What is Google’s Business Model and How Does Alphabet Make Money?

What comes to mind when you hear the word
Google? Perhaps it’s the number, the search engine, or one of the most powerful companies
in the world. Google’s parent company Alphabet is one of the richest in the world and owns
nearly a third of the 50 most popular websites in the U.S. In this video, we’re going to
break down exactly how Alphabet makes its money and how its business model goes way
beyond just delivering fast search results. Google.com is just one part of a much bigger
company known as Alphabet. Back in 2015, the company created Alphabet to allow for corporate
restructuring that put all of Google’s internet properties in one basket, and the company’s
nascent ventures — including biotech, healthcare, and artificial intelligence — in another
basket. Alphabet’s Other Bets, like its self-driving company Waymo and life sciences arm Verily,
get a lot of headlines, but they don’t really do much for the business. In 2018, Alphabet
brought in almost $137 billion. The company’s Other Bets segment contributed just $600 million
in revenue. All told, the company made over $30 billion in net income in 2018, and Alphabet’s
Google segment did the heavy lifting. But Google is a free search engine, and consumers
don’t have to pay anything to use the company’s Maps or YouTube properties either. So where
does all that money come from? Google has turned the search for information and entertainment
into an ad machine that prints money. Here’s how Google’s advertising system works.
70% of Alphabet’s revenue comes from Google Search and user activity on platforms like Gmail,
Google Maps, Google Play, and YouTube. The vast majority of that money comes from ads.
When you use Google to search for something with wireless headphones, you’re served up
refined web results and advertisements. The same goes for your Gmail inbox. These ads
costs money to tailor and put in front of you, and Google is cashing in on that process
every time it happens on its properties and on some other sites.
Google works hard to make sure ads are as relevant to their users as possible. The company
allows for ad targeting using an auction process based on several variables, like advertising
bids, quality, and relevance. Bidding takes place quickly and often. Many businesses are
surprised to find that they need to increase their advertising budgets just to keep up
with demand. Naturally, this is good for both Google and its paying advertisers. Ads vary
in price depending on a keyword’s popularity. For example, a lot of people search for Google
for professional services like insurance, loans, and attorneys. The demand and the high
dollar value of these searches allows Google to charge more to advertise in these search
results. Google will collect around $54 for an ad with the word “insurance” included in
the search, while the average ad spot comes in at around $1. 
But Alphabet’s business model isn’t all about lightning-quick advertising auctions. Since
the company is built on an arsenal of highly popular software and social sites, including
YouTube, Gmail, and Google Play, the company continues to gain new users and advertisers
every single day. It’s now estimated that Google has about two billion monthly users,
which translates to three and a half billion searches every day. As of 2019, Alphabet has
approximately 90% of search engine market share globally. It might surprise you to learn
that more than 50% of its revenue comes from abroad. Even though international search engines
like China’s Baidu are successful in their own right, most of the world uses Google. Alphabet’s
product popularity almost seems too big to fathom. Google’s Chrome remains the U.S.’s
most popular web browser. Nearly two billion people use Google’s Android mobile operating
system, and one and a half billion people use Gmail, making it the world’s
most popular e-mail service. Alphabet’s family of powerhouse apps have
shaped the way people find information and consume content. The money they generate allows
the company to test new technology that could shape the future. Alphabet is working on everything
from developing miniaturized continuous glucose monitors to self-driving cars. 
So, advertising is the moneymaker for Alphabet, at least for now.
Thanks for watching! If you have a company you’d like to see us break down, mention it
in the comments section below, and be sure to like the video and subscribe to get more
videos like this from The Motley Fool.

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About the Author: Oren Garnes

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