Google (GOOG) ranks number 22 in the world by revenues according to the Fortune 500 and is the largest search engine in the world with a market share of around 71%. After a mere 20 years in existence, what has made Google such a Goliath? The answer lies in its business model. Google offers an array of products and services including search tools, advertising services, communication, publishing, development and security tools, as well as map-related products, statistical and mobile-based software, hardware and cloud-related services. Most of the services that Google offers are free, but that didn't stop the tech giant from reporting $33.74 billion in revenues in Q3 2018. So how does Google actually make money?
At the heart of Google's business model is advertising. Specifically, Google generates revenue from its two complementary advertising programs, AdWords and AdSense, both of which charge advertisers based on the aggregate number of clicks their ads generate. In Q3 2018, roughly $28.95 billion of Google's $33.74 billion in revenue came from these two products.
How Does Google Make Money Using Ads?
AdWords is Google’s auction-based advertising program that inserts simple, text-based ads on the search results pages of Google and its partner’s websites. Using search terms, Google provides users with ads that may be relevant based on their search results.
AdSense is the program that Google offers to partners and other online publishers, who can place Google AdWords ads on their own websites. Google also does brand advertising that promotes advertisers’ products and services through videos, text, images, and interactive ads that run on distinct platforms. This includes TrueView ads displayed on YouTube videos, Google maps, and other Google sites.
In Q3 2018, Google generated approximately 85% of its revenue from advertising, with just over two-thirds of that coming from the ads on Google's own websites. The percentage of Google's revenue that comes from advertising is about flat year-over-year, in part because the fee that Google can charge per click has decreased over time. Price decreases are driven by growing competition in the search engine industry alongside lower prices for mobile and tablet advertisement clicks.
How Much Money Does Google Make from Product Sales?
Google also generates non-advertising revenue through products such as Google Play (an online store for apps, movies and music), Google for Work, Chromecast, and Nexus and Chrome OS devices. In Q3 2018, the company generated 13.75% of its revenues from its product lines, up from 12.93% from the same time last year. Although the margins on these businesses are growing, they are unlikely to ever equal the company's advertising revenues.
Where Does Google Do Business?
With respect to geographical segmentation, Google generated roughly 46% of its revenue in the United States in Q3 2018. International revenues continue to increase year-over-year, even as overseas competition on the smartphone makers grows. Google now competes for users with multinational technology giants Samsung, Apple, and Huawei.
What Are Google's Costs?
The company's cost of revenues includes Traffic Acquisition Costs (TAC), content acquisition costs, expenses associated with the operations of its data centers, and inventory costs for hardware, etc. Google's TAC represented 70% of its total cost of revenues in Q3 2018 and consists almost entirely of advertising revenues that Google shares with network partners and distributors through the AdSense program. Those AdSense partners and online publishers receive 68% of the ad revenue hosted on their content and 51% of the ad revenue for the searches on their sites. That's one reason the profit margins from the AdSense program are lower than those for the AdWords ads on Google's own websites.
Research and development costs include the compensation for the company's massive R&D team of more than 20,000 employees. Paying a staff of that size amounted to $5.23 billion in Q3 2018 and as Google continues to diversify its product line, that expense is only expected to grow.
Google also has a significant sales and marketing team, with a headcount of over 17,000. Sales and marketing accounted for roughly $3.85 billion, or 15.14%, of the company's overall expenses and is expected to rise given growing competition in the search engine business. Administrative expenses increased by nearly a third from Q3 2017 to Q3 2018, with the company spending approximately $2.07 billion.
Why Does Google's Search Engine Matter to U.S. Congress?
On Dec. 11, 2018, Google CEO Sundar Pichai will testify before the U.S. Congress in a wide-range hearing about data breaches, misinformation campaigns, and concerns about working with China. The hearing is almost certainly a result of Pichai's absence in Congress earlier this year when the chief executive declined to testify alongside Twitter's Jack Dorsey and Facebook's Sheryl Sandberg during a Senate Intelligence committee meeting.
Among other concerns, lawmakers are expected to ask about the controversial algorithms powering Google's search engine. Up to this point, Google has not disclosed how its search engine prioritizes content on the web. In this article, we're going to break down how Google's search engine makes money.
The Bottom Line
The products and services offered by Google share one objective — to strengthen the company's core advertising business. Through email, search, and other products, the company works to connect advertisers with consumers, target ads based on user search history, and make money in the process. As internet access extends to developing countries, Google's hold over the search engine industry is only expected to grow.