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.
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.
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.
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 (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2023, Alphabet generated over $175B from Google search, $31.51B billion from the Network members (Adsense and AdMob), $31.31B billion from YouTube Ads, $33B from Google Cloud, and $34.69B billion from other sources (Google Play, Hardware devices, and other services). And $1.53B from its other bets.
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.
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.
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 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.
Key Highlights
Hidden Revenue Model:
The business model does not rely on direct payment from users for products or services.
Instead, revenue is generated from other sources, such as advertisers or business partners.
Google’s Value Proposition:
Google provides a powerful search engine that is free for users to access.
The majority of Google’s revenue (over $224 billion as of 2022) comes from its advertising networks, known as AdWords.
Advertisers bid on keywords to display targeted ads, leading to increased sales for businesses.
Flaws and Concerns:
Users provide valuable data to Google without direct compensation, leading to an asymmetry in value exchange.
Publishers may prioritize content creation to cater to ad targeting rather than providing the most relevant and high-quality information.
The prevalence of ads has transformed the web into a vast advertising platform, raising questions about the original intent of the internet.
Challenges from AI Conversational Interfaces:
The emergence of AI conversational interfaces, exemplified by ChatGPT, is disrupting traditional search methods.
Privacy-focused search engines like DuckDuckGo are gaining popularity as users become more conscious of data tracking.
The demand for alternative search models based on privacy and user empowerment is creating opportunities for competitors to innovate.
Element
Description
Value Proposition
Hidden Revenue Business Models, such as Google’s, offer the following value propositions for their users: – Free Access: Providing valuable services or products for free, attracting a large user base. – Quality and Convenience: Offering high-quality products or services that meet users’ needs. – Innovation: Continuously introducing new features and improvements. – Monetization Flexibility: Providing users with the option to pay for enhanced features or an ad-free experience. – Data Privacy: Ensuring data privacy and security to build trust. – Global Reach: Offering services on a global scale.
Core Products/Services
Core products and services provided by Hidden Revenue Business Models include: – Free Basic Services: Offering essential services or products to users at no cost. – Advertising: Generating revenue through targeted advertising based on user data. – Freemium Tiers: Offering premium or enhanced features for a subscription fee. – Data Collection: Collecting user data to improve services and target ads effectively. – Analytics and Insights: Providing data analytics and insights to businesses as a paid service. – Ecosystem Expansion: Expanding the product or service ecosystem to retain and engage users.
Customer Segments
Hidden Revenue Business Models target various customer segments: – Casual Users: Individuals who use the free basic services casually. – Businesses: Companies looking to advertise and access data insights. – Premium Users: Customers willing to pay for enhanced features or an ad-free experience. – Data Partners: Organizations interested in purchasing user data for analysis. – Developers: Third-party developers and app creators using the platform’s tools. – Global Audience: Users from diverse geographic locations.
Revenue Streams
Hidden Revenue Business Models generate revenue through several revenue streams: – Advertising: Earnings from displaying targeted ads to users. – Freemium Subscriptions: Revenue from users who subscribe to premium features or ad-free experiences. – Data Monetization: Selling user data to businesses for marketing and analysis. – API Access Fees: Charging developers or businesses for access to the platform’s APIs and tools. – Paid Analytics Services: Offering data analytics and insights as a paid service. – Partnerships: Collaborating with businesses for joint ventures and revenue-sharing opportunities.
Distribution Strategy
The distribution strategy for Hidden Revenue Business Models includes global reach and user engagement: – Global Availability: Offering services or products worldwide to reach a broad audience. – User Engagement: Encouraging user engagement and retention through regular updates and improvements. – App Stores: Distributing mobile apps through app stores for easy access. – Online Advertising: Leveraging online advertising to attract and retain users. – Data Analytics Tools: Providing businesses with tools for data analysis and insights. – Developer Ecosystem: Supporting third-party developers to create apps and services within the ecosystem. – Security Measures: Ensuring robust data privacy and security measures to build trust with users.
Google is primarily owned by its founders, Larry Page and Sergey Brin, who have more than 51% voting power. Other individual shareholders comprise John Doerr (1.5%), a venture capitalist and early investor in Google, and CEO, Sundar Pichai. Former Google CEO Eric Schmidt has 4.2% voting power. The most prominent institutional shareholders are mutual funds BlackRock and The Vanguard Group, with 2.7% and 3.1%, respectively.
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2023, Alphabet generated over $175B from Google search, $31.51B billion from the Network members (Adsense and AdMob), $31.31B billion from YouTube Ads, $33B from Google Cloud, and $34.69B billion from other sources (Google Play, Hardware devices, and other services). And $1.53B from its other bets.
Google is an attention merchant that – in 2022 – generated over $224 billion (almost 80% of revenues) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $29 billion segment), and Google Cloud ($26.2 billion).
Of Google’s (Alphabet) over $307.39 billion in revenue for 2023, Google also generated for the first time, well over 1.5 billion dollars in revenue from its bets, which Google considers potential moonshots (companies that might open up new industries). Google’s bets also generated a loss for the company of over $4 billion in the same year. In short, Google is using the money generated by search and betting it on other innovative industries, which are ramping up in 2023.
In 2023, Alphabet’s (Google) Cloud Business generated over $33 billion within Alphabet’s Google overall business model, and it was also profitable, with over $1.7 billion in profits. Google Cloud is instrumental to Google’s AI strategy.
Google is an attention merchant that – in 2023 – generated $237.85 billion (over 77% of its total revenues) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $31.5 billion segment), and Google Cloud (over $33 billion).
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 2023 Google spent 21.39% ($50.9 billion) of its total advertising revenues ($237.8 billion) to guarantee its traffic on several desktop and mobile devices across the web.
YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, and it reported more than $31B in revenues by 2023. YouTube also makes money with its paid memberships and premium content.
In 2023, Google’s search advertising machine, generated over 175 billion dollars. Whereas Microsoft’s Bing generated 12.2 billion dollars. Thus, as of 2023, Google’s search advertising machine is over 14x larger than Microsoft’s search advertising machine.
Google makes most of its money from advertising. Indeed total advertising revenue represented nearly 78% of Google’s (Alphabet) overall revenues for 2023. Google Search represented nearly 57% of Google’s total revenues. Google generated $307.39B in revenues in 2022, and $73.79B billion in net profits.
In 2023, Google generated $307.39 billion, comprising $175B in Google Search, $31.51B in YouTube ads, and $31.31B in Google network revenue. $34.69B in other revenue, $33B in Google cloud, $1.53B in other bets.
In 2023, Google generated 237.85B in revenue in advertising, which represented over 77% of its total revenues of $ 307.39 B. In 2022, Google generated $224.47B in revenues from advertising, which represented almost 80% of the total revenues, compared to $282.83B in total revenues. Therefore, most of the revenues from Alphabet, the mother company of Google, come from advertising.
At the end of December 2022, Google had over 190,000 employees. On January 20, Google announced the layoff of 12,000 employees within the company, thus bringing the number of total employees by December 2023 to 182,502 full-time employees.
Google generated $1,684,332 per employee in 2023, compared to $1,486,779 per employee in 2022. As of January 2023, as the company announced a mass layoff, it brought back its revenue per employee at $1,586,880, still behind the peak in 2021, for $1,840,330.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
In an asymmetric businessmodel, 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.
In an asymmetric businessmodel, 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.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
