google-q2-2020

The State Of Google Business Model – Q2 2020

  • Google remains the core product for the Alphabet’s business model
  • The search engine made over $55 billion in the first six months of the year 2020. 
  • The video search engine (YouTube) made $7.8 billion in advertising revenues. 
  • This does not include the membership revenues which are composed of Google’s revenues. 
  • Google search and Google network members’ revenues slightly decreased in the first six months of 2020, compared to 2019. (get a detailed report to see what caused the decrease).
  • The segments that grew were YouTube Ads, Google Other revenues (comprising purchases in Google Play Store, Hardware, and YouTube Subscriptions). 
  • Other bets also decreased, while Waymo, one of the other Google’s bets, finalized another important round of investment. 
  • In July 2020, Alphabet committed $4.5 billion to invest in India’s Reliance Jio Platforms. The Indian media giant. This is in line with the Alphabet’s strategy to create a strong presence in India. It was also an important move to compete with Facebook’s prior investment, a few weeks before. 

Detailed report

  • Google’s revenues are primary made of: 
  • Advertising on Google’s properties (Google Ads).
  • Advertising on Google’s network members properties (Google AdSense for websites and Google AdMob for apps in the Play store).
  • YouTube Ads. 
  • Google Cloud. 
  • Other Bets.

What caused Google’s advertising revenues to decline? 

For the quarter ended June 30, 2020, Google’s advertising revenues declined compared to the prior year due to the impacts of COVID-19 causing reductions in global economic activity. 

Google Search & other (all these produced on Google’s properties) revenues decreased by $2.3 billion in the first three months of 2020, compared to 2019. Beginning in March of 2020, the effects of COVID-19 on both desktop and mobile search led to a decline in revenues when, despite an increase in user search activity, the revenues were adversely affected by a shift to less commercial topics and reduced advertiser spending. 

To appreciate these changes it’s crucial to understand Google‘s pipeline in terms of users’ behaviors. Indeed, search from users can be classified in three main categories:

  • Informational 
  • Navigational 
  • Transactional

Throughout the pandemic the informational search has spiked. However, transactional and commercial (users searching for commercial keys such as “buy X” or “product A”) searches decreased. 

Thus causing at the same time a decrease in revenues, as the keywords searched by users were less valuable for advertisers on Google’s Ads platform. 

However, in the second quarter of the year, things started to stabilize. As lockdown measures got lifted (or perhaps as people started to get out), also search behavior adapted again, and it picked up. 

Thus, the overall loss in revenues from advertising in the six months of 2020, compared to 2019 was around $368 millions, overall. 

Google’s network members decrease

In the six months of 2020, compared to 2019, Google’s network members decreased by $305 million. This decline in revenues was primarily driven by Google Ad Manager and AdSense due to reduced advertiser spending driven by the impact of COVID-19

YouTube advertising machine on the rise 

YouTube video search engine, with its video-based advertising, showed instead not only a resilience during the pandemic. But a strong increase in revenues. 

YouTube ads revenues increased by over $1.2 billion in the last six months of 2020, compared to 2019. YouTube advertising revenues increased thanks to its direct response advertising products. What caused YouTube ads revenue increase? 

Improvements to ad formats and delivery and increased advertiser spending. 

Understanding the dynamics of Google’s advertising machine

Google advertising machine is primary based on clicks. The more clicks the company is able to generate toward advertisers’ websites, the more it will make money through its Google Ads machine. 

Yet, for those clicks to be valuable for both the advertiser and Google, it needs to drive qualified traffic, while Google is able to keep the click cost for advertisers constant. However, in the first part of the year:

  • As users’ traffic patterns changed from commercial keywords to informational keywords, the overall traffic spiked, yet the value of the traffic decreased. 
  • In addition, advertisers reduced their budgets.
  • And Alphabet’s new ad formats (YouTube perhaps) determined an increased in paid clicks, but a decrease in value per click. 

In short, while paid clicks increased on Google – driven by growth in views of YouTube engagement ads; an increase in clicks due to search queries resulting from ongoing growth in user adoption and usage, primarily on mobile devices; and improvements in ad formats and delivery – the cost per click for advertisers decreased, thus also reducing Google advertising revenues. 

What caused the decrease in cost-per-click advertising?

To recap, three main factors influenced cost-per-click decrease:

  • Less commercial topics during the pandemic (people searched for information on any topics, but less commercial keywords). 
  • Reduced advertiser spending in response to COVID-19 (many large companies reduced their advertising budgets substantially).
  • Continued growth in YouTube engagement ads where cost-per-click remaining lower than on our other advertising platforms. Indeed, as the YouTube advertising formats are still relatively young compared to Google’s search ads formats, they are also – so far – less competitive, therefore still have a lower cost, compared to traditional search. 

Google’s isn’t just, what we can call, a last-mile advertising machine, but also a digital branding machine. When users see brands’ names on the search results pages, those count as impressions. 

Overall, by June 2020, impressions count increased by 14% compared to 2019, yet the cost-per-impression decreased, thus resulting in a negative change. 

What caused it? 

While increased impressions had a positive effect on revenues, the reduced budget of advertisers (especially on branding activities) reduced the overall revenues for the company.

Inside Google’s cloud business

Google Cloud revenues are made of offerings from: 

  • Google Cloud Platform (“GCP”) which includes infrastructure, data and analytics, and other services; 
  • G Suite productivity tools; 
  • Other enterprise cloud services. 

Google’s Cloud revenues increased by $1.8 in the six months ended June 30, 2020, compared to the same period in 2019. GCP and G Suite offerings drove this growth. Within GCP, infrastructure, data and analytics platform products were the largest contributors. 

Inside Google’s other revenue streams

Google other revenues are made of: 

  • Google Play, which includes revenues from sales of apps and in-app purchases and digital content sold in the Google Play store; 
  • Hardware, including Google Nest home products, Pixelbooks, Pixel phones and other devices; 
  • YouTube non-advertising, including YouTube Premium and YouTube TV subscriptions and other services; 
  • And other products and services. 

Google other revenues by $1.85 billion by June 2020, compared to 2019. 

What drove Google’s other revenue growth

The growth was primarily driven by Google Play (driven by sales of apps and in-app purchases) and YouTube subscriptions (driven by an increase in paid subscribers).

At the same time Google recorde a decrease in hardware revenues (Pixel Phones, Google Home and the rest). 

Other bets

Other Bets revenues consist primarily of revenues from the sale of Access internet services and Verily licensing and R&D services.

Google’s other bets are not profitable yet. 

Google’s costs of sales (money spent to generate revenues)

For Google’s cost of sales, or the money the company spends to generate revenues in the first place. Those costs of sales are broken down into:

  • TAC: traffic acquisition costs on Google’s properties, and revenue-split with network members. 
  • Other cost of sales (data centers, infrastructural costs and content acquisition costs).

What does influence Google‘s TAC?

A key metric to look at to evaluate the health of Google in the long-term, it’s the TAC, or traffic acquisition costs. 

In short, Google runs several expenses to deliver its search results in the first place, or to enable other partners to deliver advertising on their websites, as part of Google’s networks.

Therefore, we have two main types of TAC.

  • Partnerships, distribution (make Google the default search engine). Partnerships and distribution deals are critical to make the service accessible, and therefore collect the revenues. Perhaps, if you find Google as the default search engine on Safari, or your iPhone, that is not by chance. Behind that there is a multi-billion dollar deal, which is part of Google’s traffic acquisition costs. Those are expenses run by Google on its main properties.
  • Revenue-split with network members represent another important chunk of that. Indeed, Google has to split the revenues coming from the banners shown on network members websites. Therefore, if Google collects $100 on advertising revenues coming from a website part of Google’s network, a good chunk (around 70% of that) goes back to the publishers part of the network. 

What does influence Google’s other cost of revenues? 

  • Data centers and infrastructure expenses are critical to deliver the service in the first place. What non-software companies call CoGS (or cost of sales), Google calls those traffic acquisition costs. Therefore, what it takes for Google (in terms of resources) to deliver the core service, and therefore collect the revenues in the first place.
  • Shifting the platform to mobile also influenced the increased traffic acquisition costs, as we’ll see, as Google has to adapt to the global shift in consumers’ behavior.

Reduced traffic acquisition costs for network members, and increased cost of revenues for Google’s platforms

While the TAC remained stable in the first six months of 2020, compared to 2019. Other cost of revenues increased substantially (over $4 billion). Some key aspects determined TAC to remain stable: 

  • TAC rate on Google properties increased due to the ongoing shift to mobile, which carries higher TAC because more mobile searches are channeled through paid access points. 
  • This increase was partially offset by the favorable revenue mix shift from Google Network Members’ properties to Google properties. 

Cost of revenues increased by over  $4 billion for the six months ended June 30, 2020, compared to 2019 was due to an increase in data center and other operations costs and an increase in content acquisition costs primarily for YouTube consistent with the growth in YouTube revenues. This increase was partially offset by a decline in hardware costs.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two 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 in touch with Gennaro here