google-business-model

The Power of Google Business Model in a Nutshell

Google is a platform, and a tech media company running an attention-based business model. As of 2020, Alphabet’s Google generated over $182 billion in revenues. Almost $147 billion came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $21 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), followed by Google Cloud, which generated over $13 billion in 2020.

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 saying how the value of your business over time will be based on how hard you worked in persuading people believing 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 busienss models 

Google was not the first search engine on the Internet. Quite the opposite, it was a late comer, 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 have 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 which 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

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 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 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 ads 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 ads revenue on their own. In return, Google got one-third of the revenue generated. As Danny Sullivan put it at the time on 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 a 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 that search engine today wouldn’t exist. Also, most if not all Google 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!

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

google-business-model

As of 2017, Google still got 86% 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 which focuses on App purchases through the Google Play store, the Google Cloud offering, and the Hardware product was in 2017 a $14 billion a year business. Compared to 2015 when it represented just $7 billion.

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 the Google “other bets” a set of risky, yet visionary attempt 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, 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 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 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 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 it this traffic. This isn’t a simple network, but rather a massive infrastructure worth billions of dollars each year.

How 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 the 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 after a few months from 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 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 may other organic results, that didn’t pay a dime to be featured there. This is possible because Google has a massive index of 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 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 at 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 on it, independently from its brand.

Google AdSense is still an essential element of Google 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 their attention. That means Google will need:

Salesforce able to support AdWords (now Google Ads) businesses

Offer 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 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 to businesses paying Google for service but also those people or organization that contribute to Google 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 of 2017, Google had $7.2 billion of contractual obligations, primarily related to data center operations, digital media content licensing, and purchases of inventory.

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 his 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 in 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, since 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 on billions of devices in the world

I’ve extensively covered Google distribution strategy below:

Google cost structure

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

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

TAC stands for traffic acquisition costs, 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’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 cost of revenues

Google revenue streams

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

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

Methodologies & Frameworks

Startup Resources

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. Of its $182 billion in revenues in 2020, almost $147 billion came from Google Advertising products (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.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"

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