How Does Google (Alphabet) Make Money? Business Model Explained!

Google, entirely Google LLC formerly Google Inc. (1998-2017), American search engine company founded in 1998 by Sergey Brin and Larry Page and a subsidiary of the holding company Alphabet Inc.

More than 70 percent of the world’s online searches are conducted through Google, placing the company at the center of most Internet users’ experiences. The company’s headquarters are located in Mountain View, California.

Google began as an online search engine, but now offers more than 50 Internet services and products, from e-mail and online document creation to software for cell phones and tablet computers. The acquisition of Motorola Mobility in 2012 has also enabled the company to sell hardware in the form of cell phones.

Google’s broad product portfolio and size make it one of the four most influential companies in the high-tech market, alongside Apple, IBM, and Microsoft. Despite this multitude of products, the original search function remains at the heart of its success. In 2016, Alphabet generated almost all of its revenue from Google advertising based on users’ search queries.

Google’s Financials

During Q4 of its fiscal year, which ended on Dec. 31, 2021, Alphabet earned $20.6 billion in net income. This was a 35.6% increase over Q4 FY 2020. The company reported revenue of $75.3 billion for the quarter, an increase of 32.4% from the prior year.

In the quarter, Alphabet’s advertising business continued to grow strongly. 

Despite supply constraints, the Pixel phones achieved a quarterly sales record. Cloud revenues also continued to grow strongly at Alphabet.

How Does Google Make Money?

Alphabet began dividing its business into three segments in the fourth quarter of FY 2020: Google Cloud, Google Services, and Other Bets. According to the company, each of these segments generates revenue and operating income. 

Furthermore, it includes certain unallocated corporate costs, such as corporate initiatives, finance, and legal costs, and some shared research and development costs. Revenue hedged gains (losses) are also included in corporate costs.

The Google and Other Bets segments were separated by Alphabet prior to Q4 FY 2020.

Below is a breakdown of Google’s income sources:

1. Google Services

Google Services consists of a number of products and services, such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. Advertisement revenue represents the majority of the revenue generated by the segment. In addition, YouTube receives revenue from the sale of apps, in-app purchases, digital content products, hardware, and subscription fees from YouTube Premium and YouTube TV.

Google Ads

Google Ads generates 80% of Google’s current revenue. These activities are expected to generate more than $147 billion in revenues in 2020. YouTube videos and Google searches are the most common places to find ads. Clicking on an ad may generate anywhere from a few cents to over $50. 

By tying ads directly to searches, Google is able to target relevant content directly to users and gets billions of clicks in the process.

YouTube

YouTube’s main source of revenue is advertising, which helps businesses find relevant audiences and grow their brands. Creators who participate in the YouTube Partner Program (YPP) can benefit from advertising revenue.

YouTube Premium subscription business also generates revenue for YouTube. The revenue from YouTube Premium membership fees is currently distributed to Creators based on how much of their content is watched by members.

Gmail

Gmail is another important Google service. Gmail generates revenue primarily through personalized advertising for companies through advertising agencies and by sharing its users’ data to deliver relevant ads according to their searches and likes.

The majority of Gmail’s revenue comes from advertising. In addition, Gmail makes money through the GSuite subscription service. Custom domain emails are used by businesses, professional bodies, and institutions.

The business world per se tends to use Gmail as their revenue source, where they pitch their products or brands to audiences. As a result, Gmail earns every penny from personalized ads that focus on users’ interests and track their web activity; therefore, Gmail displays pertinent advertisements according to users’ needs.

Gmail also makes 120 million dollars per day from these three activities.

  • Displaying personalized ads
  • Share data to deliver relevant ads
  • Drive businesses to subscribe to GSuite for custom domain

Google Playstore

Apps, as well as games, are available on the Google Playstore, which distributes apps and services. The Google Play Pass costs $4.99 per month or $29.99 per year. On the store, apps range in price from free to $14.99 per month.

Get access to select games and apps without ads or in-app purchases when you purchase the pass. This does not unlock the entire Play Store. There is a $25 fee for developers before they can upload their first app.

Android operating system

Since 2008, Google’s Android operating system has generated $31 billion in revenue and $22 billion in profit. A lawyer for Oracle Corp revealed this in court in a case the company is battling with Google.

Two ways Google makes money from Android: The first is through advertisements displayed on Android devices. The second way comes from Google Play, the company’s app store.

In total, about 92% of revenue in Q4 FY 2021 came from Google Services, which generated $69.4 billion. Approximately 88% of the segment’s revenue came from advertising, at $61.2 billion. Revenue for the segment grew 31.3% compared to Q4 FY 2020. The operating income for Google Services grew 36.3% from a year ago to $26.0 billion.

Due to operating losses in the other two segments and unallocated corporate costs, this figure exceeded Alphabet’s total consolidated operating income of $21.9 billion. Alphabet’s only segment currently contributing positively to its operating income is Google Services.

2. Google Cloud

Google Cloud provides infrastructure and data analytics platforms, collaboration tools, and other enterprise-oriented services for Google’s enterprise customers. Almost all of the segment’s revenue comes from Google Cloud Platform services and Google Workspace (formerly known as G Suite) collaboration tools.

The Google Cloud generated about 7% of total revenue during Q4 FY 2021 with a revenue of $5.5 billion. This was an increase of 44.6% over Q4 FY 2020. In the quarter under review, the segment posted an operating loss of $890 million. In the year-ago quarter, the company posted an operating loss of $1.2 billion.

3. Other Bets

There are a number of different operations in the Other Bets segment that are not individually material. Alphabet has a number of Other Bets, including Waymo, an autonomous driving firm. The segment’s revenue is primarily derived from internet services, licensing, and R&D services.

Final Words

With a stronghold in search management, Google has expanded into entertainment, business, hardware, and other fields. Those considering investing in Google should review their latest income statement, balance sheet, and cash flow statement, as well as assess their future potential in relation to investment objectives and horizons.

In recent years, Google has released a number of hardware solutions, including the Google Pixel smartphones, tablets, laptops, and earbuds; Google Nest smart home products; and Chromecast digital media players. In addition to Fitbits, it also sells game controllers.

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