Business Model of Google ( $2 Trillion Dollars )
Hello friends, did you know that more than 8.5 billion Google searches are done every day on Google?
It is like assuming every person living in the world searches something on Google once a day. This in itself is not a small thing, but what is even more amazing is that doing all this is absolutely free. And not just Google search, almost every product of Google is completely free to use. Watching videos on YouTube is free, using Gmail is free, using Google Maps is free. Despite giving all this for free, Google’s market cap is more than $2 trillion.
How do it Possible ?
How can Google give us so many services for free, does not charge any money from us but still became such a rich company? Friends, let’s understand the business model of the most famous company of the Internet.
You must have often heard that just like today we call a photocopy machine a Xerox machine, white glue is called Fevicol, and adhesive bandage is called Band-Aid. Whenever a company dominates its field in this way, its name itself starts getting associated with its work.
In the same way, today searching the internet is called ‘Google it’. Friends, this Google search was started in the year 1998 as a college project. Larry Page and Sergey Brin created it with a mission to organize all the information of the world and make it accessible and useful.
In the initial days, Google was just a simple search engine, which looked something like this.
A very simple website for searching the internet. The word Google in itself has no meaning but it is inspired by the word Googol. Googol is the name of a number, put 100 zeros after one. For example, if there are three zeros after one, we will call it thousand. If there are four zeros after one, then it will be called 10,000, similarly if there are 100 zeros after one, then that number is called Googol. The name of this company Google was chosen to show that our search engine will find and bring so much information on the internet that it will be in Googols. If you are a very old user of the internet, then you will remember that in those days when we used to search Google, then actually a lot of result pages used to come and Google used to show these result pages at the bottom 1 2 3 4 5, endlessly and used to write its name also below it along with so many such numbers.
In the year 2000 Google took its first big step, they introduced the system of AdWords. It is today called Google Ads. With this, businesses could pay to have their ads displayed on Google’s search result pages.
But over the years Google slowly started offering many products and services. In the year 2004, Gmail was introduced for the first time. In 2005 Google Maps was introduced, which changed the map of the world. In 2006 Google acquired YouTube. Many people do not know that in the beginning YouTube used to be a separate company. It was only in 2006 that Google acquired YouTube. After this in 2008 Google introduced Android, the same mobile operating system that is installed in most people’s phones. In the same year, Google also launched its web browser, Google Chrome, which is the most popular web browser in the world today. Later, Google also started making its own hardware products, its Pixel smartphones, its Chromebook laptops, and smart home devices. Today Google is also expanding in the field of Artificial Intelligence and hearing all this, you will feel that Google kept launching one great product after another and everything kept becoming successful. But this thing is not true, all the examples I have told you are all examples of successful products and services. There are many such things that Google tried but Google failed in all of them. For example, Google+, Google tried to create its own social media platform in competition with Facebook but it failed.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.Google Hangouts is a chat app which used to be very popular at one time but it was discontinued in 2022. Google Nexus tablets – these too were once very famous in competition with the iPad, but after some time Google discontinued them as well. Google Podcast, Google Glass, Google Wave, Google Reader – there are actually more examples of failures than successes. If you go to Wikipedia and see the complete list, there are more than 200 such products and services of Google which have failed. And this is a big lesson for all of us.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.“Failure is the mother of all successes.” To achieve true success, you will have to fail many times. Keeping all these successes and failures in mind, let’s know from what Google earns the most money today? From its oldest business model, Google Search Ads. Let’s understand in detail. On the screen you can see Google’s revenue break down for the year 2022, that is, from where Google earned the money in the year 2022. The total revenue is $280 billion, out of which 58% money, that is, $162 billion comes from the ads shown on Google Search. After this, the second biggest source of income is Google Network Ads. The ads you see on different websites that partner with Google, Google earns $32.78 billion from here. At number three is YouTube Ads, $29 billion comes from here, that is, the ads you will see in the middle of this video. Here is a very interesting thing that these ads are also a source of income for YouTubers. The money that advertisers pay to show these ads is split between creators and Google. 45% of the money goes to Google, 55% remains with creators like me. So, the 45% share of YouTube from all creators generates $29 billion in revenue for Google in a year. Similarly, there are apps on Google Play Store. When an app creator sells his app through Google Play Store, 70% of the revenue goes to the app creator and 30% of the revenue has to be given to Google. So, the revenue that Google earns from the sales of these apps and the rest by selling phones and laptops comes fourth, with $29 billion, around 10.4%. And then the last major revenue source is Google Cloud, with $26 billion, around 9.4%.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.Now the interesting thing to see is where Google spends this money? About $40 billion is spent on research and development, so that more new products and services can be researched and new failures can be attempted. About $44 billion is spent on non-production costs such as renting offices, advertising, marketing, spending on accounting, paying salaries to employees. Their total expenditure including all expenses comes to about $207 billion, as you can see on the screen.
This is the balance sheet of their entire company, here you can also see that the income before taxes is $71 billion in 2022. They pay tax of about $11 billion and make a profit of approximately $60 billion. The most interesting thing in this entire business model is this freebie. After all, how is it possible to make profit by giving free things? There are two reasons behind this. Firstly, all these free things are not completely free. Base level products are free but if you want premium services then you have to pay. This is a very common business strategy which is called premium model. Free plus premium, and many companies use it. Spotify, LinkedIn, Zoom and now even Twitter uses it. In simple words, the basic thing will be given to you for free but if you want premium services then you will have to pay for it. For example, using Gmail is free, but its storage limit is 15 GB. If you want more storage than that, you will have to pay. Using Google Drive is free, but its storage limit is also 15 GB. If you want more than that, you will have to pay. Watching videos on YouTube is free, but ads will come in between. If you want to remove ads then you will have to pay money. You will have to buy YouTube Premium. This premium model is a very successful model because it gives a try before buy opportunity, that is, you can try the product and if you like it then only you can pay for it. But, in Google’s case, the interesting thing is that most people still do not use their paid services. 95% of the people who watch YouTube have not purchased premium. 95% of the people who use Gmail or Google Drive do not pay for it. But still, Google earns majority of its revenue from free services only.Here comes our second reason, data collection. The more free services we use, the more data Google has on us. Every single thing we search on Google, every single video we watch on YouTube, every single email we send, all this data is collected anonymously and used for targeted advertising. You must have seen this happening yourself. If you search for a healthy recipe on YouTube, then while browsing websites on Google, you will start getting ads for healthy tiffin services or nutritionists. If you are searching for Dubai hotels on Google, then you will start getting ads for Dubai tourism, different tourist attractions in Dubai. Google uses a very advanced machine learning algorithm to show targeted ads. To better understand how Google does ad targeting, 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 things do you search for? What things do you like? On the basis of all these things, a profile of you is created and from another perspective, an advertiser can choose all these things. You have a small business of selling clothes or glasses, and you want your ad to be shown to girls aged 18 to 25 years who specifically live in the NCR region. So, you can choose these things and then you can choose some keywords like sunglasses or sarees and Google’s job here is to match an advertiser with a user.
If your age group, region and gender match, and you search for a word related to sunglasses on Google or watch a video related to it on YouTube, like you watched a review of a sunglasses, then Google knows that you are the target customer for this ad and Google will show you this ad. This is a very simplified explanation, but this is how Google ads work. If we go a little more complex, there is a lot of competition among advertisers, so bidding is done for ads. Advertisers can decide how much money they are willing to pay to have their ad shown. If on the other hand, some other company is willing to pay more, then their ad will be shown first. Google calculates the ad rank here to decide which ad should be placed at which rank. For this, apart from money, the quality of the ad is also seen, that how well the user on the other side is matching with this specific ad. If he has searched for something, then how relevant is this advertiser for that user. And here there are also different types of ads, like search ads, when you write something on Google, the ads that appear on top in the search results are called search ads. Then there are banner ads, when you visit different websites like a news website, then the ads that you see on the sides in banners are a part of Google Display Network and then there are video ads shown on YouTube which play in the middle of the video or before the video. In this also there is a category of skippable and non-skippable. If we look at the total of the money coming from all these different types of ads, then Google’s total revenue from ads is $237 billion, and similarly, in 2022, their total revenue was $280 billion. Out of $280, Google earns $237 billion only from these ads.
Look at this Chart...
You can see how much was Google’s advertising revenue year after year, almost an exponential growth is seen here, this revenue has been increasing for the last 20 years. And from 2020 to 21 you will see a huge jump, this was due to Covid, most of the people were sitting in their homes and spending time on the internet, More ads were being seen, more advertisers were spending money on ads, so Google’s revenue increased so much during this time. And Google is not the only company here that depends on targeted advertising in this way for its business, the same is the case with Meta, Facebook and Instagram. In 2023, Meta’s annual advertising revenue was $131 billion. Amazon also earns money by showing ads in this way. You would think why did Amazon need to show ads, when Amazon is already earning money on its website by selling products. Actually, the purchase history data that is coming out from selling those products is even more important about the users than Google’s data. Because Google only knows what you are interested in. You watch a video on YouTube or you search for something in Google search according to your interest, but Amazon knows which products you purchased. With these product sales, you can be targeted more accurately. If we know that you like to buy these kinds of things, then ads of the same kind of things can be shown to you more. Due to this, Amazon generated $46.9 billion in its revenue from advertising alone.
In the last 20 years, all these companies have dominated the internet on the basis of this business model, but now it seems that cracks have started appearing in this model. There are two big reasons behind this, the first is privacy concerns, people are worried about what all things Google knows about you. What do you eat, where do you live, where do you work, even what diseases do you travel with because often people search Google about those things. What are your relationships, what problems are you facing in your life. Look at this news of 2023
Google paid a fine of $93 million to the state of California because Google was tracking the location of users, even two users had turned off location history. As people are becoming more aware of privacy, people are sharing less information on the Internet and the less information these websites have, the worse their ad targeting will be, and if ad targeting is bad, advertisers will not want to spend so much money, which will affect their revenue. But the other problem is even bigger than this, there is a famous saying that you must have heard: “Don’t put all your eggs in one basket”, do not keep all your eggs in one basket, if that basket falls, all the eggs will break. This advertising model will completely fall apart if someday people stop using Google search for some reason. Already, the reliability of Google search has been decreasing with time. Earlier you used to see only one ad at the top, but now if you search for anything, the top search results will be ads only. If you search for ads everywhere, then the usefulness of those search results starts decreasing. And now imagine a competitor that shows you exactly what you want to search, without any ads, such as I stopped using Google search for some reason. Already, the reliability of Google search has decreased with time. Earlier, you used to see only one ad at the top, but now if you search for anything, the top search results will be ads only. If you see only ads everywhere while searching, then the usefulness of those search results starts decreasing. And now imagine a competitor comes that shows you exactly what you want to search, without any ads, like a platform like ChatGPT. You ask ChatGPT a question, you get a direct answer in a paragraph without any ads. But if you enter the same question on Google search, you will get a lot of results in which there will be many ads and you do not know the reliability of different search results. Which one is reliable, which is a trustworthy source, which website should be clicked on, which should not be clicked on. In my opinion, these AI powered chat bots like ChatGPT will become the biggest threat to Google’s advertising business model in the coming years. Perhaps Google also knows this, that is why Google is also developing its own artificial intelligence software, such as Gemini which is a competitor of ChatGPT. Now only time will tell whether Google remains the face of the Internet for the next 20 years or not, or some other company will come and leave it behind. But one thing is for sure, this competition between these different companies is a good thing for us, as consumers, because we will get better services and products.