Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. 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).
Alphabet’s Google Revenues (2022) Google Search & other $162.45B Google Network Members $32.78B YouTube ads $29.24B Google Other $29B Google Cloud $26.28B Other Bets $1B
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 send qualified traffic back to its properties. Keeping this number stable, or decreasing over time, is critical.
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 Google can monetize its properties.
For instance, in 2022, this number was 4.6.
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 2022, advertising still represented 80% of 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
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 that 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.
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 reasons 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 selects 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 explained
Paid clicks represent the main business of Google that is bringing the company over $162 billion in 2022!
One of the innovations 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 properties
- paid clicks on Google member’s network
Paid clicks on Google.com
Paid clicks on Google properties represent engagement by users and include clicks on advertisements by end-users related to searches on Google.com
Paid clicks on other Google properties
Paid clicks also relate to advertisements on other owned and operated properties; some examples:
- Google Maps
- Google Play
- YouTube engagement ads
Paid clicks on Google member’s 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:
- 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’s 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’s advertising revenue growth?
As pointed out in Alphabet annual report 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;
- 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 assesses as its main metrics the change in its pay per clicks change and the change in its cost-per-click (defined as the average amount Google charges advertisers for each engagement by users ).
An increase in paid clicks is a good sign of Google’s ability to attract advertisers to its platform. However, it needs to be assessed against Google’s cost-per-click change.
More advertisers might spend less per click, thus making the average revenues for Google decrease.
As you can see, in 2022, the pay-per-click decreased by 1% compared to 2021.
Breaking down the other side of the Google business model
Google’s other revenues consist primarily of revenues from:
- Apps, in-app purchases, and digital content in the Google Play store;
- Google Cloud offerings
Google Play business model
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 was developed on top of the Android software development kit and published via Google.
On Google Play, developers will make – based on app purchases – a revenue split of 85/15. In short, the app developer makes 85%, while Google retains 15%. The products on the Google Play store have a strong mix comprising:
- Movies and TV shows
- News publications and magazines
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 “Other Bets”: A look into Google’s future
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
Attention merchants’ business models compared
While Google and Facebook’s business models are both advertising-based.
There are slight differences between the two. Facebook users’ attention is gathered primarily through a news feed. Which is a continuous scroll mechanism, where users’ attention is continuously 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.
Whereas Google’s advertising machines are 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’s business model can be broken down into three main lines:
- Google advertising network.
- Google other revenues (consisting of Apps, in-app purchases, and digital content in the Google Play store; Google Cloud offerings and Hardware).
- Google other bets.
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.
Understanding how Google works at several levels, from how it makes money to how its search algorithms work, is critical to understanding 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.
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
Let me articulate a few of the key points.
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.
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
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.
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