What Is a Hidden Revenue Business Model? Google's Business Model Explained

A hidden revenue business model is a pattern for revenue generation that keeps users out of the equation, so they don’t pay for the service or product offered. For instance, Google’s users don’t pay for the search engine. Instead, the revenue streams come from advertising money spent by businesses bidding on keywords.

Google’s Win-Win-Win Value Proposition

Let’s see in more detail how Google managed to create a business model which generates more than two hundred billion dollars in revenues.

In fact, to unlock so much financial value, a proper business model has to have an appealing value proposition for several key stakeholders.

As of 2022, over $224 billion, which consisted of about 80% of Google’s revenues, came from advertising networks.

How did Google manage to be so financially successful and sustainable over time? The answer lies in a compelling value proposition for three key players.

Users: I can find an answer to anything

Google is the most powerful search engine in the world. However, it was not the first. In fact, when it appeared on the scene in the late 90s, it was one of the latest search engines.

However, thanks to a powerful algorithm called PageRank, it soon took off. Initially, it was not clear how the search engine was supposed to make money. One thing was clear for its founders though: it was supposed to be free for its users.

In fact, the billions of people that use Google each day are what makes the search engine better and better.

In fact, Google uses that data to tweak its search algorithm to make it able to read, interpret, understand, and process users’ queries.

But if users aren’t paying, who’s paying for it?

Businesses: I get more sales through targeted Ads

Google uses an advertising business model, where companies take part in an ad network called AdWords.

In short, they can bid on keywords (such as “car insurance”) to sell their products and services.

This model works quite well as it allows those businesses to track the results of their ad, offer their ads to interested users (in fact, through tracking, Google can understand what users might want), and pay based on what users click through.

This compelling value proposition made Google’s profits grow quite fast. However, there is another critical piece of the puzzle: publishers.

Publishers: Easily monetize my content

Each day millions of new articles are written on the web.

But why do so many publishers hit the publish button? Of course, it has never been so easy to provide information.

In fact, today, thanks to the internet, anyone can become a publisher.

However, as Google’s powerful algorithm can index the whole visible web, it also becomes harder for publishers to be featured through it.

Thus, it makes sense for small and large publishers to compete and create “content factories.”

In fact, the more content they create, the more chances they get to be featured on Google. But what for?

A significant payoff for publishers to be featured by Google is, of course, visibility.

In fact, many publishers monetize mainly through traffic. Second, and most importantly: money!

Indeed, those same publishers can “rent” part of their web page space to Google to place banners from businesses part of the AdWords network. When users browse the pages with banners or click through them, those publishers can finally monetize their content. (this is called AdSense)

The overall Google’s business model ability to generate value is summarised below.

google-revenue-breakdown — Alphabet generated over $282B from Google search and others, $32.78 billion from the Network members (Adsense and AdMob), $29.2 billion from YouTube Ads, $26.28B from the Cloud, and $29 billion from other sources (Google Play, Hardware devices, and other services).

That is how Google, through its hidden revenue business model was able to become a tech giant.

The business model worked so well that it made Google so big and powerful, and over time, some concerns have grown.

Google’s business model? Not without a flaw

An advertising model based on hidden revenue generation might carry some flaws. In Google’s specific case, below are some of the flaws.

Asymmetry toward users: You give me data, and I make money

That is true that users don’t pay, but in the process, they do offer Google valuable data. Some argue whether that data should be given back to the same users in some ways.

Biased content: Is content that targets keywords really relevant?

Publishers are incentivized to produce content that might not always be the best form of information.

In fact, although Google’s original mission was to organize the world’s information, its business model became so effective to influence it eventually. In fact, today, many publishers follow SEO guidelines to make sure to comply with the way Google’s algorithm works.

We can then argue whether Google’s algorithm gives back the best content or the content that best fits its guidelines.

That is not an easy answer to that, and of course, in most cases, I believe Google does an incredible job.

The web as a giant billboard: Is this indeed the web we want?

When Google finally opted to adopt an advertising business model the web suddenly became a giant billboard.

Many argue whether or not that is the way the internet was supposed to be. It’s interesting to see the point some internet visionaries expressed on Wired when they said: “the internet is broken.“

Privacy concerns: Do you really have to track me?

As users become more and more aware of the data that Google collects from them, it raises questions about whether or not it makes sense for them to keep using it.

In fact, other search engines more focused on privacy are growing their user base. That raises an important question.

Is Google’s business model the only possible for search?

Any company, sooner or later, will be disrupted.

At times the paradox is that innovation comes from going back to the past. In fact, alternatives like DuckDuckGo (a search engine that doesn’t track its users) argue whether a search engine has to track its users.

In fact, search engines like DuckDuckGo get a growing piece of the search pie by focusing on those concerns. Indeed, its founder, Gabriel Weinberg, argues that a search engine can make money without tracking its users.

That means as users become more sophisticated, privacy becomes a new value proposition as powerful as monetization. That, of course, would undermine the basis of a hidden revenue model built on users’ data.

However, the real threat today is coming from new tools like ChatGPT.

how-does-chat-gpt-work — ChatGPT leverages GPT-3.5 as the underlying model, while it uses an additional layer, a model called InstructGPT, which has become a standard within the OpenAI large language models. InstructGPT optimizes conversational abilities and improves on top of the existing GPT models.

With the rise of AI conversational interfaces, led by OpenAI, search is getting disrupted.

how-does-openai-make-money — OpenAI has built the foundational layer of the AI industry. With large generative models like GPT-3 and DALL-E, OpenAI offers API access to businesses that want to develop applications on top of its foundational models while being able to plug these models into their products and customize these models with proprietary data and additional AI features. On the other hand, OpenAI also released ChatGPT, developing around a freemium model. Microsoft also commercializes opener products through its commercial partnership.

And its partnership with Microsoft, things are moving quite fast.

openai-microsoft — OpenAI and Microsoft partnered up from a commercial standpoint. The history of the partnership started in 2016 and consolidated in 2019, with Microsoft investing a billion dollars into the partnership. It’s now taking a leap forward, with Microsoft in talks to put $10 billion into this partnership. Microsoft, through OpenAI, is developing its Azure AI Supercomputer while enhancing its Azure Enterprise Platform and integrating OpenAI’s models into its business and consumer products (GitHub, Office, Bing).

Key takeaways

A hidden revenue generation business model keeps users out of the equation while it lets other parties finance – in part or entirely – the product or service offered.
This kind of model works if the value proposition is appealing to several stakeholders. For instance, Google has created a sustainable business model based on hidden revenue generation by creating a compelling value proposition for businesses and publishers. The former can bid on keywords and generate sales through targeted ads. The latter can effectively monetize their content.
Google’s hidden revenue business model has become so powerful that, of course, it has shown some flaws. The paradox is that what a few years back was an innovative model that is now creating opportunities for competitors to come up with alternative value propositions. Thus, monetization was a strong motivator over privacy just a few years ago. Now, privacy is becoming more and more important. That leaves space for new players!
The strongest disruptive forces for Google come from AI conversational interfaces led by OpenAI.