What Is Google’s Business Model? How Is It Making Money? In 2019, Alphabet brought in almost $162 billion, 18.3% higher than the previous year. Advertising revenue is still the main source of total revenue, accounting for 83.3% of total revenue. The advertising revenue from YouTube accounts for about 10% of the total advertising revenue. As we all know, we, consumers, don’t have to pay anything, such as using Google Maps or Gmail or YouTube. So How does the company make money?
When we are using a series of Google products, our search history, and product participation have created the most profitable opportunity for Google to make money. This opportunity is advertising. Google has two main components to support its advertising business: AdWords, AdSense. Among these, AdWords is the main resource for advertising revenue.
Advertising companies sell related advertisements according to the keywords provided by Google, and the vary in price depending on a keyword’s popularity. Then, Google allows the advertising company to serve an advertisement when the quality score of the ads is highest, which is based on evaluating matching degree with the keywords.
At last, the advertising company pays Google based on the number of customer clicks. For example, a keyword ‘ski glasses’ should appear in the search for ski products stores rather than in the search for ski playgrounds. At the same time, compared with large companies that can pay higher advertising fees, small companies that specialize in ski glasses will get the opportunity to be displayed because of high advertising scores.
Admittedly, advertising is the Alphabet’s core business model. However, Alphabet also has many other business models. Alphabets’ other Bets revenues of $ 659 million, accounting for only about 16.7% of total revenue (Alphabet Alphabet Announces Fourth Quarter and Fiscal Year2019, P1), including Waymo, a self-driving technology, Verily, a life sciences brand from Google, Nest, a home auto-machine brand, and Google Fiber. This part of the business was consolidated and disclosed as ‘other bets.’ However, they have not contributed a lot to Google’s financial success.
In summary, the Alphabet’s core business model is advertising, and the majority of revenue from advertising is from AdWords. Alphabet’s other businesses cover many areas, but right now, they have not brought considerable benefits to the company. Based on its popular platforms and software, Alphabet continues to accumulate users and advertising companies and then uses the profit from advertising to support continuous experimentation and explore in other areas.
Tasks 1-3: Who are Google’s main competitors? What and who should Google worry about? What should the CEO of Google do about these challenges? Provide recommendations, be specific.
Alphabet faces competition from all aspects of its business, especially from the business involving the data connection of users with the platform, such as Verizon’s Yahoo, Microsoft, Facebook, Apple, Amazon, Baidu.
From the perspective of the core business of Alphabet, Facebook is undoubtedly his strongest competitor in mobile advertising. We can see from Appendix B, the quarterly revenue of advertising on Facebook almost accounts for 98% of total revenue.
From the perspective of the search engines and information services, Alphabet faces competitors like Microsoft’s Bing, Verizon’s Yahoo, and Baidu in China. From the perspective of mobile & operating system—Google Play, Apple is the company’s competitor. From the field of e-commercial websites and social networks, such as Amazon, Microsoft’s LinkedIn, Snapchat, and Facebook are Alphabet’s Competitors, because many consumers will choose to search for information directly on these applications instead of using Google to find them. Therefore, the Alphabet’s market share will face challenges
As the risk factors mentioned in Alphabet’s 10-K report in 2019, we can also find that in addition to competitors, Alphabet currently has other faces, including risks in their advertising business, facing intense competition, ongoing investment in new business, revenue growth rate could down over time, any inability to protect their intellectual property, failing to maintain and enhance their brand, risk in manufacturing, and international affairs.
According to the challenges mentioned above and knowledge learned from lecture 4, I would like to give some advice from four aspects of the overall strategy of the corporation.
Firstly, managers should consider the growth strategy about enhancing the Alphabet’s brand awareness. Continue to expand the scope of it’s a platform so that customers can meet more and more needs on the same platform.
This will not only maintain the loyalty of the original customers but also expand the brand effect and attract more consumers. For example, Google has developed more excellent platforms based on its original search engine, such as Google Doc, Gmail, Google Cloud. But the company can expand more fields, for example, continue to develop the information organization function based on the search engine.
When users browse the web through Google Chrome, they encounter particularly good information, and only need to click the email to automatically Collect it into a page, and then organize and save it directly on that page. There is no need to copy and paste it into a Word document or other text.
Secondly, managers should consider revenue developing strategy of sales, market, and customer service. On the one hand, as a company with a huge market share, in addition to horizontally expanding the business scope to increase the customer experience, management can also develop services vertically to increase the frequency of customer contact with Alphabet’s product.
For example, the combination of online and offline consumer experiences is becoming more and more popular today, and Amazon’s Alexa is an impressive example. Alphabet should work hard to develop smart digital products, integrating products and services that customers can usually operate on computers into customers’ real life. On the other thing, the Alphabet should focus more on international markets.
International revenues accounted for approximately 54% of Alphabet consolidated revenues in 2019. With the popularity of the Internet economy in more and more countries, the development of overseas markets cannot be ignored, because the company’s own experience and capabilities can provide a better user experience and a series of services than any other platform, which will be very attractive overseas user.
Last but not least, managers in Alphabet should also focus on risk management or crisis management both inside and outside. This includes the brain drain faced by Alphabet, turbulence in international currency exchange rates, sanctions by European countries. In the face of these uncontrollable factors, companies can hire professional teams, such as financial teams and international transaction processing teams, to deal with such matters exclusively, and to minimize such matters to interfere with the company’s normal business activities.
Task 1-4: How is Google using platform strategy? What are some strengths and weaknesses of this approach?
As we all know, Google provides consumers with a variety of services to meet consumers’ needs. It uses these services to create the value-adding and data-exchanging interaction of customers and producers. Thus forms its unique system and corporate competitiveness.
From my point of view, the whole Alphabet’s Google Company’s business is a giant platform in which it owns many interfaces of platforms, like Google Map, Google Chrome, Youtube. Let’s take Youtube for example. The producers in Youtube are Youtubers or any content creators/ providers and advertising companies.
Providers are videos and advertisements invested in it by the advertisement company. Owners are Alphabet’s Google company. In this platform ecosystem, consumers can bring the data, the traffic, and feedback to the producers, and in turn, producers provide targeted content and advertisements to consumers.
According to lecture 4, the platform strategy has three dimensions. The first dimension is in the process of watching videos from video providers, Alphabet can collect data, traffic, and feedback through customers on Youtube.
At the same time, video producers can increase their social reputation and earn more advertising revenue from advertising companies with an increase in the amount of video click and attention. In the second dimension, for the Youtube platform and Alphabet, the ultimate goal is to generate and monetize the traffic generated by producers and consumers. So how to perfectly match the needs between customers and advertisers is the most important purpose of the Alphabet and Youtube platform.
The third dimension is Google, as the owner, created a platform called Youtube, and used the company’s reputation, technical support, and financial support to ensure that the needs of both producers and consumers were targeted. At the same time, it allows third-party sites, like advertising companies that use Google’s platform and channel to connect you with their targeted services and advertisements. However, Google does not sell any data to these third-party companies, and it just provides the platform to help this advertising company making more targeted advertisements.
The strengths of using platform strategy are the following. Firstly, this platform is a good recycling system. The value, namely data, will be greater as new users sign up and increase the potential number of connections. Then, Google can continuously understand what its customers need and meet them. As a result, a good service experience leads to higher customer loyalty and attracts more new users.
Secondly, having its data platform making it more difficult for competitors to overtake its market share. The newly developed products do not meet the needs of users, so customers and revenue will decline at any time, and the cooperating advertisers will also terminate the cooperation at any time. Cooperating companies provide customers with false or bad advertising content, which will also damage Google’s brand image and reduce customer loyalty.
Using customers’ data-based platform also have weaknesses. Firstly, if the newly developed products and services do not meet the needs of users, so customers and revenue will decline at any time, and the cooperating advertisers will also terminate the cooperation at any time. Secondly, the company allows any content creator to provide content on Youtube, and this will cause the video content to contain inappropriate content and illegal issues.
At the same time, videos with poor quality will also cause advertisers to invest. Thirdly, due to the systems bugs or misuse, Google faces the theft, damage, or usurp of data during the process of data transmission and mining, and even leads to lawsuits over the right to use the data. These improper usages and protection of data will weaken Google’s ability.
Task 1-5: What type of diversification strategy is Alphabet pursuing? What organizational structure is Alphabet using? What is the rationale behind this structure and diversification strategy?
Alphabet’s Google company owns its core business and also had diversified businesses. Although its majority of revenue comes from its core business—advertising, it still needs to keep innovation in outside advertising areas to keep its competitiveness, maintain its dominant position in the market, and separate its risks. These other bets include self-driving area, Internet connectivity, and delivery drone business, and life extension science.
When we talk about organizational structure, there are four types of common organizational structure, including the functional, multidivisional( or divisional), Flatarchy, and matrix. According to the definition of divisional structure, it means among the large company, it often structures based on the products, projects, or subsidiaries. Thus, from my point of view, the organizational structure of the Alphabet is divisional.
According to Appendix C, in the organizational structure of the Alphabet, the top of the structure is Alphabet. Then, Google and other bets are subsidiaries of Alphabet. Among subsidiaries, the main revenue comes from Google, including Google Search, Google Chrome, Google Maps, Gmail, Youtube, and Google Play. Other bets include OB Technology(“moonshot” research and development), and Verily (life sciences). The other bets include Waymo(self-driving technology), OB Tchologies Inc., Calico LLC, and Alphabet Holdings LLC.
I think the rationality of this structure is that on the one hand, it increases the transparency of supervision because each task is assigned to each Department, and each Department has much autonomy, so if there is a problem, it is also a very specific Department. On the other hand, is committed to exploring other areas is to diversify the company’s risks. After all, it mainly depends on advertising revenue, and the uncertainty of advertising partners and consumers is too large.