How Google Makes Money (GOOG)
Originally incorporated in California in 1998 and in Delaware in 2003, Google underwent a reorganization in 2015, becoming part of a holding company, Alphabet, Inc. (GOOG). Although Alphabet is a collection of businesses, Google remains by far the largest of them and includes well-known platforms and apps, like Gmail, Google Maps, Google Play, Google Photos, Google Music, Google Docs, Chrome, Android, Google Drive, Search, and YouTube, the majority of which are seemingly free to the end user. So, how, exactly, does Google make money? Well, to paraphrase famed economist Milton Friedman and others, “There’s no such thing as a free lunch.” When we use Google products, we are paying for them by giving Google our personal data, which Google collects and analyzes in order to provide relevant ads that target specific audiences. (Ever wonder why so many shoe ads appear after you have been shopping for shoes online?) These advertising revenues are Google’s primary source of income, but Google also makes money from app sales, in-app purchases, hardware products (like Pixel 4 phones), and licensing and service fees, which includes fees paid for Google Cloud and product subscriptions.
Google provides both brand and performance advertising vehicles for companies. Brand advertising is used to increase the end-user’s familiarity with the advertiser’s products and/or services. These ads include not only text, but also videos, images, and interactive ads that will display on all types of devices. Some of the YouTube ads that precede the YouTube videos you click on to view are examples of brand advertisements. Performance advertisers can use Google’s tools to design straight-forward, text-based ads that appear when a Google product is being used or when the property of a Google network member is visited. When an end-user clicks on these ads, he or she is redirected to the advertiser’s website. For example, when you use Google to search on a topic, you will notice that the first few results displayed have the word “Ad” below the title on the left. A click on the link sends you to the website of that company. This is also the case when you click on an ad displayed on any other Google product, such as Google Maps or Gmail. Google network members also use Google platforms, such as AdSense, AdMob, and Google Ad Manager, to display ads on their own properties. Depending on the arrangement, Google can earn revenue each time an ad is displayed, viewed, or clicked on.
For the year ended December 31, 2019, Google revenues totaled $160,743 million, an increase of 17.6% from 2018. Of this, $134,811 million, or approximately 84%, were from advertising. This includes revenue generated via ads on Google Search and other Google products as well as revenues for impressions displayed by network members via Google Ad Manager, AdSense, and AdMob. Google charges its advertisers for each end-user click on advertisements that appear when a user conducts a search on Google.com or uses one of Google’s other products. Alphabet reports that the number of paid-clicks rose from 2018 to 2019, due partly to more views of YouTube ads; an increase in searches as a result of more users and usage, particularly via mobile devices; and a growth in the number of ads.
Although ads are clearly the largest source of Google’s revenue, Google also generates revenues from its Cloud services, which includes the Google Cloud Platform (GCP), on which software developers are able to build, test, and install their apps. Google provides infrastructure and data and analytics as well as other services to its GCP users. Another of Google’s Cloud services is G Suite, which offers tools to increase productivity and communication, such as Google Drive, Google Docs, and videoconferencing abilities. Google’s Cloud revenues increased from $5,838 million in 2018 to $8,918 million in 2019, an increase of almost 53%. And its Cloud revenues as a percentage of Google’s total revenues has been increasing steadily. They were 3.7% in 2017, 4.3% in 2018, and 5.5% in 2019.
Google’s revenues from other sources have also been increasing steadily as a percentage of the segment’s total revenues. These include revenues from sales of Google Play apps and in-app purchases as well as digital content that users purchase in the Google Play store; hardware sales, including Pixel phones, Pixelbooks, and similar devices; and non-advertising YouTube revenues, such as YouTube TV subscriptions. In 2017, these revenues accounted for only 9.9% of total revenue; in 2018, they were 10.3% of total revenue; and in 2019, they were 10.6% of total revenue. Moreover, they grew from $14,063 million in 2018 to $17,014 million in 2019—a growth rate of approximately 21%. Alphabet attributes this growth primarily to Google Play and YouTube subscriptions.
Although advertising remains the principal source of Google’s revenues at this point and will likely remain so in the foreseeable future, it is interesting to note that while revenues from both Google’s Cloud products and services and its revenues from other sources, such as Google Play and YouTube subscriptions, have been increasing as a percentage of Google’s total revenues, advertising revenues have actually decreased when viewed as a percentage of total revenues. In 2017, they represented 86.5% of total revenues; in 2018, they fell to 85.4% of total revenues; and in 2019, they were only 83.9% of total revenues. And according to a statement in its 2019 annual report, Alphabet is making long-term investments to promote future growth in these non-advertising areas of Google’s business.