Alphabet’s market capitalization of over $1.5 trillion makes it one of the most valuable publicly traded companies in the world, trailing only Apple, Microsoft and Amazon.
Created in 2015, Alphabet is essentially a holding company for Google, which generates nearly all of its revenue and profit. Google has always portrayed itself as a tech company and has invested in many far-reaching areas of technology — such as internet search, mobile phones, artificial intelligence, self-driving cars and health technology. Its conference for software developers, Google I/O, which kicks off Tuesday, typically intersperses deep tech talk with far-reaching visions of the future.
But Google’s main business is online advertising. In 2020, Alphabet generated almost $183 billion in revenue. Of that, $147 billion — over 80% — came from Google’s ads business, according to the company’s 2020 annual report.
Google has been the market leader in online advertising for well over a decade and is expected to command nearly a 29% share of digital ad spending globally in 2021, according to eMarketer. Number-two Facebook is expected to capture less than 24%, while Alibaba is projected to be a distant third, with less than 9%.
Over the years, Google has built and acquired a slew of ad tech tools that enable content publishers to make money through advertising and let ad buyers seek out the kinds of people they would like to get in front of on Google Search, YouTube, Maps and on other websites across the internet. While Search and other properties make up the bulk of Google’s ad revenues, its YouTube advertising business, which saw a near 50% year-over-year jump in the first quarter, is increasingly grabbing ad dollars away from traditional linear television.
Here are the major pieces of Google’s advertising business and how they make money.
Search and other Google properties
Search is Google’s most lucrative unit. In 2020, the company generated $104 billion in “search and other” revenues, making up 71% of Google’s ad revenue and 57% of Alphabet’s total revenue.
That “search and other” figure includes revenue generated on Google’s search properties, along with ads on other Google-owned properties like Gmail, Maps and the Google Play app store.
Advertisers using Google products can bid on search keywords — specific words and phrases that lead their ads to show up to relevant users in search results.
Any advertiser can choose from different bidding strategies. If they want to generate traffic to their site, for instance, they might choose to do “cost-per-click” bidding, where they pay when someone clicks on their ads. They can choose a maximum amount they want to pay for that click, and each time an ad is eligible to appear for a search, an auction will determine whether the ad shows up, and in which position.
Example of mattress ads on a Google search.
Example of mattress ads on a Google search.
Megan Graham
“Usually, the more competitive and more expensive an industry is, the more expensive the bid is going to be,” said Joe Balestrino, a digital marketing specialist.
“For example, if you’re an attorney and you deal with crane accidents … you’re looking at about millions of dollars in lawsuit, you’re probably going to pay a couple hundred dollars for that click. [Whereas] if you’re running a house-cleaning business, you’re probably paying $7 a click because your average sale is maybe 50 bucks. So depending on how competitive the niche and how much money a business owner stands to make, the more costly those keywords are,” he said.
Google also lets advertisers target a location, language and audience — like people who are interested in buying finance-related products or services or who are renters vs. homeowners.
The company primarily shows ads on commercial searches, which means about 80% of searches still aren’t monetized through ads, according to estimates from Wedbush. As buying increasingly moves online, analysts expect ad budgets to continue shifting from areas like linear television and direct marketing into search.
But Amazon is increasingly competing with Google on search. Alhough eMarketer expects Google will account for a 56.8% share of all U.S. search ad revenue in 2021, Amazon’s 19% share has been steadily growing. That’s eroding Google’s share of the ad market overall, according to eMarketer forecasts.
“The place where they’re losing share is basically all about the search piece, and the reason that they’re losing share of search ads is because more search ad spending is going to sites like Amazon, instead of general search sites like Google or Bing,” said eMarketer principal analyst Nicole Perrin.
With people increasingly looking to buy online, it’s not just to Google’s benefit. “It’s happening right now. It’s been happening through the pandemic, there’s been more digital demand for goods and services,” she said. “Google has benefited from that, but Amazon has benefited more.”
Analysts who are optimistic about Google’s search business note that it has evolved throughout the years and will continue to do so, whether it’s using voice and image searches or other innovations to get products in front of potentially interested eyeballs.
Meanwhile, products like Maps are becoming more strategic on the ad side. Using Google Maps, advertisers can buy ads for local business listings and “pins.” Maps, which only began allowing ads in 2019, has 1 billion monthly active users and it’s updated tens of thousands of times in a day.
