Google (GOOG) is well known for its popular search engine, email service, web browser, and various online tools we use daily at work, at home, and on the go. What many don’t think about day-to-day, however, is that all of these services are free. So how does Google make money? (For more, see: Baidu Versus Google: Who Will Win The Global Search War?)
AdWords and Search Advertising
When you use Google to search for anything from financial information to local weather, you’re given a list of search results generated by Google’s algorithm. The algorithm attempts to provide the most relevant results for your query, and, along with these results, you may find related suggested pages from an AdWords advertiser.
AdWords advertisements integration touches almost all of Google’s web properties. Any recommended websites you see when logged into Gmail, YouTube, Google Maps, and other Google sites are generated through the AdWords platform.
To gain the top spot in Google advertisements, advertisers have to outbid each other. Higher bids move up the list while low bids may not even be displayed.
Advertisers pay Google each time a visitor clicks on an advertisement. A click may be worth anywhere from a few cents to over $50 for highly competitive search terms, including insurance, loans and other financial services. (For more, see: Google Ads Vs. Facebook Ads.)
In addition to featuring search advertising on its own sites, Google’s AdSense program enables non-Google websites to incorporate Google display advertising on their pages. AdSense ads work similarly to Google’s own onsite advertising but are displayed on Google approved sites anywhere on the Internet.
When a visitor clicks on a display advertisement on a member website, a portion of the revenue is paid to the site owner while Google keeps part of the fee. According to Google Vice President of Product Management Neal Mohan, there were “well over a million” websites in the Google Display Network as of 2010. Due to the breadth of companies advertising through the network, entire businesses depend on AdSense as their primary source of income.
Revenue from AdSense advertising made up 23 percent – or $15 billion – of Google’s total 2015 ad revenue.
The remaining nearly $8 billion of Google’s 2015 revenue came from an assortment of non-advertising related projects. These initiatives, at times loathed by investors due to their disconnect from Google’s core advertising business, include a diverse set of projects from both online and offline businesses.
Included in the list of “other revenues” is income from related online, media, and cloud computing businesses such as the Play Store, Chromecast, Chromebooks, Android, Google Apps, and the Google Cloud Platform. Offline projects include Google’s famous self-driving cars, Google Glass, and an investment in a solar power plant the Mojave Desert.
Analysts have criticized Google’s investment in these projects, many of which have yet to generate revenue, let alone profit, as mounting expenses from non-core businesses cut into profit margins for the entire company.
Major Misstep: Motorola Mobility
Just because Google’s advertising business is a revenue cash cow doesn’t mean the company is without faults. Google’s largest financial mistake in recent years was the $12.5 billion purchase of Motorola Mobility in 2011.
By January 2011, Google had become the owner of the world’s leading smartphone platform thanks to the success of its Android operating system. Although Google already participated in the mobile market as a software vendor, the company made a $13 billion bet on Motorola Mobility. Google believed it could grow Motorola’s handset business through a natural synergy with the Android software development team.
This deal turned out to be the biggest flop in Google history. It led to a major $9.6 billion write-down when Lenovo bought Motorola Mobility for $2.91 billion from Google two years after the deal’s completion. For its efforts, Google retained ownership of the majority of the 17,000 patents gained through the acquisition.
The Bottom Line
From 2014 to 2015 Google’s annual revenue grew over 13%. During that time, revenue from Google websites has comprised a relatively consistent 67 to 68 percent of total company revenue. With the inclusion of the advertising network, Google earns about 90 percent of its entire income from advertising.
While other businesses contribute billions to Google’s income each year, Google makes most of its money through online advertising. Despite the company's investments in other ventures, that doesn’t appear to be changing any time soon.