Google 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 its money?
Parent company Alphabet (GOOGL) released Q4 2019 earnings with $46.075 billion in revenue, according to its website, which stated, "These numbers range from October to December, and includes the busy holiday shopping season for Made by Google’s hardware efforts."
Google Ads and Search Advertising
The bulk of Google's 162 billion dollar revenue in 2019 came from its proprietary advertising service, Google Ads.
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 a Google Ads advertiser.
- Google’s AdSense program allows websites not affiliated with Google to use Google display advertising on their sites.
- A large portion of Google's revenue comes from advertising.
- Google also makes money on its cloud-related businesses such as the Google Cloud 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.
Google's ads 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 advertising platform.
In addition to featuring search advertising on its sites, Google’s AdSense program enables non-Google websites to incorporate Google display advertising on their pages. AdSense ads work similarly to Google’s 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. Due to the breadth of companies advertising through the network, entire businesses depend on AdSense as their primary source of income.
The rest of Google’s 2019 revenue came from an assortment of non-advertising related projects. These initiatives 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.
Past offline projects include Google’s famous self-driving cars, Google Glass, and an investment in a solar power plant in the Mojave Desert. Analysts have criticized Google’s investment in these projects, 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 does not 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 from Google for $2.91 billion just two years after the acquisition, as reported in the media. For its efforts, Google retained ownership of a majority of the 17,000 patents gained through the acquisition.
The Bottom Line
In 2019 Google was up 18% year over year and up 20% on a constant currency basis, according to information released by Ruth Porat, the chief financial officer of Alphabet and Google.
While other business segments 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, the tech giant's presence in the online advertising space does not appear to be changing anytime soon, nor does its strong revenue growth.