| | | How Google (Alphabet) Makes Money
Google advertising comprises the majority of total revenue
By ERIC ROSENBERG
Updated February 18, 2022
Reviewed by JULIUS MANSA
Fact checked by VIKKI VELASQUEZ
Note from Frank Sully: Although “Advertising” and “Cloud” are the major sources of revenues for Alphabet, and “Other Bets” (including AI & Robotics, which including autonomous vehicles <Waymo>) is an insignificant amount currently, one should realize that AI advances are being deployed in the Google Search engine, in Google Maps, and in YouTube: it’s just not possible to quantify the monetary contribution. And, rapid exponential growth in these Other Bets “Moon Shots” will power the future growth of Google’s revenues and earnings!
Alphabet Inc. ( GOOGL Class A and GOOG Class C) is a collection of different businesses with Google being the largest. The company offers a variety of software and Internet-related services and solutions, including web browsing and searching, cloud computing, streaming entertainment, mobile operating systems and applications, and more. Alphabet leverages its various platforms and services to generate a substantial portion of its revenue from advertising.
One of the primary ways Alphabet generates revenue through advertising is through its Google Ads program. Whenever a user searches for anything using Google's search engine, an algorithm generates a list of search results. The algorithm attempts to provide the most relevant search result for the query as well as related suggested pages from a Google Ads advertiser.12 Google generates fees from advertisers when users engage with the ad in some way, such as by clicking on it or by simply seeing the ad.3Advertisers also pay Google to have their pages suggested to users and will attempt to outbid each other for the top spot on the search result list.45
Alphabet also generates some ad revenue from the Google AdSense program. The program works similarly to Google Ads, but it differs in that it enables non-Google websites to incorporate Google display advertising on their pages. When a visitor clicks on a display advertisement on a member's website, a portion of the revenue is paid to the site owner while Google keeps part of the fee.67
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 Holding Ltd. ( BABA), and others.8
KEY TAKEAWAYS
- Alphabet leverages its search, web browsing, mobile operating systems, and cloud computing to make money through the sale of advertising and various service fees.
- Advertising generates the majority of revenue, but Google Cloud revenues are growing rapidly.
- Alphabet announced a 20-for-one stock split to be paid out as a one-time special stock dividend to be administered on July 15, 2022.
Google (Alphabet) Segment Breakdown
Based on Alphabet's Q4 FY 2021 ended Dec. 31, 2021
Segment __________Revenue______Operating Income
Google Services________92%________________100%
Google Cloud___________8%__________________0%
Other Bets______________0%__________________0%
Alphabet's Financials
Alphabet earned $20.6 billion in net income during Q4 of its 2021 fiscal year ( FY), the three-month period ended Dec. 31, 2021. Net income rose 35.6% compared to Q4 FY 2020.Revenue for the quarter was reported at $75.3 billion, up 32.4% from the year-ago quarter.9
Alphabet said that it continued to enjoy strong growth in its advertising business during the quarter. The company's Pixel phones reached a quarterly sales record despite supply constraints. Alphabet's cloud business also saw strong revenue growth.9
Alphabet's Business Segments
Starting in Q4 FY 2020, Alphabet began separating its business into three reportable segments: Google Services, Google Cloud, and Other Bets. The company provides a breakdown of revenue and operating income for each of these segments. It also reports certain unallocated corporate costs, including corporate initiatives, finance and legal costs, and costs associated with certain shared research and development activities. Corporate costs also include hedging gains (losses) related to revenue.10 All of these corporate costs are excluded from the segment breakdowns below as well as in the pie charts above. Prior to Q4 FY 2020, Alphabet separated its business into two reportable segments: Google and Other Bets.11
Google Services
The Google Services segment is comprised of a range of products and services, including ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. The segment generates most of its revenue from advertising. Other sources of revenue include sales of apps, in-app purchases, digital content products, hardware, and fees received for subscription-based products such as YouTube Premium and YouTube TV.10
Google Services generated $69.4 billion, or about 92% of total revenue, in Q4 FY 2021. Advertising revenue, at $61.2 billion, comprised 88% of the segment's revenue. The segment's revenue is up 31.3% compared to Q4 FY 2020. Google Services posted operating income of $26.0 billion, up 36.3% from the year-ago quarter.12
This figure surpassed Alphabet's total consolidated operating income of $21.9 billion due to operating losses in the other two segments as well as unallocated corporate costs. Google Services is thus the only segment that currently makes positive contributions to Alphabet's overall operating income.12
Google Cloud
The Google Cloud segment is comprised of Google's infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. The majority of the segment's revenue is generated from fees received for Google Cloud Platform services and Google Workspace (formerly known as G Suite) collaboration tools.10
Google Cloud generated $5.5 billion in revenue during Q4 FY 2021, comprising about 7% of total revenue. It was up 44.6% compared to Q4 FY 2020. The segment is still not profitable, posting an operating loss of $890 million during the quarter. However, that loss was smaller than the $1.2 billion operating loss reported in the year-ago quarter.12
Other Bets
The Other Bets segment is comprised of a number of different operations that are not individually material. Some of Alphabet's Other Bets include its autonomous driving business Waymo. Most of the segment's revenue is generated through the sale of internet services as well as licensing and R&D services.13
Comment from Frank Sully: See Note above!
Alphabet's Recent Developments
On Feb. 1, 2022 Alphabet announced in its Q4 FY 2021 earnings release that its board of directors had approved a 20-for-one stock split, which is to be executed in the form of a one-time special stock dividend. If approved by shareholders, each stockholder of record as of the close of business on July 1, 2022 will receive a dividend of 19 additional shares of the company's stock for each share held, following the close of business on July 15, 2022.12
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