Alphabet (Google) business model evolution

Google business model is changing over the years. Even though advertising is still its cash cow, Google has been diversifying its revenues in other areas. While in 2015 90% of Google revenues came from advertising, in 2017, advertising revenues represented 86%. Other revenues grew from about 10% in 2015 to almost 13% in 2017.

It is critical to notice a few important aspects about Google business model:

monetization strategy: how the revenue composition is changing
profitability: how operating margin is evolving
cost structure: how the TAC rate is changing

Evolution of Google monetization strategy

Google monetization strategy has been changing over the years. Even though Google still follows an advertising business model at its core. Alphabet (this is how Google got rebranded) has been diversifying its revenues in several areas.

Revenue breakdown 2015



Google properties
52,357


Google Network
15,033


Other revenues
7,154


Other Bets revenues
445







Revenue breakdown 2016



Google properties
63,785


Google Network
15,598


Other revenues
10,080


Other Bets revenues
809







Revenues breakdown 2017



Google properties
77,788


Google Network
17,587


Other revenues
14,277


Other Bets revenues
1,203

It is interesting to observe how Google revenue composition is changing over the years. Advertising revenues changed from 90% in 2015, to 86% in 2017.

Evolution of Google profitability

At its core, Google has been a highly profitable company since its IPO. Indeed, when investors looked under the hood of Google the found a company which was highly profitable, it was growing at lightspeed, and it was meant to dominate the digital space.

Operating Margin Evolution

Operating income
Revenues
Operating Margin


2013
15,403
55,519
28%


2014
16,496
66,001
25%


2015
19,360
74,989
26%


2016
23,716
90,272
26%


2017
26,146
110,855
24%

Over the years Google managed to keep its operating margins pretty high. Indeed Google‘s operating margins or the percentage of revenues that are represented by operating income has gone from 28% in 2013 to 24% in 2017.

Google cost structure evolution

One key ingredient of Google success is its ability to keep the traffic acquisition costs at a level that guarantees its search pages a proper distribution (each day people perform more than three billion queries through Google search algorithms) while being able to monetize its pages:

[image error]TAC stands for traffic acquisition cost, and that is the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google percentage of revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.








Evolution of Google TAC Rate

TAC to distribution partners (as % of Google Properties Revenues)
TAC to Google Network Members (as % of Google Members Revenues)


2013
7.90%
68.10%


2014
8.10%
67.80%


2015
7.80%
68.10%


2016
9.20%
69.90%


2017
11.60%
71.90%

It is critical to distinguish between the acquisition costs of Google on its search pages and that outside its search pages. Indeed, to get traffic on its search pages, Google has to close deals with partners to guarantee a continuous stream of traffic. Instead, to allow businesses part of the Google AdWords (now Google Ads) platform to be featured within web properties part of Google AdSense, Google shares its revenues with the publishers that allow Google to place banners on their properties. Therefore, Google has way higher costs in a percentage of segment revenues on its members’ properties, than on its properties.

Keeping this distinction in mind is critical to have a deep understanding of the Google business model.

Resources for your business: 

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business

Handpicked case studies: 

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained

The post Alphabet (Google) business model evolution appeared first on Four-Week MBA.