How Google (Alphabet) Makes Money: Advertising and Cloud

Advertising Comprises Most Revenue As It Spends Billions on AI

Reviewed by Julius MansaFact checked by David RubinReviewed by Julius MansaFact checked by David Rubin

Alphabet is a collection of different businesses. Most know it as the parent company of Google, with its Class A (GOOGL) and Class C (GOOG) shares. The company also offers a variety of software and internet-related services and products, including web browsing and search, cloud computing, streaming entertainment, mobile operating systems and applications, and more. Alphabet leverages its platforms and services to generate about three-quarters of its revenue from advertising.

Below, we take you through Google’s major business lines, its leap into the AI sector, and a major 2024 antitrust ruling that could have a significant effect on Alphabet’s operations.

Key Takeaways

• Alphabet is a collection of different companies, including the popular search engine Google.
• The company leverages its search, web browsing, mobile operating systems, and cloud computing services to make money through the sale of advertising and various service fees.
• Advertising generates most of its revenue, but Google Cloud revenues are growing rapidly.
• The company has three reportable segments: Google Services, Google Cloud, and Other Bets.
• Google Services is the most profitable, while Google Cloud and Other Bets often post operating losses.

Alphabet’s Revenue Streams

Alphabet primarily generates revenue through advertising through its Google Ads program. Whenever you use 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 and related suggested pages from Google Ads advertisers.

Google generates fees from advertisers when users engage with the ad in some way, such as by clicking or simply seeing it. Advertisers 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.

Alphabet also generates ad revenue from its AdSense program, which works similarly to Google Ads. Unlike Google Ads, 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, and Google keeps part of the fee.

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.

Alphabet’s Financials

Alphabet reported revenue of $307 billion for the year ending Dec. 31, 2023. That’s a 9% increase over the $283 billion the company reported the previous year. Operating income was $84.3 billion, compared with $75 billion in 2022. Net income in 2023 was $73.8 billion, up 23% from the prior year.

The company reported the following for each reportable segment for the first half of 2024:

Alphabet’s Business Segments

Alphabet provides a breakdown of revenue and operating income for its three reportable segments: Google Services, Google Cloud, and Other Bets. It also reports certain unallocated corporate costs, including corporate initiatives, finance and legal costs, and costs associated with certain shared research and development activities.

All these corporate costs are excluded from the segment breakdowns below as well as in the pie charts below.

Note

The company separated into its three reportable segments as of the fourth quarter of 2020. Before this, Alphabet separated its business into Google and Other Bets.

Google Services

This segment primarily generates revenue from advertising through Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. Other sources of revenue include app sales, in-app purchases, digital content products, hardware, and fees received for subscription-based products such as YouTube Premium and YouTube TV.

Google Services generated revenue of $144.3 billion during the first two quarters of 2024. That’s about 90% of its total revenue. Operating income came in at just under $57.6 billion.

Google Cloud

The Google Cloud segment comprises Google’s infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. Most of the segment’s revenue is generated from fees for Google Cloud Platform services and Google Workspace (formerly G Suite) collaboration tools.

Google Cloud generated $19.9 billion in revenue in the first half of 2024, comprising about 12% of total revenue. The segment has become profitable, earning over $2 billion in operating income over the same period.

Other Bets

The Other Bets segment comprises several 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 and health-care services. The segment reported revenue of $860 million and an operating loss of about $2.15 billion in the first half of 2024.

Important

Alphabet’s major competitors include Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), Meta (META), Alibaba Group (BABA), and others.

Google’s AI Business

In earnings calls in 2024, the company’s management has voiced confidence in its AI investments, despite snafus that led to bad press when its AI overviews—summaries of content its algorithms display at the top of results pages—were first revealed in 2024. AI has become central to the company’s strategy. Google Search, for instance, employs AI to understand user intent, while Google Ads uses it for ad placement.

As we’ve reported, while its research budget increased more modestly than previously—Alphabet spent about 7.7% more in R&D in the first half of 2024 than in the same period in 2023—investors have raised concerns over Google’s heavy investments in its AI infrastructure.

Google’s AI, Gemini, has four different models with one of the larger context windows (2 million tokens) among the major AI companies. This means it can read and respond to far larger amounts of text than those with smaller context windows.” In addition, about 1.5 million developers, Sunder Pindai, CEO of Alphabet, said, “are now using Gemini across our developer tools.”

Against those suggesting Alphabet show more patience before pushing so fast into AI to ensure its dollars are well spent, Pindai argued the risk was not responding fast enough given the immense competition in the AI sector.

“The risk of underinvesting is dramatically greater than the risk of overinvesting for us here. Even in scenarios where if it turns out we are overinvesting, these are infrastructure which are widely useful for us, they have long useful lives, and we can apply it across and we can work through that,” Pindai said. Alphabet worries that if AI is the future of search, letting others gain ground first could damage its business. “I think not investing to be at the front here, I think, definitely has much more significant downsides.”

How Alphabet Reports Diversity and Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Alphabet and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Alphabet releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Alphabet discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Alphabet breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.

Google’s 2024 Antitrust Ruling

In one of the most significant tech-related court rulings since the Microsoft antitrust case of the 1990s, a U.S. District Court in Washington D.C. found Google had abused its monopoly over internet search to illegally cement its dominance in other areas of its business. The case, brought by the U.S. Department of Justice (DOJ) and numerous U.S. states, accused the company of engaging in a wide range of practices that effectively ended competition in many significant areas of mobility and internet technology.

“Google is a monopolist, and it has acted as one to maintain its monopoly,” said U.S. District Court Judge Amit P. Mehta in his ruling.

The 277-page ruling also found that Google, which by 2020 commanded almost 90% of general search services and 95% on mobile devices, has exploited its dominance by paying billions to cellular service and smartphone providers like Samsung and Apple to secure its place as the default search on their devices and platforms.

While the company plans to appeal, the decision’s factual finding that it acted to leverage its monopoly to expand its profits is a major win for the DOJ. “This landmark decision holds Google accountable,” said Jonathan Kanter, the assistant attorney general in charge of the DOJ’s antitrust division. “It paves the path for innovation for generations to come and protects access to information for all Americans.”

The ruling could significantly change how Google operates, possibly eroding its market dominance and creating opportunities for competitors. The verdict puts wind in the sails of other DOJ investigations into the broader tech ecosystem, particularly companies benefiting from Google’s payments for default search placement.

The implications extend beyond Google, potentially affecting firms like Apple, which reportedly received an estimated $20 billion from Google in 2022 for default search status. If such deals are curtailed or even prohibited, it could impact the revenue streams of several tech giants.

However, they are being targeted just for how they did business with Google. The ruling puts winds in the sails behind other DOJ lawsuits against other dominant tech companies, signaling a shift toward stricter antitrust enforcement in the sector. The DOJ and U.S. Federal Trade Commission have sued Amazon, Apple, Google (twice), and Meta, the parent company of Instagram and WhatsApp, in what government officials have called a necessary effort to promote competition in areas where these companies have long held incredible power.

For consumers, the long-term effects remain uncertain. Increased competition could lead to better products and services. However, changes to Google’s business model might also affect the free services users have come to rely on. This ruling sets the stage for a potential reshaping of the digital landscape, challenging the power of Big Tech and possibly ushering in a new era of competition and further regulation in the sector.

When Did Google Become Alphabet?

Google is one of the world’s most popular internet search engines. The company went public in August 2004 under the name Google. However, its leaders took the company in a different direction by changing its structure and, more importantly, its name. In a letter posted on the company’s website in 2015, co-founder Larry Page said creating Alphabet would open up opportunities within Google. The move, he stated, would also allow the company to design and develop new ventures, including investments in new technologies like artificial intelligence and drone delivery. As such, the company’s name changed, but it retained its ticker on the Nasdaq.

How Can I Invest in Alphabet?

You can invest in Alphabet by purchasing shares of its Class A or Class C shares. Their ticker symbols are GOOGL and GOOG, respectively. The company also has a set of Class B shares but these are only intended for insiders rather than the general public. You can purchase shares by opening a brokerage account, buying shares in a mutual fund, or buying shares of an exchange-traded fund (ETF) that invests in the company.

What Are Some of Alphabet’s Major Companies?

Google is Alphabet’s largest subsidiary, and it has several major brands under it. These include YouTube, Nest, and Fitbit. All these ultimately fall under the Alphabet umbrella. Alphabet also owns Wing, which develops drone delivery systems, Calico (a health care and biotechnology company), and Verily, a life sciences research organization.

Who Are Alphabet’s Top Shareholders?

The top Alphabet shareholders are Larry Page, Sergey Brin, and Sundar Pichai, and the top institutional shareholders are the Vanguard Group and BlackRock (BLK).

What’s the Difference Between Alphabet’s Class A and Class C Shares?

Alphabet has several share classes, two of which are intended for regular investors. Class A shares are traded on the Nasdaq under the ticker symbol GOOGL. This class refers to the company’s common shares and gives the investor who holds them voting and ownership rights. Class C shares, which trade under the ticker symbol GOOG, are held mostly by employees of the company.

The Bottom Line

Google is one of the world’s largest and most popular search engines. Once its own company, it became part of a newer parent company in 2015. As Alphabet, it owns a range of companies that span various services, such as internet searching, streaming, drone delivery, health care and life sciences research, and artificial intelligence.

If you’re interested in investing in the company, it trades on the Nasdaq under common shares (GOOGL) and nonvoting stock (GOOG). You can invest in it by opening up a trading account or by investing in mutual funds or ETFs that hold its shares, which many do.

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