Equities How Does Google Make Money?

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. Parent company Alphabet (GOOGL) released Q3 2018 earnings on October 25, 2018. The global tech giant reported revenues of $33.7 billion for the quarter, roughly a 21% increase from $27.77 billion in Q3 2017.

On Dec 11th 2018, Google CEO Sundar Pichai testified before the U.S. Congress in a wide-range hearing about data breaches, misinformation campaigns, and concerns about working with China. The hearing was almost certainly a result of Pichai's absence in Congress earlier in the 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 raised were to ask about the controversial algorithms powering Google's search engine. Up to that point, Google had not disclosed how its search engine prioritizes content on the web. In this article, we're going to break down what we do know about Google, including how it nets billions of dollars each year by offering free services.

AdWords and Search Advertising
The bulk of Google’s $110.8 billion revenue in 2017 came from its proprietary advertising service, Google AdWords.

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.

AdSense Network
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. Due to the breadth of companies advertising through the network, entire businesses depend on AdSense as their primary source of income.

A staggering $24.1 billion of Google's $27.77 billion revenue for Q3 2018 was from advertising – roughly a 22% increase from $19.8 billion in Q3 2017.

Other Revenue
The rest of Google’s 2017 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. 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. For its efforts, Google retained ownership of a majority of the 17,000 patents gained through the acquisition.

In Summary
From Q3 2017 to Q3 2018, Google's revenue grew over 21.35%. During that time, advertising from Google websites has comprised a relatively consistent 86.78% of total company revenue. 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.

Eric Rosenberg can be contacted at Eric Rosenberg.com
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