Understanding Google’s Mobile Economy
Google is big. So big that its revenue in 2019, that of $161.85 billion, would make it the 56th biggest country in the world. Astonishingly, with over two-thirds of its earnings coming from advertisements, people call it an advertising company. However, with its size and the level of influence it exerts, it would not be wrong to imagine it as an economy in itself.
This write-up does exactly that. It is an attempt to see google as an economy and to link its disparate arms to show how it operates. To narrow the scope, the focus is primarily on Google’s strategy on mobile phones.
Entering Google’s Mobile Economy
Imagine people living inside mobile phones. This sounds hypothetical, but with an average user spending 3hrs 15mins on a mobile phone every day, we are essentially spending ~12% of our adult lives on the small digital screens.
Now, in this mobile economy, think of the power dynamics between Google’s Android and Apple’s iOS — operating systems that have immense control over all of the software and hardware of our smartphones. There may be individual differences in opinions between us users, but if there were an election, a democratic system would always lead to a majority for Google. Look at the market share for instance. Seventy percent of the smartphones today have Android as their operating system. In the mobile economy, this implies that Google’s Android would be at the center and with its ability to influence greater than that of other operating systems.
But why does Android have a 70 percent-plus market share?
Because Android is open-source. In simple terms, it is free. Also because Apple’s iOS is not. A handset maker, such as Xiaomi or OnePlus, that selects Android as its operating system does not have to pay a single dollar to Google. Apple’s iOS, on the other hand, is not even licensed to third-party handset operators and can only be used in Apple smartphones.
Now if we think of handset operators as smaller parties in search of more popularity, we realise that they stand a better chance of winning by associating themselves, at near-zero cost, with Google’s Android. People already recognise and trust Android. And if other handset makers are opting for it, a manufacturer needs a strong operating system and marketing team of its own to not follow them. Besides, Android, as we now know, is quite welcoming.
This raises an important question. Is Google really so benevolent?
Maybe. But it is definitely smart. Google imposes certain strict terms for those handset makers who want to adopt Android: add a few of Google’s applications on your smartphones, the likes of YouTube, Google Maps, and Gmail, and ensure that the Google search bar and Play Store be “at least on the panel immediately adjacent to the Default Home Screen”.
The technical term for such applications that come pre-installed and are often not possible to uninstall is bloatware. For users, these applications become the default choice for mails, videos, and internet searches — and therein lies the key to Google’s strategy. Think of the bloatware as institutions mandated by Google to the handset operators. Each of them performs a different function.
G-mail in our little analogy acts as any other ID system in the world, giving an identity to a smartphone user. Much like other ID systems, G-mail also raises several privacy concerns but the majority have come to overlook them for the benefits. Similarly, YouTube acts as the first choice for video and audio content for the masses, gathering billions of eyeballs each month. And Google Search and Google Maps track locations off and on the internet for the users. Combined, these applications help Google maintain control over its economy, allowing it to build user profiles and predict their behaviours.
The terms and conditions by Google invite little resistance from the hardware manufacturers. Moreover, they also realise an opportunity to save on software costs by adopting Android, allowing them to offer smartphones at lower prices — eventually benefiting the end consumer. This drives more manufactures and in turn more consumers towards Android. A classic case of network effects. No wonder Google gets the popular vote.
Wheels of the Economy
Getting the popular vote is great. But to continue to offer its largely free-of-cost services such as Google Maps, G-mail, Google Search, and YouTube, among others, Google must earn to cover for the costs of running them. And to earn, it does what most governments do. Sell the public property to and collect taxes from businesses and users in its economy.
Users are simply the consumers of Android. As the users interact with the pre-installed Google applications, they leave their footprint at every step. Unlike in the physical world we live in, the surveillance is more sophisticated in our smartphones. Each Google search, website click, and video that we watch carries information about us. And every silly doubt or little curiosity that we would not share with anyone else, we share with Google. This package of information on more than a billion users is what Google offers to the businesses.
And in our little analogy, businesses refer to every individual or organization that wants to take its product or service to the user-base in the Google mobile economy. A shopkeeper in search of sales, a tourism company eager to sell more tickets, a blogger sharing some thoughts — the possibilities for products and services sold across the internet are endless.
Please note that the article ahead studies the two major revenue strategies for Google, responsible for over 90% of its total income. However, these are not exhaustive and leave out certain other smaller revenue streams.
Revenue Strategy #1: Property Space for Sale
Millions of businesses operate in the internet economy, selling goods, services, or simply content for consumption. And few find better ways to catch eyeballs than to capitalize on the traffic that Google generates through its superior user database. Selling higher visibility, Google lures businesses to advertise on its properties and on the properties of the members in the Google network. For providing this service, Google charges advertisers. And interestingly, that makes up for 83.9% of its total revenue.
Now think of advertising as a billboard space that Google offers to businesses. Since Google constantly tracks a user’s behaviour, the Google database registers the paths the users are taking, the websites they are visiting, and the services they are using. The difference here compared to a large billboard you would see on the highway is that in the google economy, there are millions of such roads and we can still precisely identify which type of users are expected to be where. Businesses use this ability to identify their consumers and target their advertising efforts to find their highest potential customers. And this sounds a lot better than adopting a mass-marketing sales channel for businesses.
But how does Google sell property space?
Based on its ability to connect businesses to users, Google offers four types of advertisement opportunities and spaces — AdWords, AdSense, AdMob, and YouTube ads. Each of them differs in practice.
1. AdWords
These refer to advertisement spaces on Google Search results. To underline its enormity: Google Search saw over 3.5 billion queries in 2019. And potentially, each search query on Google leads to a different and dynamic result, or a separate road if we may call it that. Like people in the physical world, users in the google economy also travel on their usual set of roads more often than not. Recognizing this fact, businesses hope to use the information on user search patterns to identify the most attractive search pages to place their advertisements.
As for the earnings, Google uses a simple and seemingly fair auction mechanism to price the ad space for a search query. For each ad space that it sells, it charges for either per thousand ad impressions, i.e. ad views, or per ad click. Ultimately, businesses have the final say on the payment model they want to adopt. However, the most common payment model for AdWords is the Cost per thousand impressions (CPI) or known in the advertising jargon as Cost per Mile (CPM).
What works in Google’s favour is that, often, ad spaces see competition from multiple parties. To add to the trouble for businesses, they have a limited window to catch the user’s attention — around 92% of searchers never go past page one or top ten results of a Google Search query. Google capitalizes on these facts and attracts higher bids for a more desired property space. Overwhelmingly, AdWords or this direct form of property auctions is the primary source of revenue for Google, accounting for 60.8% of its total revenue or just short of a $100 billion last year.
2. AdSense and AdMob
Not only the search queries, but Google also uses the properties of other private members in its network to sell advertisement spaces. Only here, Google acts as a broker. To use a more real-world analogy: in our day-to-day lives, we see ads not just on highway billboards but also on shops, and in commercial spaces. The owners of these spaces leverage their popularity (read, number of customer visits) to earn money from businesses that want to advertise to the visitors of that space.
For websites, this can be a win-win situation if the poorer website aesthetics due to ads is not a huge concern. They pay nothing for lending site space for ads, and in exchange can earn money. The idea is simple. Select the kind of ads you want to display and spaces on your website where you want them to appear. When done, advertisers take over and bid for your Ad space in a real-time auction. Google calls this website-based model AdSense. AdMob, on the other hand, is AdSense for mobile applications. Similar to how websites lend their spaces for Advertisements in partnership with Google, mobile applications do through AdMob.
Numbers help us establish the enormity of these secondary Ad models. There are presently over ten million websites using Google AdSense and over a million apps using Google AdMob. Combined, these network property sales earned Google ~13.3% of its revenues or around $21.5 billion last year.
3. YouTube ads
Lastly, I look at the smallest and the fastest-growing advertising segment for Google — YouTube ads. These offer businesses video advertising on YouTube properties and are similar to digital advertising screens that we see in malls of the metro cities.
For businesses, YouTube has made this mode of advertising process more streamlined, straightforward, and effective. All a business has to do is to discover the right audience for their product on YouTube, build video content for advertising based on the audience, select their YouTube campaign goal, and finally reach out to people on the homepage, on specific YouTube search results, or show their video ad before a YouTube video.
Quite neatly, YouTube provides six types of advertisement opportunities to such businesses with each requiring a specific campaign goal to be selected, each appearing at different stages on the YouTube app, and each requiring you to pay based on a particular payment metric. With Google expecting the video format to account for 82 percent of all internet traffic by 2021, the opportunities are enormous for this ad revenue segment.
Registering over two billion monthly visitors, YouTube earned Google a total of $15.15 billion in 2019 through YouTube ads — a figure rising ~35% on a year-on-year basis, compared to a ~15.7% increase in total advertising revenue for Google in 2019.
Revenue Strategy #2: Collect Taxes from the Developers
In the mobile economy, Google has created a marketplace to sell mobile applications called Play Store. This is similar to any other marketplace in our physical economy. Application developers get a place in the marketplace of over a billion consumers and for providing this space, Google charges these developers some tax. Now taxes, in the simplest form, are a small charge on your income mandated by some central authority. And Google ensures their collection by mandating developers to process all their payments through Google Billing only.
As for the service fees, Google Play charges 30 percent of any app sale, in-app product sale, or subscription that the developer wins. The only deviation allowed from the 70–30 rule is the drop in service charge to 15% for any revenue from ‘subscribers you retain after 12 paid months’. That is, if someone has subscribed to your app for more than 12 months, any additional subscription revenue from that user will see an 85–15 split instead of the 70–30 for any other revenue.
While the information on revenue particularly from Google Play Store is not public, the annual report mentions revenue from Google Play under ‘Other Revenues’, which measured a sizeable $17 billion or ~10.6% of total revenues in 2019. Of the entire figure, Google Play undoubtedly captures a majority chunk with the presence of over 2.5 million apps in the marketplace. Moreover, hardware and YouTube non-advertising revenues make the left-out part of ‘Other Revenues’ and are relatively small in popularity.
Summary and the Final Words
The sheer magnitude of Google puts it in a tremendous position of influence over the billion-plus mobile users. For some perspective, Google’s Android captures over 70 percent operating system market share in smartphones today. The article attempts to understand how Google wins that popular vote and how it keeps its engine running.
Offering its operating system at free-of-cost, Google’s Android attracts high adoption from hardware manufacturers. In return, it only asks for certain applications to come pre-installed in the smartphones. These terms seem innocuous to the manufacturers, but the volume and depth of data that Google collects with Google Search, G-mail, YouTube, Google Maps, among other apps sets the path for Google’s revenue strategies. The strategies have fairly simple real-world analogies and can primarily be divided into the following:
- Property Space Sales: Google sells advertisement spaces on its own property through Google Search and Google-owned operator properties such as Gmail, Google Maps, and Google Play. Moreover, it offers broadly four types of advertising platforms— AdWords, AdSense, AdMob, and YouTube Ads — to the advertisers. The property sales alone are responsible for ~84 percent revenue earnings of Google.
- Tax Collection from Developers: Secondly, Google charges a fixed 30 percent of all revenue earned by developers through their Google Play Store apps as service fees. The rule only deviates for revenue earned from 12 months plus subscriptions. Significantly, this stream of income contributed roughly 10.6% of Google’s revenues last year.
Combined, the two strategies earned Google ~$150 billion last year, and segmenting each and studying the parts help us understand how Google operates its mobile economy.
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