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How Does Google Make Money?

By Jeremy Bowman - Oct 4, 2017 at 11:18AM

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As you might expect, the world's leading search engine make most of it money from advertising.

Google-parent Alphabet ( GOOG -0.87% ) ( GOOGL -0.68% ) has become one of the most valuable companies in the world thanks to its dominant search engine, related products like Adwords, YouTube, and Android, its mobile operating system.

Alphabet's advertising machine is set to generate more than $100 billion this year as user page clicks increase, though the cost-per-click has continued to decline -- YouTube engagement ads, which are outgrowing the platform, tend to have a lower cost-per-click.

In addition to its advertising business, Alphabet also produces hardware such as Chromebook computers, Chromecast streaming devices, and the Google Home voice-activated speaker. The tech giant also invests in "moonshots," high-risk, long-term projects like self-driving cars.

In its financial reports, Alphabet classifies these moonshots as Other Bets, but those brought on less than 1% of revenue last year. With that in mind, let's take a closer look at Google's core businesses that really drive the company's results.

A woman works on a laptop computer

Image source: Getty Images.

Search is king 

Google's products like Search, Android, Maps, and YouTube generally revolve around advertising, and the company divides its advertising business into two categories: performance and brand. Performance advertising is its primary source of revenue and includes businesses like AdWords, the company's auction-based ad program, which allows advertisers to buy text-based ads on properties like its search pages, and AdSense, which publishes ads on partners' websites.

Brand advertising functions through videos, text, and images that build awareness of advertisers' products.

Google's own properties contributed $63.8 billion of $90.3 billion in revenue last year, with the vast majority of that coming from advertising. Revenue from Google properties increased 22% last year, with that growth being driven by mobile search as well as YouTube. 

Paid clicks surged last year by 40% due to increased adoption of YouTube engagement ads, improvements in ad formats and ad delivery, and expansion of products around the world. That increase was partially offset by a 13% decline in cost-per-click, tracking a pattern investors have seen for several years now.

Growth at Google Network Members' properties, which is driven by AdSense, was slower, growing by just 3.8% to $15.6 billion as revenue from AdSense declined, though that was offset by AdMob, Google's advertising platform for monetizing mobile applications. Paid clicks increased just 3% last year and cost-per-click fell 13%.

Finally, $10.1 billion in revenue last year came from other categories like apps and in-app purchases, hardware, and licensing fees. Revenue in the other category increased 41%, driven by the success of Google Play, hardware sales, and Google Cloud offerings. 

Google's future growth

Looking ahead, Google's revenue is likely to continue its solid growth as paid search clicks increase, and the company is investing in technologies like artificial intelligence and virtual reality. Google and rival Facebook ( FB -1.14% ) have come to dominate digital advertising, each one with its own strengths. With its detailed information on users, Facebook excels at ad targeting, while Google's ads are better applied to searches, such as product purchases or services. Increasingly, Amazon.com is also taking search market share from Google as it becomes the first stop for online purchases, which explains why Google is partnering with Wal-Mart on things like delivery and integration with Google Home.

And there's a real possibility of one of its other bets such as Google Fiber or Waymo, its automonous vehicle technology division, paying off. Waymo appears to be the most promising, as Google is considered the leader in such technology and the self-driving car market is estimated by some to be worth $42 billion by 2025.

Alphabet has been one of the most dependable winners on the stock market since its 2004 IPO. With its dominance of search, it has a strong base that can help fuel investment in promising new technologies, setting the company up for success further down the road.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,840.03 (-0.68%) $-19.29
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,850.41 (-0.87%) $-25.12
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$137.51 (1.51%) $2.04
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$306.84 (-1.14%) $-3.55
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,389.79 (-1.38%) $-47.57

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