What Is Google TAC? And Why It Matters To Understand Google Cost Structure

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.

Why TAC Rates matter to understanding Google’s cost structure

Google growth and success are represented by its ability to keep a constant stream of traffic that gets monetized at high margins. Therefore its cost structure – a critical element of any business model – can be understood by looking at this metric. Google has two main channels to acquire traffic.

The cost structure is one of the building blocks of a business model. It represents how companies spend most of their resources to keep generating demand for their products and services. The cost structure together with revenue streams, help assess the operational scalability of an organization.

The Google Properties traffic acquisition based on partnerships and distribution deals (like deals with a browser to have Google as the default search engine) focuses on bringing as much traffic to Google’s properties for monetization.

The Network Members traffic acquisition is based on Google Network Members (part of the AdSense program) to monetize those pages by displaying ads on their properties, generating revenues when site visitors view or click on the ads.

Throughout the years’ Google has been pretty good in keeping its traffic acquisition costs low compared to its ability to monetize the pages where advertising got sold. The TAC Rate represents the percentage of revenue Google has to spend to acquire the necessary traffic to monetize its properties or the sites part of its networks (AdSense in primis).

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 Aggregate TAC Rate in 2021 was 21.7%. While we can look at the aggregate traffic acquisition costs as a percentage of Google revenues, a better way to understand Google’s cost structure is to look at Google Properties TAC Rates and Google Network Members TAC Rates separately.

In addition, Google managed to monetize its traffic many times over.

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.

Google Properties TAC Rates

One of the ingredients of Google success is its massive traffic. Google has gained that also via partnerships and distribution deals (like that with Safari to have Google as a default search engine on mobile devices). That traffic isn’t cheap. Google pays billions for it.

In 2017, Google Properties TAC rate was 11.6%. This means that Google spent over nine billion dollars in deals and partnerships that allowed it a stream of traffic monetized at very high margins and a sustainable business model. As pointed out in “Why Google Success Was The Fruit Of Its Business Distribution Strategy” over the years Google executed an aggressive and successful distribution strategy that enabled it to control the search market. Another aspect of Google’s success was its Members’ Networks.  

Google Network Members

Google, developer of the award-winning Google search engine, today announced a new self-service option for Google AdSense, a program that enables website publishers to serve ads precisely targeted to the specific content of their individual web pages. With Google AdSense, publishers serve text-based Google AdWords ads on their site and Google pays them for clicks on these ads – users benefit from more relevant ads and publishers can maximize the revenue potential of their websites. The self-service option augments the existing content targeting services for publishers announced by Google in March 2003, now making this service available to a broader universe of high-quality websites.

It was June 2003 when Google announced AdSense, a network of sites that could monetize their content with a minimum effort while allowing Google to match a user intent on a page with advertising. As Sergey Brin pointed out back then: Google AdSense improves the overall web user experience by bringing relevant, unobtrusive, text ads to web pages rather than disruptive, unrelated ads such as pop-ups and animations.” He continued .”By providing website publishers with an effective way to monetize content pages on their sites, Google AdSense strengthens the long-term business viability of content creation on the web.” That was another key ingredient for Google sustainable business model

The traffic coming from Google Network Members (sites part of AdSense) cost Google more than twelve and a half-billion dollars in 2017. This represented a TAC Rate of 71.9%. What it means is that for each dollar Google earned in 2017 via Network Members sites the company had to give 71.9 cents back to them.

This cost structure is way more expensive compared to the Google Properties cost structure. Keeping an eye on how Google manages this cost structure is critical to understanding Google business model sustainability in the long run. 

Key takeaway

One key business metric to look at to understand Google business model sustainability is its TAC Rates. Those represent the percentage of revenues Google will need to spend to acquire enough traffic to monetize. Google uses partnerships and distribution agreements to bring traffic to its properties. 

Keeping an eye on Google TAC Rate enables you to understand how its cost structure is evolving and so how its business model is changing.

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