Google’s $2 Trillion Business Model: How Google Earns Money and the Rise of AI
Hello, friends! Do you know that on Google, 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 Google search, almost every product by Google 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, Google’s market cap is more than $2 Trillion.
How is this possible? How can Google provide so many services for free? It doesn’t charge us any money, but has still managed to become such a big company. Friends, today, let’s understand the business model of the most famous company on the internet in this video.
From Google Search to Google Ads: The Evolution of a Business Model
Friends, you must have heard a lot about how we refer to photocopy machines as Xerox machines, refer to white glue as Fevicol, 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, today, an internet search is known as “Googling” something.
This Google search started in 1998 as a college project. Larry Page and Sergey Brin created it with a mission to organise all the information in the world and to make it accessible and useful.
“Our entire mission is basically to organize world’s information and make it universally accessible and useful.”
During its initial days, Google was a simple search engine. This is how it looked, a simple website to search for things on the internet. The word “Google” doesn’t actually mean anything, but it is inspired from the word 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.
Google 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 the 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.
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 Google’s search results pages. Later in this video, we will talk about how it became Google’s biggest business model.
But, over the years, Google started offering many more products and services. In 2004, Gmail was introduced. In 2005, Google Maps was introduced, which changed the world. In 2006, Google acquired YouTube, 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.
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.
Google’s Failures: The Importance of Experimentation and Learning from Mistakes
The examples I listed right now are the examples of its successful products and services. 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. Google 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 Search Ads: The Core of Google’s Revenue
Let’s understand it in detail. On the screen, you can see the revenue breakdown of Google for the year 2022. That is, where did Google earn its revenue in the year 2022? The total revenue is $280 billion, of which 58% of the revenue, i.e., $162 billion, comes from the ads shown with Google searches.
After this, the second biggest source of income is Google Network ads, the ads that you get on different websites that partner with Google. Google earns $32.78 billion from here.
Third is YouTube Ads. $29 billion comes from here, the ads that you will see while watching this video. Here, it’s interesting that these ads are the source of income for us YouTubers. 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 like me. So, the 45% share of YouTube from the content of all creators generates about $29 billion in revenue for Google in a year.
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.
Now, it is also interesting to see where does Google spend this money. Around $40 billion is spent on Research and Development for their ongoing research to create more new products and services, to keep on attempting at new failures. About $44 billion is spent on non-production costs like renting offices, spending on advertising, marketing, and accounting, and paying salaries to the employees. Their total expenses are around $207 billion, as you can see on the screen. This is the Balance Sheet of their company. Here you can also see that income before taxes was $71 billion in 2022. They paid $11 billion in taxes, and their profit was approximately $60 billion.
The Freemium Model and the Power of Data Collection
The most interesting thing in this business model is providing things for “free.” How is it possible to earn a profit by providing things for free?
There are two reasons behind this:
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The Freemium Model: 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.
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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.
Google uses an advanced Machine Learning Algorithm to show targeted ads, and not just for ads, but even to show normal search results. Google uses a very complex algorithm. When you look up something, which website will be shown at the top of the search results, and which website will be at the bottom, and how to get your own website to rank higher, this has become a distinct branch of science today. It is called SEO, or Search Engine Optimization.
Thatware: Helping Your Business Thrive with SEO
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Now, let’s get back to the topic of paid ads to understand Google’s Ad Targeting better.
Google’s Ad Targeting: Matching Advertisers with Users Based on Data
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 the NCR region specifically, 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.
Google 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.
And here, there are different types of ads too. 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, Google’s total revenue from ads is $237 billion. And in 2022, their total revenue was $280 billion. So, out of the $280 billion, Google earns $237 billion just from these ads.
The Future of Google: The Rise of AI and the Challenges to the Advertising Model
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 Google knows only about where your interest lies, when you watch a video on YouTube or search for something on Google search, those are your interests. But Amazon knows which products you have purchased, you can be more accurately targeted by these product sales. If they know what are the things you like to buy, then you be shown the ads of other similar things.
That’s why Amazon generated $46.9 billion in revenue from advertising alone.
In the last 20 years, this single Business 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:
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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 I think Google does have more information than Facebook does. I don’t know if that’s a bad thing. I think that 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.
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The Rise of AI: 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 Google search for some reason.
Already, with time, Google 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 Google 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. Perhaps, Google already knows this. That’s why Google is also developing its own Artificial Intelligence software, like Gemini, as a competitor to ChatGPT.
Now, only time will tell whether Google will remain as the face of the internet for the next 20 years or not, or whether some other company gets ahead of it.
But one thing is for sure. This competition between different companies is definitely beneficial for the consumers, for individuals like us, because we will get better services and products.
If you want to understand Artificial Intelligence in detail, I have explained it in this video. You can click here to watch it.
Thank you very much!
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