How Does Alphabet Make Money?

What comes to mind when you hear the word "Google"? 

If you're like most people with access to the internet, you probably think of the search engine that gives us instant access to tons of other websites around the world. But Google is free to use for people like you and me, so how exactly does it make its money?

In this video, we break down exactly how Google's parent company, Alphabet (GOOG 0.56%) (GOOGL 0.69%), makes its money, and what the company is doing behind the scenes to not only improve our day-to-day lives, but also shape our future.

A full transcript follows the video.

Narrator: What comes to mind when you hear the word Google?

Perhaps it's a number, a 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 US. 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 a 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 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.

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 like wireless headphones, you're served up refined web results... and advertisements. Same goes for your Gmail inbox.

These ads cost 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 both for Google and for its paying advertisers.

Here's a graphic of how the Google advertising auction process works:

Ads vary in price depending on a keyword's popularity. For example, a lot of people search Google for professional services like insurance, loans, and attorneys. The demand and the high dollar value of these searchers allows Google to charge more to advertise in these search results. Google will collect around $54 for an ad on with the word "insurance" included in a search, while the average ad spot comes in at around the $1 mark. 

But Alphabet's business model isn't all about lightning quick advertising auctions. Since the company has built out 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 3.5 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 that revenue comes from abroad. Even though international search engines like China's Baidu (BIDU -1.78%) are successful in their own right, most of the world uses Google.

Alphabet's product popularity almost seems too big to fathom. Google Chrome remains the U.S.'s most popular web browser. Nearly 2 billion people use Google's android mobile operating system. 1.5 billion people use G-Mail, making it the world's most popular email service.

Alphabet's family of powerhouse apps have shaped the way people find information and consume content. And the money they generate allows the company to test new technology that could shape the future. Alphabet is working on everything from glucose sensing contact lenses to self driving cars.

So advertising is the moneymaker for Alphabet... 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 one from The Motley Fool.