Every day, there are more than 8.5 billion Google searches. It’s as if every person on Earth, searches for something or the other on Google at least once a day. This is not a small feat. But more amazing than this is that doing this is completely free. And not only just search, its almost every product is completely free to use. Watching videos on YouTube is free. Using Gmail is free. Google Maps is free to use. Despite providing all of this for free, its market cap is more than $2 Trillion.
Interestingly, its doesn’t charge us any money, but has still managed to become such a big company. Let’s understand the business model of the most famous company on the internet in this article. You must have heard a lot about how we refer to photocopy machines as Xerox machines, refer to white glue as Favicol and refer to adhesive bandage as Bandaid. Whenever a company dominates in its field like this, its name is associated with what it does. Similarly, an internet search is known as “Googling” something.
FOUNDATION OF GOOGLE
Google doesn’t charge us any money, but has still managed to become such a big company. Let’s understand the business model of the most famous company on the internet
The Google search started in 1998 as a college project. Larry Page and Sergey Brin created it with a mission to organize all the information in the world and to make it accessible and useful. Basically their mission was to organize world’s information and make it universally accessible and useful.
During its initial days, Google was a simple search engine. A simple website to search for things on the internet. The word “Google” is inspired from the world Googol. Googol is the name of a number. The number 1 followed by 100 zeroes. If there are 3 zeros after 1, it is called a Thousand. If there are 4 zeros after 1, it is Ten Thousand. Similarly, if there are 100 zeros after 1, that number is called Googol.
It was chosen as a name to refer to this number to show that their search engine will look up so much information on the internet that it will be in Googols. If you used internet during its early days, you’d remember that Google searches in those days, showed numerous result pages. And Google used to number and list these result pages endlessly. And the name Google came with extra O’s.
SUCCESS
In 2000, Google took its first big step. They introduced the system of AdWords. Today, it is known as Google Ads. Through this, the businesses could pay to display their ads on its search results pages. Later it became Google’s biggest business model. But over the years, it started offering many more products and services. In 2004, Gmail was introduced. Google Maps was introduced in 2005, which changed the world and Google acquired YouTube in 2006, the very platform you are watching this video on.
Many people don’t know that in the beginning, YouTube was a separate company. It was only in 2006 that Google bought YouTube. After that, in 2008, Google introduced Android. The same mobile operating system that is in most people’s phones. The same year, Google launched its own web browser. Google Chrome. Which is the most popular web browser in the world today. Later, Google started making its own hardware products. Their Pixel smartphones, Chromebook laptops, and smart home devices. Today, Google is expanding in the Artificial Intelligence field as well.
FAILURES
And after hearing all this you will feel that Google has been producing one powerful product after another. And everything turned out to be successful. But this is not true. There are many things that Google tried but eventually failed. Like Google Plus. Google tried to make its own social media platform to compete with Facebook. But it failed. Google Hangouts, an app for chatting, which was popular at one time, but was shut down in 2022. Nexus tablets, which were also famous at one time, they were competing with the iPad, but after a while, Google shut them down too.
Google Podcasts, Google Glass, Google Wave, Google Reader, the number of examples of failures, in reality, are far more in comparison to the successes. If you go to Wikipedia and look at the entire list, there are more than 200 such products and services by Google that have failed.
And here we have an important lesson. “Failure is the mother of all successes.” If you really want to achieve success, you will have to fail many times. Keeping in mind these successes and failures, let’s talk about the present day, and see which is the most profitable stream for Google. With its oldest business model, Google Search Ads.
GOOGLE REVENUE
Lets talk about total revenue of Google in year 2022 which was $282 billion, out of which 58% of the revenue, i.e. $162 billion came from the ads shown with Google searches. After this, the second biggest source of income was Google Network ads. Google earns $33 billion from the ads that you get on different websites that partner with Google. Third was $29 billion which came from Ads that you see while watching YouTube videos. The money that advertisers pay to show these ads is split between Google and the creators. 45% of the revenue goes to Google and 55% goes to creators.
Similarly, there are apps on Google Play Store. When an app creator sells their app through Google Play Store, 70% of the revenue goes to the creator and 30% goes to Google. So, the revenue from the sales of these apps and the other revenue by selling phones and laptops, that part of Google’s revenue is fourth on the list with $29 billion, at around 10.4%. And the last major revenue source is Google Cloud with $26 billion.
GOOGLE EXPENSES
Now, it is also interesting to see where does Google spend this money? Around $40 billion were spent on Research and Development. For their ongoing research to create more new products and services. About $44 billion were spent on non-production costs like renting offices, spending on advertising, marketing, and accounting, and paying salaries to the employees.
Their total expenses were around $207 billion, income before taxes was $71 billion in 2022. They paid $11 billion in taxes and their profit was approximately $60 billion.
PROFIT BY PROVIDING THINGS FOR FREE?
The most interesting thing in this business model is providing things for “free.” There are two reasons behind this. First, these “free” things are not completely free. The base level products are free, but if you want premium service, you have to pay. This is a common business strategy which is called the Freemium model.
Free plus premium. And many companies use this. Spotify, LinkedIn, Zoom, and now even Twitter uses it. In simple words, the basic services will be given to you for free, but if you want the Premium service, you will have to pay for it.
Like, Gmail is free to use, but its storage limit is 15 GB. If you want more storage, you will have to pay. Google Drive is free to use, but its storage limit is 15 GB too. If you want more than that, you need to pay. Watching videos on YouTube is free. But you will get ads in between.
If you want to remove ads, you will have to pay money. You will have to subscribe to YouTube Premium. This Freemium model is very successful because it gives you an opportunity to ‘Try Before You Buy.’ You can try a product and only if you like it, should you pay for it.
But in Google’s case, the interesting thing is that most people do not use their paid services. 95% of people who watch videos on YouTube have not subscribed to their Premium version. 95% of people who use Gmail or Google Drive do not pay for it. But still, Google earns its majority revenue from its free services.
Here comes our second reason, Data Collection. The more free services we use, the more can Google access our data. Everything we search on Google, every video we watch on YouTube, every email we send, all of this data is anonymously collected and used for targeted advertising.
You must have noticed this too. If you search for a healthy recipe on YouTube, later when you are on Google and its partner websites, you will see ads for healthy tiffin services or nutritionists. If you search for hotels in Dubai on Google, you will see ads for Dubai tourism, and different tourist attractions in Dubai.
What is your age group? Are you a man or a woman? Which country do you live in? Which city do you live in? What do you search about? What do you like? Based on these data, Google creates a profile for you.
And from a different perspective, an advertiser can choose these as parameters. If you have a small business selling clothes or glasses. And you want your ad to be seen by 18-25 year old girls, who live in a specific region.
You can choose these parameters. And then you can choose some keywords, like sunglasses or sarees. And Google’s task here is to match an advertiser with a user. If your age group, region, and gender matches to the parameters and you search for a word related to ‘sunglasses’ on Google or you watch a video related to it on YouTube, like a review of some sunglass, Google will know that you are the target customer for this ad and Google will show you this ad.
This is a simplified explanation, but broadly speaking, this is how Google Ads work. If we go into a bit more complexity, there is a lot of competition between advertisers as well.
So, there’s a bidding to show Ads. Advertisers can decide how much money they are ready to pay to show their ad. If another company is willing to pay more, then their ad will be shown first. It calculates the Ad Rank to decide this. It decides the rank for each ad. For this, apart from the money the quality of the ad is also considered. On the other hand, the user Google checks how well the user matches to each specific ad. Based on whatever they have searched for, how relevant will an advertiser be for that particular user.
ADVERTISMENTS
There are different types of ads, like Search Ads, when you type something on Google, the ads on top of the search results are called Search Ads. Then there are Banner Ads. When you go to different websites, like a news website, the ads that you see on the banners on the website are part of the Google Display Network.
And then there are Video Ads shown on YouTube, which are played in the middle, before or at the end of the video. This is further bifurcated into the category Skippable and Non-Skippable. If we see the combined revenue from all these different types of ads, it’s total revenue from ads is $237 billion. And in 2022, their total revenue was $282 billion. So, out of the $282 billion, Google earns $237 billion just from these ads.
This revenue has been increasing for the past 20 years. And in 2020-21, you will see a huge jump. This was due to COVID. Most people were spending time at home on the internet. More and more ads were being watched. Advertisers were willing to spend more money on ads. So Google’s revenue jumped so high during that time.But Google is not the only company which relies on targeted advertising for its business. Meta’s Facebook and Instagram do the same.
In 2023, Meta’s annual advertising revenue was $131 billion. Amazon also makes money by showing ads like this. You might be thinking, why would Amazon need to show ads when it is already making money by selling products on its website? Actually, while selling the products, the purchase history data of each user that is generated, is more important than the data collected by Google. Because it knows only about where your interest lies.
When you watch a video on YouTube or search for something on Google search, those are you interests. But Amazon knows which products you have purchased. You can be more accurately targeted by these product sales. If they know what the things you like to buy are, then you be shown the ads of other similar things. That’s why Amazon generated $46.9 billion in revenue from advertising alone.
CHALLENGES FACE
In the last 20 years, targeted marketing model has helped these companies dominate the internet. But now, cracks seem to have appeared in this model.
There are two major reasons for this. First, the privacy concerns. People are worried about the extent of things Google knows about you. What you eat, where you live, where you work. Even the diseases you suffer from. Because people often search for such things on Google. What are your relationships? What are the problems you face in your life? “So it does have more information than Facebook does and it helps make the product better.”
Look at this news from 2023. Google paid a fine of $93 million to the state of California, USA. Because Google was tracking users’ location even though users had turned off their location history. As awareness about privacy is increasing among people, people are sharing less information on the internet. And if these websites do not get more and more information their ad targeting will get worse. And if ad targeting gets bad, advertisers won’t want to spend more money which will adversely affect their revenue.
But the second problem is even bigger. You must have heard the famous saying “Don’t put all your eggs in one basket.” because if that basket falls, all the eggs will break. This advertising model will completely fall apart if someday people stop using its search for some reason. Already, with time, its search’s reliability has been on the decline. Earlier, you saw only one ad on the top. But now, if you search for something, the first few top results will be ads.
If you are hit by so many ads when you look up something, then the usefulness of those search results starts to decrease. And now imagine that if a competitor comes up, which shows you exactly what you want to search for, without any ads. A platform like ChatGPT. When you ask ChatGPT any question, you get a direct answer neatly formatted into paragraphs without any ads.
But if you look up the same question on it’s search, you will get a lot of results, which will be full of ads and you won’t know the reliability of different search results, which is reliable, which is a trustable source, which website should you click on, and which website should you not. In my opinion, these AI-powered chatbots like ChatGPT will be the biggest threat to Google’s advertising business model in the coming years.
USE OF AI BY GOOGLE
Google Gemini is Google’s innovative AI model designed to contest directly with OpenAI’s ChatGPT. Stood as a dominant rival, Gemini integrates deep reasoning, coding, and multimodal capabilities across Google’s ecosystem, including Search, Gmail, and Android. With versions like Gemini 1.5 offering long-context understanding and enhanced performance, it aims to match or surpass ChatGPT in natural language processing and user interaction, leveraging Google’s vast data and infrastructure to stay competitive in the rapidly evolving AI landscape.
