How Google (Alphabet) Makes Money

Google

(Investopedia)

Alphabet Inc. (GOOGL – Class A and GOOG – Class C) makes money through the Google Search engine, YouTube, Google Play, Google Cloud, Chrome browser, and Android mobile operating system. In addition, the company has made considerable investments in the Stadia cloud gaming system, Waymo self-driving vehicles, and other technology initiatives.

Alphabet competes with companies that provide online platforms for connecting people with information and relevant advertising, digital content and application platforms, enterprise cloud services, and more. Major competitors include Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Apple Inc. (AAPL), Facebook Inc. (FB), Alibaba Group Holdings Ltd. (BABA), and others.1

Alphabet leverages its search, web browsing, and mobile operating systems to make money through the sale of advertising, apps, subscriptions, hardware, licensing, and service fees.

Advertising generates the majority of revenue, but Google Cloud revenues are growing.

Alphabet earned $11.2 billion in net income in Q3 2020, which ended September 30, 2020. It was a sharp 59.1% rise from the company’s year-ago net income for Q3 2019. Revenue for the quarter was reported at $46.2 billion, up 14.0% from the same three-month period a year ago.

The third quarter was a sharp rebound from Q2 2020, when advertising revenue was adversely impacted by the COVID-19 pandemic, causing declines in both net income and revenue.

Alphabet’s stronger Q3 2020 results were driven by increases in advertiser spend in Google Search and YouTube, as well as continued strength in Google Cloud and Play.

Alphabet separates all business services other than Google operations into ‘Other Bets’. According to the company, “ Google is our only reportable segment. None of our other segments meet the quantitative thresholds to qualify as reportable segments; therefore, the other operating segments are combined and disclosed as Other Bets.

Other Bets include Access, Calico, CapitalG, GV, Verily, and X. This catch-all category also features developmental and early commercial stage projects, including the Waymo self-driving system and the Stadia cloud-gaming system.

The Google segment generated nearly 100% of all Alphabet revenue in Q3 2020 and all of the company’s operating income (profit after expenses such as wages, depreciation, and cost of goods sold). Revenue for the segment rose 14.4% to $46.0 billion compared to the year-ago quarter, while operating income grew 17.2% to $12.6 billion.

Advertising generated about 81% of Google segment revenue for Q3 2020, which was down from 84% of the segment’s revenue in the same quarter a year ago. Google Cloud generated over 7% of segment revenue, up from nearly 6% in Q3 2019. Other revenue sources, which includes non-advertising revenue from YouTube, comprised about 12% of the segment’s total revenue in Q3 2020, up from 10% in the same three-month period a year ago.

Paid clicks accelerated to a year-over-year (YOY) rise of 27% in Q3 2020 compared to Q3 2019. Paid clicks rose 18% between Q3 2018 and Q3 2019. Cost-per-click accelerated its YOY decline to 15% in Q3 2020 from a YOY decline of 2% in the previous year’s Q3.

Other Bets
In this segment, revenue rose 14.8% to $178 million in Q3 2020 compared to the same quarter a year ago. The segment comprises less than half a percent of Alphabet’s total revenue.5 The segment posted an operating loss of $1.1 billion for the quarter, an increase from the $941 million operating loss reported in Q3 2019.

This segment has reported an operating loss in every fiscal year since 2016.

Alphabet’s Recent Developments
Google announced on October 22, 2020, that it has entered into a Framework Agreement to provide Secure Cloud Services to the federal government of Canada. The agreement enables Google to provide its innovative cloud platform and collaboration technologies to federal agencies of the Canadian government.

On October 6, 2020, after a 16-month investigation into the business practices of tech behemoths Apple, Amazon, Facebook and Alphabet, the House Judiciary subcommittee on antitrust released its recommendations on how to reform laws to avoid the continued emergence of digital monopolies. The Democratic-majority staff presented a nearly 450-page report concluding that the four Big Tech companies dominate the industry in ways that affect the U.S. economy and democracy, suggesting Congress implement changes to antitrust laws that could result in parts of the businesses being separated.

On Oct. 20, 2020, the Justice Department filed suit against Google, launching the first major antitrust suit based on the current round of DOJ antitrust investigations against big tech companies. The suit accuses Google of illegally protecting its dominant position in the search market by making deals with smartphone makers in which Google pays them to make Google the default search engine on their devices.

This was followed up by a suit by 10 attorneys general on Dec. 16, 2020 alleging that Google had made an anti-competition agreement with Facebook regarding online ads, while also overcharging publishers using its monopoly power.14A third suit filed on Dec. 17 by 37 attorneys general alleged that Google maintained a monopoly on internet searches by discriminating against other search engines and online information providers.

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