Key Trends in Google Revenue and how Google makes money

Google is an advertising behemoth, which makes most of its money through search based advertising revenue and advertising revenue from Youtube, Gmail, Google Map, AdSense, AdMob and Double Click Ad Exchange. Google advertising revenue constitutes majority of Google’s total revenue but Google has now started diversifying its revenue so as to reduce its dependence on advertising and more specifically search based advertising.

This blog discusses key trends in Google revenue, non-advertising revenue, segment wise Google’s revenue, Paid Clicks and Cost per Click earned by Google. Paid Clicks and Cost per Click metrics are 2 important metrics to understand the direction in which Google business is going.

Key trends in Google’s overall revenue is as following:

1. Increasing non-advertising revenue

Google parent company Alphabet Inc’s posted $26.064 Billion revenue in Q4, 2016 quarter (quarter ending 31 December 2016 and fiscal year ending December 31, 2016) with $3.665 Billion revenue coming from other bets and Google’s other revenue. Contribution of non advertising revenue increased from 10.5% in Q4, 2015 ($2.251 Billion revenue through other sources out of total revenue of $21.329 Billion revenue) to 14.06% in Q4, 2016.

2. Huge dependence on advertisement for revenue 

Google depends heavily on advertisement to generate its revenue. Google generated 88% of its total revenues from advertising in 2016. This over dependence possesses huge risk for Google’s overall revenue.

3. Mobile search and Youtube driven growth

Google posted 22% YoY growth in Q4 revenue largely driven by strong performance in mobile search and YouTube. Advertising revenue growth was mainly driven by mobile search with ongoing strength in YouTube and programmatic. There was substantial growth in other Revenues from Hardware, Play and Cloud.

4. Increasing paid clicks and decreasing cost per clicks continued

• Paid Clicks – Paid Clicks can be divided into 2 components – Paid clicks on Google properties and Paid Clicks on Google Network Members property. Paid clicks on Google properties include clicks on advertisements on Google.com searches, other owned and operated properties such as Gmail, Maps, and Google Play and YouTube engagement ads like TrueView (counted as an engagement when the user chooses not to skip the ad) and certain trial ad formats. Paid Clicks on Google Network Members property, include clicks on advertisements served on Google’s AdSense for Search, AdSense for Content and AdMob businesses. Number of paid clicks increased in Q4, 2016 with same overall trend being 2016 as well.
• Cost per Click – Cost-per-click is another metrics that helps in understanding Google business. Cost-per-click is equal to total click-driven revenue divided by total number of paid clicks and represents average amount Google charge advertisers for each engagement by users. Any change in Google Cost per Clicks also influences overall digital marketing cost of all the companies that relies on Google for their marketing needs. Cost per click decreased in the Q4, 2016 with same overall trend in 2016 as well.

5. Increase in competition

Google faces increasing competition from players in different industries which include:

1. General purpose search engines and information services
2. Vertical search engines and e-commerce websites
3. Social networks
4. Other forms of advertising and online advertising platforms
5. Companies that design, manufacture, and market consumer electronic products
6. Providers of enterprise cloud services and digital video services
7. Digital assistant providers.

6. Risk faced by Google and its impact on Google’s revenue

Google faces many risks to its business including increased completion and advertiser’s willingness to pay for Google’s ad. These factors are mainly due to following factors:

1. Fees advertisers are willing to pay based on how they manage their advertising costs
2. Termination of contract by Google’s advertisers, companies that distribute Google’s products and services, digital publishers, and content partners if Google fails to provide value for them (such as increased numbers of users or customers, new sales leads, increased brand awareness, or more effective monetization) efficiently and competitively than other alternatives.
3. Cyclical expenditures by advertisers based on overall economic conditions and their budgeting and buying patterns
4. General economic conditions – Adverse macroeconomic conditions also impact user activity and demand for advertising leading to reduced spending by advertisers
5. Advertiser competition for keywords
6. Changes in advertising quality or formats
7. Changes in device mix
8. Query growth rates
9. Challenges in maintaining growth rate as our revenues increase to higher levels
10. Evolution of online advertising market
11. Investments in new business strategies
12. Changes in product mix
13. Shifts in geographic mix of Google revenue
14. Evolving user preferences
15. Acceptance by users of Google products and services as they are delivered on diverse device
16. Our ability to create a seamless experience for users and advertisers
17. Movements in foreign currency exchange rates
18. Seasonality
19. Changes in foreign currency exchange rates
20. Traffic growth in emerging markets and mature markets and across various advertising verticals and channels

7. Alphabet Revenue

Alphabet’s Q4, 2016 revenue increased to $26.1 billion in Q4, 2016 from $21.3-bn revenue in Q4, 2015.

	Q4, 2015	Q4, 2016
Alphabet Revenue	21.329	26.064
Google Revenue	21.179	25.802
Other Bets Revenue	0.150	0.262

Breakup of Alphabet and Google’s revenue, expenses, profit and Net Income can be seen below:

	Q4, 2015	Q4, 2016
Alphabet
Revenue	21.329	26.064
Cost of Revenue	8.188	10.661
Gross Profit	13.141	15.403
Selling/General/Administrative Expense	4.251	5.142
Research & Development	3.510	3.622
Operating Expense	7.761	8.764
Total Operating Expense	15.949	19.425
Operating Income	5.380	6.639
Net Income	4.923	5.333
Google
Revenue	21.179	25.802
Operating Income	6,744	7.883
Other Bets
Revenue	0.150	0.262
Operating Income	-1.213	-1.088

Alphabet’s revenue consists of revenue from 2 segments:

• Google segment – Google segment consists mainly of 3 components –
  • Google properties
  • Google’s Network Member’s Properties
  • Google’s other revenue.
• Other bets – Other bets include all other operating segments other than Google segment.

Alphabet’s segment wise revenue (revenue for Google properties, Google’s Network Member’s Properties and Google’s other revenue along with revenue from Google’s Other Bets for 2015 and 2016 can be seen below:

	Q4, 2015	Q4, 2016	Year ended 2016	Year ended 2015
Google Segment
Google properties	14.936	17.968	63.785	52.357
Google’s Network Member’s Properties	4.142	4.431	15.598	15.033
Google’s Advertising revenues	19.078	22.399	79.383	67.390
Google’s other revenues	2.101	3.403	10.080	7.154
Google segment revenues	21.179	25.802	89.463	74.544
Other Bets
Other Bets Revenue	0.150	0.262	0.809	0.445
Consolidated Revenue	21.329	26.064	90.272	74.989

We will discuss trends in Google Segment revenue and Other bets later.

8. Google Paid Clicks

There was 36% YoY increase in Google aggregate paid clicks in Q4, 2016(with respect to Q4, 2015) and 20% QoQ increase in aggregate paid clicks (with respect to Q3, 2016).

	Q4, 2015	Q4, 2016
Alphabet Revenue	21.329	26.064
Google Revenue	21.179	25.802
Other Bets Revenue	0.150	0.262

9. Google Cost per Click

There was 15% YoY decrease in Google Cost per Click in Q4, 2016 with respect to Q4, 2015 and 9% QoQ decrease in Google Cost per Click with respect to Q3, 2016.

	YoY Change from Q4, 2015 to Q4, 2016	QoQ change from Q3, 2016 to Q3, 2016
Aggregate Cost per Clicks	-15%	-9%
Paid Clicks on Google properties	-16%	-11%
Paid Clicks on Google Network Members’ properties	-19%	0%

There was 16% YoY decrease in Google properties Cost per Clicks and 19% YoY decrease in Cost per Clicks on Google Network Members’ properties. At the same time, there was there was 11% QoQ decrease in Cost per Clicks on Google properties and 1% decrease on Cost per Click on Google Network Members’ properties.

10. Google Properties Revenue

Revenue from Google properties primarily include revenue generated on:

• com searches and searches from distribution partners using Google.com as default search in browsers, toolbars, etc
• Other Google properties like Gmail, Maps and Google Play
• YouTube TrueView and Google Preferred ads

Key trends in Google Properties revenue:

1. Revenue growth – Revenue from Google properties increased by $11.428 bn from 2015 to 2016. Further there revenue from Google properties as percentage of Google segment revenues also increased during this period. Increase in Google properties revenue was driven by:
   • Mobile search ad revenue – Growth in Google properties revenue was primarily led by mobile search, which in turn was driven by improvements in ad formats and delivery launched during 2016.
   • YouTube revenue – Growth in You tube revenue was mainly driven by TrueView video ads and Google preferred ads (Google Preferred aggregates YouTube’s top content into easy-to-buy packages for brand advertisers), growing contribution of ad buying on DoubleClick Bid Manager and improvements in YouTube ad formats and delivery.

2. Paid clicks on Google properties – Number of paid clicks increased 40% YoY from 2015 to 2016 due to:
   • Increased adoption of YouTube engagement ads
   • Improvements in ad formats and delivery
   • Increase in user base across all platforms particularly mobile
   • Global expansion of Google products and advertisers

3. Decrease in CPC – Increase in paid clicks was offset by decrease in CPC paid by advertisers. The main reason for decrease in CPC was:
   • Continued growth in YouTube engagement ads where CPC is lower than CPC on other advertising platforms
   • Changes in device mix, property mix, product mix, geographic mix and ongoing product changes
   • General strengthening of U.S. dollar compared to certain foreign currencies

11. Google’s Network Member’s Properties trends

Revenue from Google’s Network Member’s Properties primarily consist of ad revenues generated from:

1. AdSense (AdSense for Search, AdSense for Content etc.)
2. AdMob
3. DoubleClick AdExchange

Key trends in revenue from Google Network Members’ properties:

1. Revenue growth – Revenue from Google Network Members’ properties increased by $565 million from 2015 to 2016. Main driver for this growth was strength in programmatic advertising buying and strength in AdMob. This growth was offset by a decline in traditional AdSense business and USD strengthening with respect to certain foreign currencies.
2. Increasing Paid Clicks – Paid clicks increased by 3% from 2015 to 2016. This increase was driven by growth in AdMob and at the same time this increase was offset by declines in AdSense.
3. Declining Cost per click – CPC decreased by 13% from 2015 to 2016. This decrease was driven by changes in product mix of Google Network Members advertising revenues, ongoing product and policy changes for AdSense aiming to enrich user experience, changes in property and device mix, geographic mix and strengthening of USD compared to certain foreign currencies

12. Google’s other revenue trends

Revenue from Google’s other revenues consist primarily of revenue from:

1. Apps, in-app purchases, and digital content in Google Play store
2. Hardware
3. Licensing-related revenue
4. Service fees received for our Google Cloud offerings

Key trends in Google other revenues

1. Revenue Growth – Revenue from this segment increased $2.926 bn from 2015 to 2016. Its share as percentage of Google segment revenues also increased to 11.3% in 2016.
2. This increase was due to growth in digital content products in Google Play store, primarily due to increase in revenue from in-app purchases, hardware sales, and service fees from Google Cloud offerings

13. Other Bets revenue trend

 Revenue from Other Bets consists of revenues and sales from:

1. Internet and TV services
2. Licensing and R&D services
3. Nest branded hardware

Key trends in revenue from Other bets:

1. Revenue Growth – Revenue from this segment increased $364 mn from 2015 to 2016. Its share as percentage of Google segment revenues also increased to 0.9% in 2016.
2. This increase was driven by sales of Nest branded hardware and revenues from Fiber internet and TV services. There was also an increase in revenues from Verily licensing and R&D services from 2015 to 2016.