How does Google make money?
2 months ago on July 31, 2023
The Google logo is seen January 8, 2020 at the 2020 Consumer Electronics Show (CES) in Las Vegas, Nevada.
Alphabet's market capitalization of over $1.5 trillion makes it one of the most valuable publicly traded companies in the world, trailing only Apple, Microsoft and Amazon.
Created in 2015, Alphabet is essentially a holding company for Google, which generates nearly all of its revenue and profit. Google has always portrayed itself as a tech company and has invested in many far-reaching areas of technology — such as internet search, mobile phones, artificial intelligence, self-driving cars and health technology. Its conference for software developers, Google I/O, which kicks off Tuesday, typically intersperses deep tech talk with far-reaching visions of the future.
But Google's main business is online advertising. In 2020, Alphabet generated almost $183 billion in revenue. Of that, $147 billion — over 80% — came from Google's ads business, according to the company's 2020 annual report.
Google has been the market leader in online advertising for well over a decade and is expected to command nearly a 29% share of digital ad spending globally in 2021, according to eMarketer. Number-two Facebook is expected to capture less than 24%, while Alibaba is projected to be a distant third, with less than 9%.
Over the years, Google has built and acquired a slew of ad tech tools that enable content publishers to make money through advertising and let ad buyers seek out the kinds of people they would like to get in front of on Google Search, YouTube, Maps and on other websites across the internet. While Search and other properties make up the bulk of Google's ad revenues, its YouTube advertising business, which saw a near 50% year-over-year jump in the first quarter, is increasingly grabbing ad dollars away from traditional linear television.
Here are the major pieces of Google's advertising business and how they make money.
Search and other Google properties
Search is Google's most lucrative unit. In 2020, the company generated $104 billion in "search and other" revenues, making up 71% of Google's ad revenue and 57% of Alphabet's total revenue.
That "search and other" figure includes revenue generated on Google's search properties, along with ads on other Google-owned properties like Gmail, Maps and the Google Play app store.
Advertisers using Google products can bid on search keywords — specific words and phrases that lead their ads to show up to relevant users in search results.
Any advertiser can choose from different bidding strategies. If they want to generate traffic to their site, for instance, they might choose to do "cost-per-click" bidding, where they pay when someone clicks on their ads. They can choose a maximum amount they want to pay for that click, and each time an ad is eligible to appear for a search, an auction will determine whether the ad shows up, and in which position.
"Usually, the more competitive and more expensive an industry is, the more expensive the bid is going to be," said Joe Balestrino, a digital marketing specialist.
"For example, if you're an attorney and you deal with crane accidents ... you're looking at about millions of dollars in lawsuit, you're probably going to pay a couple hundred dollars for that click. [Whereas] if you're running a house-cleaning business, you're probably paying $7 a click because your average sale is maybe 50 bucks. So depending on how competitive the niche and how much money a business owner stands to make, the more costly those keywords are," he said.
Google also lets advertisers target a location, language and audience — like people who are interested in buying finance-related products or services or who are renters vs. homeowners.
The company primarily shows ads on commercial searches, which means about 80% of searches still aren't monetized through ads, according to estimates from Wedbush. As buying increasingly moves online, analysts expect ad budgets to continue shifting from areas like linear television and direct marketing into search.
But Amazon is increasingly competing with Google on search. Although eMarketer expects Google will account for a 56.8% share of all U.S. search ad revenue in 2021, Amazon's 19% share has been steadily growing. That's eroding Google's share of the ad market overall, according to eMarketer forecasts.
"The place where they're losing share is basically all about the search piece, and the reason that they're losing share of search ads is because more search ad spending is going to sites like Amazon, instead of general search sites like Google or Bing," said eMarketer principal analyst Nicole Perrin.
With people increasingly looking to buy online, it's not just to Google's benefit. "It's happening right now. It's been happening through the pandemic, there's been more digital demand for goods and services," she said. "Google has benefited from that, but Amazon has benefited more."
Analysts who are optimistic about Google's search business note that it has evolved throughout the years and will continue to do so, whether it's using voice and image searches or other innovations to get products in front of potentially interested eyeballs.
Meanwhile, products like Maps are becoming more strategic on the ad side. Using Google Maps, advertisers can buy ads for local business listings and "pins." Maps, which only began allowing ads in 2019, has 1 billion monthly active users and it's updated tens of thousands of times in a day.
Google doesn't break out how much its Maps business makes, but it's one of Google's most under-monetized products, Morgan Stanley analyst Brian Nowak told CNBC. He estimated it could be worth $11 billion by the year 2023.
YouTube is the smallest of Google's three main advertising revenue sources, accounting for nearly $20 billion in revenue in 2020 — about 13% of Google's total ad revenues.
However, YouTube is growing more quickly than the company's other major ad sources. The unit brought in $6.01 billion in ad revenue during the first quarter — up from $4 billion from a year earlier, for a growth rate of 49%. In comparison, "search and other" and Google Network revenues each increased 30% from the year-ago quarter in Q1.
If YouTube creators want to make money off their channel and are eligible, they can turn on ads for video and share ad revenue with Google for those ads. (To be eligible to monetize videos, a channel needs 4,000 public watch hours within the past 12 months, 1,000 subscribers, and must adhere to number of policies.) Ads are served through AdSense, Google Ad Manager and other YouTube-sold sources, which includes direct-sold deals. For instance, advertisers can buy on programs like YouTube Select, which allows them to buy on "brand-safe" videos and on certain audiences.
Creators running ads give a portion of their ad revenue to YouTube. But YouTube also can run ads on videos from channels that aren't in its partner program, meaning creators of those videos aren't taking a cut.
Creators can also earn money in other ways — for instance, by setting up memberships to their channels, by selling merchandise or by taking a cut when YouTube Premium members watch their videos.
A marketer wanting to purchase an ad on YouTube has a slew of options, including skippable or nonskippable ads that appear before, after, or in-stream of the video, video discovery ads (which direct users to other YouTube video or channels) and masthead ads.
Over the last several months, YouTube announced experimental features that not only identify products in videos, but also consolidate a list of those items. The recommended algorithms could then show related videos as users scroll through the site. That has gotten the attention of Wall Street analysts who told CNBC they see it as a big potential moneymaker.
"Despite the fact that it's already massive, it still feels like this sleeping giant inside of the Google ecosystem," said Myles Younger, a senior director at the global data practice at MightyHive.
Credit Suisse estimated such product updates will help personalize ads and boost YouTube's monetization, which stands at about $9.80 per user per year. That would help the company better compete against Facebook, which monetizes at about $30 per user per year, the firm estimated.
"I can't overemphasize how much advertisers love video," Perrin said. "Advertisers have just been wanting to turn the internet into TV because they want to run video ads against everything. They think that video is so much more compelling than other formats. ... Advertisers are very happy to have more video inventory available to them, especially if they can buy it programmatically at scale with data."
Google Network and ad tech for publishers
The third main component of Google's advertising revenue is the Google Network, which at $23 billion in 2020 made up about 16% of its total ad revenues.
This bucket includes revenue generated from selling ads outside of Google's own properties. Generally speaking, publishers or app makers can use Google platforms such as AdSense, Google Ad Manager, or AdMob to offer ad slots up for sale to advertisers. Publishers use these tools to manage their campaigns, while turning some inventory over to Google to match with advertisers. The publishers and Google split the revenue in various proportions depending on how much work each party is doing.
(The correlation between these products and Google's revenue reporting is not precise — for instance, AdSense not only serves publishers of third-party sites, but also lets YouTube content creators sell advertising on their videos.)
Here are the main tools that content creators use to participate in Google's technologies.
AdSense counts more than 2 million content publishers as customers. Approved publishers can enter their Google code onto their sites or videos, and advertisers bid to show up in those ad slots in auctions.
If a publisher's content displays an ad through AdSense, that publisher receives 68% of the revenue recognized by Google in connection with that service.
Website makers can also place search ads on their own sites or apps, which lets them earn revenue when their visitors click. Publishers receive 51% of the revenue from AdSense for Search.
Google Ad Manager is an ad management platform for large publishers that have a significant amount of inventory they sell directly to advertisers. The platform supports multiple ad exchanges and networks, including Google's AdSense, Google's Ad Exchange (which lets publishers open up their ad inventory to a bigger pool of demand), and other third-party networks and exchanges. It includes pieces of its $3.1 billion DoubleClick acquisition from 2007, including DoubleClick for Publishers and the DoubleClick Ad Exchange.
AdMob, which Google acquired in 2009, is a platform for mobile app makers to sell ad space within their apps — like small banners that appear at the top or bottom of an app, or a pop-up that might appear between levels of a game. Makers of devices running on Apple's iOS and Android can use AdMob to earn money.
Google says more than a million apps use AdMob, and more than a million advertisers are on it. For the maker of a fitness and wellness iOS app in North America, Google estimates that appmaker could make more than $6,300 a year if it has 50,000 monthly active users.
Other ad tech products
Finally, Google has a slew of other products for all sorts of participants in the online advertising marketplace, including businesses of all types and sizes.
"I'm hard-pressed to think of any other tech stack that is as comprehensive" in terms of what it can do on both the buy side and sell side of advertising, said Younger. "There just isn't any other stack that offers all those pieces in one place."
Those products include:
Google Ads is a platform that helps advertisers run search, display, video, app, shopping and local ads with no minimum spend. The costs of these kinds of campaigns can entirely depend on what the advertiser wants to focus on achieving. Advertisers are charged when users interact with an ad, whether to call a business or to visit the site, and the cost can vary. The platform today is what used to be Google's AdWords business.
Google Marketing Platform has tools for major enterprise advertisers along with analytics tools for smaller businesses. The offering includes DoubleClick advertiser products and Google's Analytics 360 Suite.
Within the Google Marketing Platform sits Display & Video 360 (which contains what once was DoubleClick Bid Manager, Campaign Manager, Studio and Audience Center). DV360 offers a "single tool for planning campaigns, designing and managing creative, organizing and applying audience data, finding and buying inventory, and measuring and optimizing campaigns," according to Google's DV360 site.
"They're trying to give you an easy one-stop shop or place to see and manage it all; they're trying to give you all your data in one place," said Neil Patel, co-founder of Neil Patel Digital.
Read More Press
Get 300 checks per month absolutely FREE!
No credit card needed. No strings attached. 👍