How Google Makes its Money
Preface:
Recently, our class has looked at the web as a directed graph. We talked about how webpages point to each other using hyperlinks, and then talked a little bit about how search engines, namely Google, might search through web pages and list them in order of importance. However, as we were talking about this, I started wondering how Google, which I know as a goliath of a tech company, makes its money.
Blog Post: Google and Money
According to the linked website, Google makes most of its revenue from advertising. Unlike traditional advertising strategies that target a more general audience with more generic messages, Google uses it prowess as a search engine and an advertising method called “pay-per-click”. With this strategy, Google will “sell” certain keyword searches to companies looking to advertise such that they charge some amount of many to the company every time the link is clicked on. In other words, the moment a user of Google access a page that the moment a Google user access a page on which an add appears, the advertiser is charged. Clearly, they have been successful since they make 96% of their revenue from advertisements.
The sale of ad space to companies looking to advertise is based on auction. According to the article, “Overpay, and Google enjoys a high markup. Underbid, and you risk losing the auction to a more motivated seller.” This sounds a lot like the second price auction that we discussed earlier in class, where a given company’s dominant strategy is to bid it true value.
In addition to charging for key words, Google also sells “AdSense”. Though this mechanism, owners of websites join in Google’s network so that the can run Google-branded ads. Specifically, website owners can sign up for a network (for example yoga) so that they end up displaying related ads on their own website (for example mats). The companies to whom the ads actually belong pay Google to run those ads indirectly on other sites, and the owners of those other sites also tend to benefit. About 26% of Google’s revenue is generated this way.
In the end, every service Google offer, including Maps, Gmail and Drive, exists from a financial standpoint to get people to spend more time on Google and so further the advertisement business. The more time users spend on Google, the more ads will get clicked on, and the more money Google will make.
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PS: We actually talked about this in lecture today…which kind of takes the originality out of this article