, it needed to balance that with high-quality organic content from the web.

While Google did offer that by indexing the entire visible web, it managed to improve quite a lot when it offered to any publishers (independently from their brand) the possibility to monetize their content via the AdSense network.

Comprising millions of websites around the world; those websites allow Google to tap into their sites to place banners from businesses that want to advertise their services. Google shares the advertising revenues generated from those banners with these publishers.

Webmasters

A great payoff of Google is its ability to send qualified traffic to any site, based on searches people perform. For instance, if I search for “car insurance” on Google, I will find a few text-based ads on top of its search results.

At the same time, I’ll also find many other organic results, that didn’t pay a dime to be featured there. This is possible because Google has a massive index on the web, and if that content is relevant, it will be featured on Google‘s first page.

Being on Google‘s first page might turn in substantial income for those sites able to rank through it. In particular, web owners can submit their website via Google Search Console (a platform to monitor the indexing of a site) to control how Google sees the site.

This allows publishers – independently from being part of Google AdSense – to “control” their rankings vis Google organic search engine. Millions of webmasters each day help Google index their content, and make it easier for the search engine to keep a qualified index of the web!

Google key activities

Google’s mission is to “organize the world’s information and make it universally accessible and useful.”

This bold vision requires Google keeps innovating in the search industry, while it also looks forward to new ways the web is developing. From voice search, visual search, machine learning, and more.

Google needs to invest first of all in a robust and secure infrastructure that makes it possible for the company to handle each day billions of queries. This implies a few key activities:

  • At a basic level, Google has to keep innovating its search algorithms. This alone requires substantial investments.
  • As voice search is growing it is critical that Google keeps innovating by also offering new products. For instance, Google launched its new voice devices, such as Google Home, which compete against other tech giants, like Amazon’s Alexa and Cortana.
  • Google still generated most of its revenues from advertising. A business model based on a single source of revenue might not be sustainable in the long run. That is also why Google is investing resources in betting in other areas that might lead to the next innovation.

Google’s value proposition

For a tech giant like Google, which has a sophisticated business model, based on a hidden revenue generation, there isn’t a single value proposition.

Instead, several value propositions will serve the purpose of keeping key partnerships that allowed Google to scale up and let it today to maintain its market dominance. Thus, if I had to summarize the fundamental value propositions those would be:

The value proposition for billion of users

Free search engine for billions of users around the world. This is how Google managed to grow quickly. A great, reliable, and free service that allowed users anywhere in the world to find the information they needed, fast.

Tools and productivity apps

Besides its free search engine, Google also offers a set of free tools and apps (to mention a few: Gmail, Google Analytics, Blogger, Google Books, Google Chrome, and many others). Those free tools are among the most used in the business world.

Google advertising business

The core of the Google business model is advertising, focused on targeted text-based ads for businesses offered via the AdSense network.

Before Google existed,d there was no way for marketers to know in detail all the conversion metrics of their ads. While Overture was the first in offering CPC advertising, Google managed to scale it up to massive levels.

Google AdSense

Before Google disrupted the advertising world and took over the digital advertising market, a few established publishers could make money via advertising.

With its AdSense network, Google also allowed small publishers to monetize their content. 

In a way, it was a democratization of the digital advertising market, where anyone with the content that got the most eyeballs and attention could monetize it, independently from its brand.

Google AdSense is still an essential element of Google’s value proposition.

Google customer relationships

The cash cow for Google is its AdWords network, made of a growing number of businesses looking to sponsor their products and services. That implies two things.

First, Google needs to keep offering targeted ads that allow those businesses to generate leads. Second, Google is as worth as much as the qualified traffic it can generate.

This implies that Google needs to keep focusing on making sure that users go back to its search results pages. Indeed, even if users do not pay for Google search results, they are the products.

As any attention merchant, Google is selling back its attention. That means Google will need:

Salesforce able to support AdWords (now Google Ads) businesses

Offering the proper support to businesses part of the AdWords network requires a substantial investment in business development people able to expand the list of companies that join Google’s advertising network. This implies local initiatives, training, and support to those businesses.

Privacy

Companies like DuckDuckGo have built their business on Google’s weakness in terms of privacy. If those concerns are not addressed Google might be losing an increasing chunk of users, willing to switch because of privacy concerns

Google customer segments

In terms of value creation, with its massive business model, Google has several “customers” not intended only for businesses paying Google for service but also for those people or organizations that contribute to Google’s financial success. In that respect we have:

Free internet users

Internet users around the globe. Even though Google is a free service, Google’s users are among the most important “customers.” If Google lost them, there would be no business at all.

Agencies, marketers, and businesses

Those who are bringing big bucks to Google are agencies, marketers, and businesses part of its Ad Network. They are driven by the fact that Google is an incredible source of targeted, and qualified traffic.

Publishers

AdSense Network Members allow Google to offer targeted ads on its web properties.

It is important that Google keeps offering those publishers enough incentives to keep monetizing their content via the AdSense platform.

I treat them here as “customers” because Google still needs to “convince” them to use the AdSense platform to monetize their content.

Google key resources

Even though Google is a digital business, that might make you think the company has no real assets. This is far from the truth.

As a reference, in 2017, Google had $7.2 billion of contractual obligations, primarily related to data center operations, digital media content licensing, and purchases of inventory.

This is to have you understand, also for a software business, to run the key asset, it takes a substantial amount of resources. 

This implies a few key resources:

  • The most basic thing of any site with a large number of traffic needs is a massive server infrastructure. Back in the late 1990s when Google was still in the very initial stage at Stanford, it brought down its internet connection several times, by causing several outages. That allowed its founders to understand they needed to build up a solid infrastructure on top of their search tool. Today Google has a massive IT infrastructure made of various data centers around the world.
  • Another element to allow Google to stay on top of its game is to keep innovating in the search industry. Maintaining, updating, and innovating Google’s algorithms isn’t inexpensive. Indeed, in 2017 Google spent over $16.6 billion on R&D, which represented 15% of its total revenues.

Google distribution channel

I believe that one of the vital ingredients to Google’s success was its distribution strategy, during its first few years of operations. That is also why Google relies on:

  • global sales team which uses business development to keep growing Google operations
  • Google deals and partnerships that bring it to billions of devices in the world

I’ve extensively covered Google’s distribution strategy below:

Google cost structure

With its over $110 billion in revenues in 2017, Google reported $12.6 billion in net profits. This implies a few critical items in its income statements:

  • traffic acquisition costs are a crucial metric to assess Google’s ability to generate value over the years:
what-is-google-tac

TAC stands for traffic acquisition costs, and that is the rate at which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google’s 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%.

  • As we’ve seen R&D costs represented 15% of its total revenues, or $16.6 billion
  • Sales and marketing represented 11.6% of its revenues or almost $13 billion
  • Datacenters costs also represent another good chunk of Google’s cost of revenues

Google revenue streams

Google’s business model can be broken down into three main lines:

  • Google advertising network
  • Google’s other revenues (consisting of Apps, in-app purchases, and digital content in the Google Play Store; Google Cloud offerings and Hardware)
  • Google other bets

Where’s Alphabet going in the coming decade?

Let’s explore now some areas where Alphabet might focus in the coming 5-10 years. 

Next five years of search in business

  • Continuous growth and improvements: Google, the search engine is still the primary short-term investment for the company, which requires substantial maintenance, and a huge engineering team. Google will keep improving its search engine, at scale, testing new features, algorithms, and more. While Alphabet is a large tech player, it still behaves (at the engineering level) like a startup, performing thousand of large experiments each year, and probably hundreds of thousands if not millions of tiny experiments each year. 
  • Mobile-first search: Google has been focusing on becoming mobile-first for years, and now this transition is almost complete. Apps like YouTube are already mobile-first. Search still follows a different logic on desktop, then on mobile, many websites from which Google borrows content, indexes it and ranks it, are still far from being mobile-friendly. Thus, this transition is still ongoing and it might still take a few years. 
  • Further expanding the user base: the pandemic further expanded the adoption of Google at a massive scale. Google managed to stabilize this growth trajectory and also to monetize it. In terms of adoption, if Google is able to transition from pull to push (see below), it will further expand its user base across the world. 
  • AI-driven algorithms at scale: Alphabet is also an AI-first company. Meaning that also its products, like Google and YouTube use many AI algorithms for various reasons. From indexing, and ranking, to advanced features. For instance, Google is experimenting more and more with content generated automatically at scale. In addition, starting in 2016, going forward, some Google search features have become predominant. Features like answer boxes, People Also Ask, enriched (rich) results, and more. Google is changing its logic, and it’s moving from pull to push platform.
  • From pull to push: Google is moving from a search box mechanism to a news feed-like experience. Platforms like Google Discover, Google News, and Google Travel might become the rule of thumb. While the search box might always be there, its importance might shrink over the years. In fact, as part of Google’s plan to further scale globally, it needs to serve content in a proactive way to users, based on their preferences. This might make this “push mechanism” much larger than the classic search mechanism. Thus, in the next 5-10 years, while still important, the search might become a sub-set of a much larger information market online, dominated by advanced news-feed-like features and products. 
  • From publishing to web apps: the transition that helped Google become a tech giant, was an ecosystem made of users performing searches, websites/publishers publishing content, and companies bidding on keywords. Going forward, Google might become more and more an interface for developers. In short, as Google continuously changes its search results, and algorithms, this also requires websites to adapt to a dynamic framework. So where before it was about publishing content only, going forward, it might be way more about building dynamic websites, that beyond content also comprise customizations for users. This might make SEO become more and more a technical game. 
  • Hardware: will Google keep building smartphones? It probably will, and in a mobile market that is still the primary mass consumer platform, Google might finally get a big hit. The Google Pixel is already a great phone, and one of the future releases might give Google space to expand its hardware market share quickly. In the end, mobile is still the main platform for mass consumers, and it’s the place where Google controls the whole pipeline (for Android-based devices). 
  • A private version of Google? As privacy concerns arise, not only it might make sense for Google to buy a privacy-based alternative. It might also make sense to offer a private search alternative, even though this would be problematic to its business model in the short term. 
  • Business acquisitions? Definitely, acquisitions in spaces adjacent to search, AI, AR, and more will happen in the coming five years. But they might not be huge acquisitions, as Alphabet is under the radar of regulators. 

Five years bets adjacent to search

  • VR: where companies like Facebook are betting their future on VR. Google/Alphabet might play this game for the sake of AR. Indeed, where Facebook (Meta) wants us plugged into The Matrix so it can monetize our digital selves. Google might still want to monetize our attention, but in a mixed reality, where our productivity in the real world is enhanced through augmented reality devices. 
  • AR: Google has been the first commercial player to launch an AR headset. It was back in 2013-4 when Google launched its Google Glasses, and it was a huge failure. Yet, what many people don’t know is Google Glasses have survived for years, as an enterprise product. And now Google is revamping its efforts to try to create a hit product in the space and bring us toward a mixed reality world vision, in line with Alphabet’s vision.

Ten years bets beyond search

The moonshot factory bets are those that go way beyond search. It is hard to know whether they will work, and if one of them does, it might potentially build a whole new journey for Google/Alphabet. Let’s see some of these areas.

As discussed in Google’s bets, some of the key investments that the company made are: 

Thus these areas comprise: 

  • Smart Home Devices (Nest) and Virtual Assistants (Google Home and more) and wearables.
  • Quantum computing.
  • Mobility, transportation at scaler, and self-driving.
  • Robotics.
  • Renewable energies.

What organizational structure does Google run?

Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.

google-organizational-structure

Is Google the largest player in the digital advertising space?

Google is the largest digital advertising player. For instance, in 2021, Google search generated over $148 billion in revenues, and YouTube ads generated over $28 billion. Google was followed by Facebook/Instagram which generated over $114 billion in digital advertising revenues in 2021. Also, growing fast, there are other players like Amazon ads, which generated over $31 billion in 2021, and TikTok, which while it generated only about $4 billion, it’s growing very very fast!

advertising-industry
The digital advertising industry has become a multi-billion industry dominated by a few key tech players. The industry’s advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, TikTok, which is growing very quickly, and Pinterest.

Who are Google’s competitors?

Google, now Alphabet, is a tech giant with many moving parts, which operates in various industries. From the advertising business to the cloud and hardware business, together with other bets. If we look at the competitors of Google, as a search engine, the main ones, comprise digital advertising players like Facebook/Instagram (part of the same company, now rebranded Meta), Bing, Yandex, and Twitter, Yahoo, TikTok.

google-competitors
While Google (now Alphabet) has been born as a search engine, it is now a diversified company, even though its core business remains search, as most of its revenues still come from Google, the search engine, and YouTube, the “video engine.” However, as a tech giant, which business is primarily based on advertising, the company does compete with Facebook, Twitter, Microsoft (with Bing), and Amazon (with e-commerce search and its advertising machine).

Read Also: How Does Google Make Money.

Free Guides:

What is Google business model?

Google is an attention-based platform business model. Its search engine is free to users and subsidized by advertisers, which bid on Google’s Ads platform, to gain paid visibility through search results.

How does Google make money?

Google makes money primarily via advertising. $209 billion revenues (over 81% of the total revenues) came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They (Google Search, YouTube Ads, and Network Members sites).

Is Google a freemium business model?

Google search is free. But Google can be defined as an asymmetric business model, where the user is different from the customer. In short, free users are monetized thourhg an advertising platform, where advertisers bid on keywords. Thus, Google generates revenue in an asymmetrical way. This is the difference between an asymmetric business model and a freemium business model.

Connected Case Studies

facebook-business-model
Facebook, the main product of Meta is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues, in 2021, of which $114.9 billion was from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm). 
amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.
asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

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