How Google (Alphabet) Makes Money

Google advertising comprises the majority of total revenue

Alphabet Inc. (GOOGL Class A and GOOG Class C) is a collection of different businesses with Google being the largest. The company offers a variety of software and Internet-related services and solutions, including web browsing and searching, cloud computing, streaming entertainment, mobile operating systems and applications, and more. Alphabet leverages its various platforms and services to generate a substantial portion of its revenue from advertising.

Alphabet competes with companies that provide online platforms for connecting people with information and relevant advertising, digital content and application platforms, enterprise cloud services, and more. Major competitors include Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Apple Inc. (AAPL), Facebook Inc. (FB), Alibaba Group Holding Ltd. (BABA), and others.

Key Takeaways

  • Alphabet leverages its search, web browsing, mobile operating systems, and cloud computing to make money through the sale of advertising and various service fees.
  • Advertising generates the majority of revenue, but Google Cloud revenues are growing.
  • Google is appealing a $5 billion fine imposed by the European Union for antitrust violations regarding the company's Android operating system.
  • The European Commission launched an investigation in June 2021 over allegations that Google has abused its market dominance in the advertising-technology sector.

Alphabet’s Financials

Alphabet earned $18.5 billion in net income during Q2 of its 2021 fiscal year (FY), the three-month period ended June 30, 2021. Net income rose 166.2% compared to Q2 FY 2020. Revenue for the quarter was reported at $61.9 billion, up 61.6% from the year-ago quarter.

Alphabet noted that its business continued to benefit from heightened online consumer activity and broad-based increases in advertiser spending during the first half of 2021. This year's strength combined with last year's depressed financial results due to the impacts of the COVID-19 pandemic created strong year-over-year (YOY) growth trends during the first half of this year. The effect of these positive impacts are expected to dissipate throughout the remainder of the year.

Alphabet’s Business Segments

Starting in Q4 2020, Alphabet began separating its business into three reportable segments: Google Services, Google Cloud, and Other Bets. The company provides a breakdown of revenue and operating income for each of these segments. It also reports certain unallocated corporate costs, including corporate initiatives, finance and legal costs, and costs associated with certain shared research and development activities. Corporate costs also include hedging gains (losses) related to revenue. All of these corporate costs are excluded from the segment breakdowns below as well as in the pie charts above. Prior to Q4 2020, Alphabet separated its business into two reportable segments: Google and Other Bets.

Google Services

The Google Services segment is comprised of a range of products and services, including ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. The segment generates most of its revenue from advertising. Other sources of revenue include sales of apps, in-app purchases, digital content products, hardware, and fees received for subscription-based products such as YouTube Premium and YouTube TV.

Google Services generated $57.1 billion, or about 92% of total revenue, in Q2 FY 2021. Advertising revenue, at $50.4 billion, comprised 88% of the segment's revenue. The segment's revenue is up 63.1% compared to Q2 FY 2020. Google Services posted an operating income of $22.3 billion, up 134.2% from the year-ago quarter.

This figure surpassed Alphabet's total consolidated operating income of $19.4 billion due to operating losses in the other two segments as well as unallocated corporate costs. Google Services is thus the only segment that currently makes positive contributions to Alphabet's overall operating income.

Paid clicks grew 26% in Q2 FY 2021 compared to the year-ago quarter. Cost-per-click rose 31% YOY.

Google Cloud

The Google Cloud segment is comprised of Google's infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. The majority of the segment's revenue is generated from fees received for Google Cloud Platform services and Google Workspace (formerly known as G Suite) collaboration tools.

Google Cloud generated $4.6 billion in revenue during Q2 FY 2021, comprising about 7% of total revenue. It was up 53.9% compared to Q2 FY 2020. The segment is still not profitable, posting an operating loss of $591 million during the quarter. However, that loss was smaller than the $1.4 billion operating loss reported in the year-ago quarter.

Other Bets

The Other Bets segment is comprised of multiple different operating segments that are not individually material. Some of Alphabet's Other Bets include its autonomous driving business Waymo and its cloud-gaming platform Stadia. Most of the segment's revenue is generated through the sale of internet services as well as licensing and R&D services.

Other Bets generated $192 million in revenue in Q2 FY 2021, rising 29.7% from the year-ago quarter. It comprises just a tiny fraction of Alphabet's total revenue. Other Bets posted an operating loss of $1.4 billion, which widened from the $1.1 billion operating loss reported for Q2 FY 2020.

Alphabet’s Recent Developments

On Sept. 27, 2021, Google began an appeal to overturn an antitrust fine of $5 billion imposed by the European Union (EU). EU authorities determined in 2018 that Google had illegally abused the market power of its Android operating system. The company was alleged to have exerted substantial influence over manufacturers and distributors of Android phones into making agreements that were aimed at bolstering Google's dominance in search engine services on mobile devices. Google has been required to comply with the decision while the appeal is underway. It must offer all users of new Android phones an option to choose alternative search engines.

ln June 2021, the European Commission, Europe's top antitrust regulator, launched a formal antitrust probe to investigate allegations that Google abuses its dominance in the advertising-technology sector. The commission has had an ongoing informal investigation into the company's anticompetitive practices since at least 2019. The investigation will examine a number of allegations, including Google's alleged favoring of its own ad-buying tools in its advertising auctions as well as the company's alleged exclusion of rivals from brokering ad purchases on YouTube.

How Alphabet Reports Diversity and Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Alphabet and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Alphabet releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Alphabet discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Alphabet breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.

Google (Alphabet) Diversity and Inclusiveness Reporting
  Race Gender Ability Veteran Status Sexual Orientation
Board of Directors          
C-Suite
 
       
General Management ✔ (U.S. Only)      
Employees ✔ (U.S. Only)

Article Sources

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  2. Alphabet Inc. "Form 10-Q for the quarterly period ended June 30, 2021," Page 6. Accessed Oct. 1, 2021.

  3. Alphabet Inc. "Form 10-Q for the quarterly period ended June 30, 2021," Page 33. Accessed Oct. 1, 2021.

  4. Alphabet Inc. "Form 10-Q for the quarterly period ended June 30, 2021," Page 31. Accessed Oct. 1, 2021.

  5. Alphabet Inc. "Form 10-Q for the quarterly period ended September 30, 2020," Page 32. Accessed Oct. 1, 2021.

  6. Alphabet Inc. "Form 10-Q for the quarterly period ended June 30, 2021," Page 35. Accessed Oct. 1, 2021.

  7. Alphabet Inc. "Form 10-Q for the quarterly period ended June 30, 2021," Page 32. Accessed Oct. 1, 2021.

  8. The Wall Street Journal. "Google Pushes to Overturn EU’s $5 Billion Antitrust Decision on Android." Accessed Oct. 1, 2021.

  9. The Wall Street Journal. "Google Faces EU Antitrust Probe of Alleged Ad-Tech Abuses." Accessed Oct. 1, 2021.