how-does-google-make-money

How Does Google Make Money? It’s Not Just Advertising!

Google primarily makes money via its advertising network that in 2017 generated 86% of its revenues. Then, the other side of the business – almost 13% of its revenues in 2017 – comprised money from the Apps, in-app purchases, and digital content in the Google Play store, Google Cloud offering and Hardware products. The remaining part is attributable to Google “other bets” a set of risky businesses Google is betting on. 

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.

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 other revenues increased $4,197 million from 2016 to 2017. The increase was primarily driven by revenues from Google Cloud offerings, hardware sales, and revenues from Google Play, mainly relating to in-app purchases.

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

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

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

Alphabet “Other Bets”: In Search Of Google’s Hidden Gems

Summary and conclusions

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

The advertising network remains the cash cow of the company, making it 86% of its total revenues. That is a complex machine that 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 share with developers or publishers, usually based on an 85/15 split, where the developer keeps 85% of the revenues, while Google retains the 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.

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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