Google, a subsidiary of Alphabet Inc. (NYSE: GOOGL), has faced flak numerous times on how it generates advertising revenue and the company, along with its peers, now faces the possibility of strict regulations. Let’s take a look at how Google earns its revenue and how it has been trending thus far.
The majority of Google’s revenues come from advertising
generated through Google properties such as search, Gmail, Google Maps, Google
Play and YouTube and through Google Network Members’ properties in AdMob,
AdSense and Google Ad Manager. In 2018, Google’s ad revenues made up 85% of
parent Alphabet’s total revenue.
Google also earns revenue outside advertising through apps,
in-app purchases and digital content in the Google Play store and from Google
Cloud, hardware and YouTube subscriptions. These are classified as other
revenues.
For the first quarter of 2019, Google posted advertising revenues of $30.7 billion, which was up 15% year-over-year but down 6% sequentially. Over the trailing five quarters, growth in advertising revenue stayed in the low to mid-single digit range before seeing a double-digit climb in Q4 2018. This was followed by a drop in the most recent quarter.
Google faces tough competition from Facebook (NYSE: FB) and Amazon (NYSE: AMZN) in the digital advertising space. A report from eMarketer states that total digital ad spending in the US will grow 19% to $129.3 billion in 2019.
The report also indicates that the combined market share of
Google and Facebook is expected to drop despite a growth in revenue for both
companies. Amazon’s ad business in the US is estimated to grow over 50% in 2019
while its digital ad market share is projected to grow to 8.8% from 6.8% in
2018.
Google has been trying to diversify its revenue base beyond advertising and has been focusing on its other revenues category as part of these efforts. This segment, which includes Google Cloud, posted steady sequential revenue growth over the past three quarters until the most recent quarter, where it saw a 15% dip.
Google’s cloud business has significant potential to drive revenue growth and the company is taking measures to ramp up this business. This report from ZDNet suggests that Google Cloud and Microsoft Azure are likely to take market share away from Amazon Web Services (AWS) in 2019 and 2020. Although Amazon is moving into Google’s territory in the digital advertising space, the search giant is giving the online retailer tough competition in the cloud space.
Overall, Google enjoys a strong footing in advertising and has good potential to drive revenues in cloud going forward.