how-does-google-make-money

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).

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
The ability of Google business model to monetize its advertising machine, based on the traffic acquisition costs (FourWeekMBA BI Original Analysis) TAC
Advertising Revenues
TAC Rate Traffic Monetization Multiple
2018 $26.7B $116.4B 22.95% 4.4x
2019 $30B $134.8B 22.32% 4.5x
2020 $32.7B $146.9B 22.31% 4.5x
2021 $45.56B $209.5B 21.75% 4.6X
FourWeekMBA Analysis TAC TAC Rate
2018 26,726 22.95%
2019 30,089 22.32%
2020 32,778 22.31%
2021 45,566 21.75%

Why Google is all about advertising!

While Google, now called Alphabet, is a company placing bets in many areas, when it comes to its revenue model, it’s still very skewed toward advertising.

In fact, let me show you two important statistics to understand how advertising is built into Google’s business model, financial model and cost structure.

When you look at the Google’s business model it’s easy to think it’s a software company, and therefore, it has minimum acquisition costs.

In reality, software companies like Google, to have a long-term advantage have to master distribution. Indeed, when we look at Google’s business model, there is a key number to check out, to understand its health: traffic acquisition costs (TAC rate).

The TAC is the amount of money Google spends to keep sending qualified traffic back to its properties. Keeping this number stable, or decreasing over time, is critical.

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.

In addition, another thing we want to check is what I like to call “traffic monetization multiple” which represents how many times over its traffic acquisition costs can Google monetize its properties.

For instance, in 2021, this number was 4.6.

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.

In short, Google managed to monetize its traffic acquisition costs 4.6 times over. The higher the better, of course. But the main point is to understand through these metrics the health of the overall advertising machine.

Google advertising monetization model

Google follows an advertising business model to deliver relevant ads. For relevant ads, Google means those are showing up just at the right time and giving people useful commercial information, regardless of the device they’re using. As of 2017 advertising represented still 86% of the total Google’s revenues.

Also, Google offers advertisers a set of tools that help them better attribute and measure their advertising campaigns across screens.

It does so by running two main kinds of ads:

  • performance advertising
  • brand advertising

Performance advertising

Google creates and delivers relevant ads that users will click on, leading to direct engagement with advertisers. The performance advertisers pay when a user engages in their ads.

AdWords is the primary auction-based advertising program which helps create simple text-based ads that appear on Google properties and the properties of Google Network Members.

Also, Google Network Members use the AdSense program to display relevant ads on their web properties, generating revenues when site visitors view or click on the ads.

Brand advertising

Google helps enhance users’ awareness and affinity with advertisers’ products and services, through videos, text, images, and other interactive ads that run across various devices.

Google focuses on creating what they define “the best advertising experiences” for its users and advertisers in many ways. Google clarifies its efforts as “ranging from filtering out invalid traffic, removing hundreds of millions of bad ads from the systems every year to closely monitoring the sites, apps, and videos where ads appear and blacklisting them when necessary to ensure that ads do not fund bad content.”

This is critical to Google’s success. One of the most compelling reason for Google to take off the search industry was based on its ability to rank organically content that was qualitatively 10x higher compared to its rivals. Also, even though Google AdWords allows advertisers to bid on keywords, it also selected those text-based ads based on the quality, as those text-based ads with more clicks got the highest spot on the search results pages.

How does Google measure its advertising network performance?

When assessing the advertising revenues performance, there are two critical metrics Google looks at:

  • the percentage change in the number of paid clicks
  • and cost-per-click for Google properties (AdWords) and Google Network Members’ properties (AdSense)

Paid clicks represent the main business of Google that is bringing to the company over $95 billion (in 2017). One of the innovation Google brought, beyond its ability to serve more relevant results, it was an action-based bidding model (Google actually copied it from Overture) mixed with a relevance algorithm that ranked advertising based on what generated more clicks. Thus it was more relevant.

Paid clicks can be broken down into three main categories:

  • paid clicks on Google.com
  • paid clicks on other Google’s properties
  • paid clicks on Google members network

Paid clicks on Google properties represent engagement by users and include clicks on advertisements by end-users related to searches on Google.com

cost-per-click-google

Paid clicks also relate to advertisements on other owned and operated properties, some examples:

google-adsense-network

The former category of paid clicks is the so-called “Google Network Members’ properties.” In short, that includes clicks by end-users related to advertisements served on Google Network Members’ properties. Those are the sites participating in programs like:

  • AdMob
  • AdSense for Content
  • and AdSense for Search

In some cases, such as programmatic and reservation based advertising buying, Google primarily charges advertisers by impression; this represents a small part of Google consolidated revenues base.

Cost per click explained

Cost-per-click is defined as click-driven revenues divided by the total number of paid clicks. Thus, that is the average amount Google charges advertisers for each engagement by users.

What does influence Google advertising revenue growth?

Several revenues might be influencing Google advertising revenue growth. As pointed out on Alphabet annual report for 2017 some of those factors are:

  • advertiser competition for keywords;
  • changes in advertising quality or formats;
  • changes in device mix;
  • changes in foreign currency exchange rates;
  • fees advertisers are willing to pay based on how they manage their advertising costs;
  • general economic conditions;
  • growth rates of revenues from Google properties, including YouTube, compared to growth rates of revenues from Google Network Members’ properties;
  • seasonality;
  • a shift in the proportion of non-click based revenues generated on Google properties and Google Network Members’ properties, including an increase in programmatic and reservation based advertising buying; and
  • traffic growth in emerging markets compared to more mature markets and across various advertising verticals and channels.

Google advertising network in a nutshell

google-advertising-network

Google assesses as main metrics the change in its pay per clicks change and the change in its cost per click (defined as average amount Google charges advertisers for each engagement by users ). 

An increase in paid clicks is a good sign of Google ability to attract advertisers on its platform. However, it needs to be assessed against Google cost per click change. More advertisers might spend less per clicks thus make the average revenues for Google decrease.

As you can see in 2017, the pay per clicks increased compared to 2016. However, it was offset by a decrease in cost per click. Google doesn’t show absolute numbers as this is kept secret.

YouTube Ads

how-does-youtube-make-money
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 generated more than $15B in revenues in 2019. YouTube also makes money with its paid memberships and premium content.

youtube-advertising-machine

Breaking down the other side of the Google business model

Google other revenues consist primarily of revenues from:

  • Apps, in-app purchases, and digital content in the Google Play store;
  • Google Cloud offerings
  • Hardware

Google Play business model

number-google-play-apps

Source: web.archive.org

Google introduced in-app subscriptions to Google Play in May 2012. Previously known as Android Market, Google Play is a digital distribution service operated and developed by Google.

That is the Google official app store for the Android operating system. The set of applications developed on top of the Android software development kit and published via Google. 

On Google Play, developers will make – based on apps purchases – a revenue split of 85/15. In short, the app developer makes 85%, while Google retains the 15%.  The products on the Google Play store have a strong mix comprising:

  • Music
  • Books
  • Movies and TV shows
  • News publications and magazines

google-play-apps

Source: web.archive.org

Google cloud business model

google-cloud-business-model

Google was a company built in the cloud and has been investing in infrastructure, security, data management, analytics, and AI from the very beginning.

We have continued to enhance these strengths with features like data migration, modern development environments, and machine learning tools to provide enterprise-ready cloud services, including Google Cloud Platform and G Suite, to our customers.

Google Cloud Platform enables developers to build, test, and deploy applications on Google’s highly scalable and reliable infrastructure.

Our G Suite productivity tools — which include apps like Gmail, Docs, Drive, Calendar, Hangouts, and more — are designed with real-time collaboration and machine intelligence to help people work smarter.

Because more and more of today’s great digital experiences are being built in the cloud, our Google Cloud products help businesses of all sizes take advantage of the latest technological advances to operate more efficiently

The Google hardware business model

Google offered hardware devices for purchase until the introduction of a separate online hardware retailer, called Google Store, on March 11, 2015.

That comprises Google-branded hardware and accessories:

google-store

Google “Other Bets”: A look into Google’s future

google-business-model
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.

Alphabet’s Other Bets are early-stage businesses, which goal for them is to become “thriving, successful businesses in the medium to long-term.”

google-bets
Under the hood of Google’s 161 billion in revenues (2019), it hides an accounting item called “other bets.” That accounting item might hide the next big thing in technology and business. Yet, as Alphabet shows its “other bets” on its financials, we can try to understand where Google’s hidden gem is and where the future of technology and business might be heading toward.

That is how Google defines them. One of the first steps Google has done is to have a “strong CEO to run each company while rigorously handling capital allocation and working to make sure each business is executing well.”

Those early-stage businesses carry a high risk, yet some of them are already generating revenue. For instance, Nest is already generating revenues. Waymo, a self-driving car company, continues the development and testing of its technology and now has a fleet of vehicles in Phoenix, Arizona, driving without a person behind the wheel.

Verily, a life sciences company received an $800 million investment in 2017 from Temasek to accelerate its strategic programs.

Google’s other bets primarily generate revenues from:

  • internet and TV services
  • licensing and R&D services
  • and Nest branded hardware

Attention merchants business models compared

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.

While Goolge and Facebook business model are both advertising-based.

There are slight differences among the two. Facebook users’ attention is gathered primarily through a news feed. Which is a continous scroll mechanism, where users’ attention is continously grabbed, based on what the network shares, and based on the users’ preferences.

This, therefore, is a form of “push communication.” Instead, Google’s attention machine is based on search intent.

In short, users go to Google search, and directly look for something by typing a keyword, into the search box. This is more like a “pull communication” mechanism. 

This also changes the way Google and Facebook advertising machines work. Where Google’s advertising machines is about bidding on keywords, which are tied to users’ search intents. 

Facebook’s advertising machine is all about targeting users, based on their personal interests. 

This makes both advertising machines very effective, but also very different from each other!

Summary and conclusions

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

The advertising network remains the company’s cash cow, making it 86% of its total revenues.

That complex machine made Google one of the most successful tech companies in the world.

However, Google has been building an ecosystem that allowed it to monetize in many other ways.

Google Play is an app store where users can download anything from apps to music, books, and movies.

The model is based on revenues shared with developers or publishers, usually based on an 85/15 split, where the developer keeps 85% of the revenues, while Google retains 15%.

The third revenue model is comprised of Google’s other bets. A set of eight risky businesses, of which only a few are already generating money.

Key takeaway

Understanding how Google works at several levels, from how it makes money to how its search algorithms work, is critical to understand how the information will move in the next years.

This, in turn, will help your business draw some of the visibility that comes through Google.

Like any company starting up, it is critical to draw the first stage of traction through an established network.

Just like Google used AOL to gain traction in its initial growth stage, it might make sense for your business to gain initial traction through Google via the so-called SEO strategy.

For that matter, I’m listing below some of the other aspects of the Google business model via a few infographics.

Google’s Business Model through the economic slowdown

As the economic slowdown is hitting the business world in 2022, it’s also interesting to witness how Google’s business model evolves.

Let me articulate a few of the key points.

google-q3-2022
Alphabet (Google) Financial Results for Q3 of 2022. From the latest financial release, as we go through an economic slowdown, Google Search is the only advertising segment that keeps growing (even though it does at a slower rate). YouTube ads slew down. And the other strong segment is Google Cloud, pushed by business productivity tools on the cloud.

Reduced advertising budget with a focus on better attribution platforms, yet YouTube’s long-term prospects remain strong

When the economy slows down, companies become way more practical with their marketing spending.

Therefore, they tend to cut marketing budgets that can hardly be attributed to conversions (like TV ads) and keep spending on advertising media, making tracking conversions easier.

That also connects with the YouTube ads slow down. As many YouTube ads are for branding, companies have cut down on that.

Yet, in the long run, YouTube remains the most interesting advertising machine within Google.

With the potential to become larger than search ads in the coming decade.

TikTok effect?

It has become more competitive with new entrants like TikTok in the ad market. And companies now have more choices between platforms they might want to use to build their brand online.

Changes are that even in this scenario of economic slowdown, platforms like TikTok are accelerating.

Increased competition in the ads space: Amazon-Apple duo

Amazon and Apple have ramped up their advertising efforts. Thus, we can expect further erosion of margins and revenues away from the Google-Facebook duopoly that has dominated the web in the last decade.

Companies focus on building up their organic presence

With the increased cost of paid advertising and reduced budgets, companies evaluate a marketing strategy skewed toward building content to enable their brands.

This is called organic because it’s slower and more natural to build. Yet it helps companies build their presence over time.

In the past, startups easily switched on the paid engine, as capital was cheap and returns on paid budgets were extremely high.

Today, with also more options to build an organic presence for B2B (Twitter, LinkedIn), companies engage more in building their organic presence.

Hardware and mobile are charging Google

After years of trying, Google finally ramped up its smartphone operations. And with the release of its latest Pixel portfolio, sales for its Pixel phone are picking up.

This makes complete sense in a context where most of the growth in traffic for Google is happening through mobile.

Yet, mobile traffic is still a bit harder to monetize (it might not be like that in the future), and hardware tightens Google’s margins.

In other words, in terms of margins, Google might look more like Apple in the coming decade as it will move to a hybrid approach to business, with a strong hardware division as the foundation of software.

Business productivity is the real cash cow

Microsoft has lived for decades on top of its Microsoft package tools. Google understood that already many years back.

That is why it has managed to launch and iterate a set of productivity tools on the cloud over the years.

Those productivity tools are now pushing cloud revenues, and making Google into a de facto statanrd for business producityty.

Those business productivity tools will be the foundation for Google’s strong B2B business model.

Related to Google

Google 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, which 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).

Google Revenue Model

hidden-revenue-model-google
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 Other Bets

google-bets
Of Google’s (Alphabet) over $257 billion revenues for 2021, Google also generated $753 million from a group of startup bets, which Google considers potential moonshots (companies that might open up new industries). Those Google’s bets also generated a loss for the company of over $5.2 billion. In short, Google is using the money generated by search and betting it on other innovative industries. 

Google Organizational Structure

google-organizational-structure
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.

How Big is Google

how-big-is-google
Google is an attention merchant that – in 2021 – generated $209 billion (over 81% of revenue) 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). Over $31.5 billion went toward R&D (12.3% of its revenues).

YouTube Business Model

how-does-youtube-make-money
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, generating more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

Google Traffic Acquisition Costs

what-is-google-tac
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, 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.

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