Major Trends Affecting Google’s Business
Google, the search and advertising giant has soared faster since Pichai became the CEO of its parent company Alphabet. Within some days, the company’s market cap has soared to $1 Trillion. It was something not expected to happen so fast. Before Google, Apple and Microsoft have crossed the barrier and Amazon also touched the limit briefly.
While these figures amaze audiences worldwide including investors, employees, and fans, the company is also dealing with several challenges, some of which are related to employees and company policies whereas the others are regulatory challenges. However, despite all these challenges, Google has achieved faster growth and the reason is its strong business model. While advertising is the core source of revenue for Google, several trends have driven its faster growth.
Leading Trends Affecting Google’s Business:
Evolution of the Digital Economy and Growth of Digital Advertising:
Since its foundation, the growth of digital technology has remained the main factor driving the business growth of Google. As the number of internet users continues to grow each year, the digital economy has continued to enlarge. Advertising has shifted from offline to online channels driving revenue growth for Google, the search leader of the world. The number of people accessing internet-based services from their smartphones is also rising each year. Google continues to enjoy the lion’s share in mobile advertising followed by Facebook. In the coming years too and following the arrival of 5G, which is expected to improve the rate at which the digital economy is growing, Google is expected to enjoy faster growth.
Continuously Expanding Google’s Product Mix:
As more and more users join the community of internet users, Google has also continued to expand its product mix. The needs of both the advertisers and users are evolving and Google is expanding and improving its product mix to serve the users better. Programmatic buying offers the advertisers an opportunity to connect with the right buyers at the right time and in the right context. Over time Google has experienced a shift towards programmatic buying. Moreover, the company is experiencing a rise in YouTube engagement ads.
Growing Diversity of Devices from which Users Access Online Content:
Users are accessing online content from diverse devices. Apart from laptops, tablets, and smartphones, they are also using other internet-enabled devices to access online content and services. They want to stay connected round the clock irrespective of where they are and what they are doing. The share of mobile advertising in Google’s revenue is continuously growing. While Google’s revenue from Mobile and the other sources is growing, the margins are generally lower than traditional desktop ads. The changing device mix will continue to affect Google’s margins as the traffic acquisition costs, it pays to its distribution partners will continue to grow.
The Number of Internet Users in Developing Economies is Growing:
Google’s opportunities outside the USA are also growing. A larger population from the developing world has joined the community of global online users. Emerging economies are adding a higher number of users to Google’s customer base each year. Seeing the level of demand from developing economies, Google has developed localized versions of its products including search in various languages to support local users. Alphabet’s revenue from the international markets has also grown sharply in recent years, having risen to $73.6 billion in fiscal 2018 from $58.4 billion in 2017. As the availability of low-cost mobile devices grows, Google expects the share of income from international markets to also grow.
Google’s Non-Advertising Revenue is Growing:
Non-Advertising revenue of Google has continued to grow over the years. Alphabet’s total revenue from the Google segment (excluding other bets) in 2018 was $136.2 Billion of which $116.32 billion came from advertising while $19.9 billion came from other sources. In 2017, the total non-advertising revenue of Google was $15 billion and $10.6 billion in 2016 (Alphabet Annual Report 2018). As Google continues to expand its product offerings through products and services including Google Cloud, Google Play, hardware products, and YouTube subscriptions, it expects its non-advertising revenue to continue to grow. Google continues to generate its nonadvertising revenues mainly “from sales of apps, inapp purchases, digital content products, and hardware; and licensing and service fees including fees received for Google Cloud offerings”. The margins on these businesses can be significantly lower than Google advertising business. Google is also developing more channels on revenue in the ‘other bets’ category which are currently in their initial development stage.
Google Has Raised its R&D Spending Heavily:
The tech industry is highly competitive and therefore the size of research and development expenses also affects growth rate and competitive strength. In terms of research and development, google places strategic focus upon areas including search, advertising, cloud technology, machine learning, and new product development. It is continuously improving its search engine and advertising for improved user convenience. This has continued to grow the operating expenses of Google but its revenue and market position has also improved a lot. In 2018, Google spent $21.4 billion on research and development compared to $16.6 billion in 2017. Its R&D investment jumped by around $5 billion in just a year which signifies the importance of innovation and reflects how higher competition is driving increased innovation across the industry.