How does Google make so much money?

Research published last week by the UK media regulator Ofcom found that half of adults (51%) who use search engines are not aware that the top items on many results pages are adverts or sponsored links. While the research suggests that users are increasingly sceptical about the reliability of online information (less than one in five trust results from search engines to be accurate or unbiased), people’s understanding of the commercial dimensions of online search is limited.

What do we need to know about the commercial dimensions of internet use, and particularly of its most basic function, search? How does Google – far and away the market leader – manage to make so much money from what seems to be such a basic, straightforward service?

Google’s recently renamed parent company Alphabet is currently the most profitable business in the world. Alphabet also owns YouTube (bought by Google in 2006) and Android (the market leader in mobile phone software). It has a market value of US$565 billion, marginally ahead of Apple. The company’s quarterly revenue is over 20 billion US dollars, while its operating profit is almost six billion – an extraordinary rate of return compared with many other businesses.

At present, the company is losing money on what market analysts call ‘moonshots’ – speculative ventures such as self-driving cars, ‘smart homes’ and robotics. It is also threatened by the European Commission’s attempts to prosecute the company for favouring its own apps and services on its Android operating system (currently on 80% of smartphones), and thereby driving out the competition.

Alphabet-Google-Monopoly-2 thenextweb.com

[Source: thenextweb.com]

While a good slice of Google’s profit comes from advertising on YouTube and games sales in its Google Play store, online search – especially on mobile devices – provides far and away its main source of income. It is the area in which Google massively dominates the market, with around 90% market share. As early as 2006, the verb ‘google’ was added to the Oxford English Dictionary: it seems to have become a generic term for internet search, whichever search engine one actually uses.

Ofcom’s research suggests that few people really understand online advertising. On the face of it, this might seem puzzling. Many internet searches return links at the top of the page that are clearly (though not very prominently) labelled ‘sponsored’. Of course, it’s possible that users don’t understand the term ‘sponsored’, and few are likely to click on the information button that it explains it:

Based on your search query, we think you are trying to find a product. Clicking in this box will show you results from providers who can fulfil your request. Google may be compensated [i.e. paid] by some of these providers…

Depending on the nature of your search, you may also find further results that are unambiguously labeled ‘Ad’ with a small orange tab.

Even so, advertising on Google is much less overt than on YouTube, where pop-up ads routinely precede and interrupt the videos. Google’s home page has never contained overt advertising – and in the early days of internet search, this significantly distinguished it from other (now largely deceased) engines such as Yahoo and Alta Vista. The plain design of the page, with its large expanse of white, helps to promote its brand image as a free, non-commercial utility.

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However, advertising in the form of sponsored results is only part of the broader economics of online search. Much less obvious to ordinary users is the way in which information about them – gleaned from their online search behaviour – is gathered, used and sold. We may know something of this from our everyday experience: for example, if I search on Google for ‘black suede shoes’ (as I have been doing recently), I am likely to be targeted with adverts for such shoes on other platforms I happen to use.

Compared with traditional advertising (for example on TV), this kind of ‘personalised’ advertising is more effective for companies and less annoying for the consumer. We see the ads that are most relevant to us, without having to suffer ads for things that we are never likely to buy. Meanwhile, advertisers don’t have to waste time and money bombarding people with irrelevant marketing. This kind of targeted advertising is obviously much easier with digital technology; but it depends upon advertisers being able to track very closely what we do online – the search terms we use, the sites we visit and the clicks and keystrokes we make.

This is mainly achieved by the use of ‘cookies’ that are permanently planted on our computers and mobiles. This process used to be entirely hidden, and it was not until 2011 that an EU Directive required users to be informed about it and agree to it before they use a particular site. However, other forms of consent – such as our agreement to our personal data being made available to ‘third parties’ (that is, sold to companies) – are mostly hidden in the terms and conditions of service that few users will be bothered to read.

Sometimes this information is aggregated – that is, combined from different sources and accumulated into bigger data-sets, which can then be analysed using a computerized process known as data mining. It’s not always possible here for analysts to identify specific individuals – which could have major implications for privacy – but it can be useful for identifying broader trends. Thus, the people who analyse this data might discover that people who like black suede shoes also tend to like fruit smoothies or exotic adventure holidays, and so they will be inclined to target them with ads for such products as well. Google’s own subsidiary Google Analytics is the leading company in this business, and it has several other companies and services in the area, including AdSense, Google Trends and PageRank. It recently partnered with Twitter in its efforts to track consumer behaviour and attention on a more immediate, minute-by-minute basis.

All these issues need to be seen in the context of Google’s (or Alphabet’s) overall business strategy. In the early days of the internet, enthusiasts like Nicholas Negroponte predicted that it would decentralise the media environment, leading to a ‘cottage industry’ of small producers. While there have undoubtedly been elements of this, digital media have been increasingly dominated by a small number of mega-corporations, on whom all users have to depend. This is a ‘winner take all’ industry, where smaller players – and sometimes those who were a little ahead of their time – frequently go to the wall, while larger companies get ever larger.

monopoly-Google-game

[Source: wisdomquarterly.blogspot.co.uk]

This is partly a result of economies of scale, which are apparent across the media industries in general. Unlike many other commodities, media products and services are intangible goods: they are not used up when they are consumed. The makers of baked beans have to make new cans of baked beans for everybody who wants to buy them. By contrast, the makers of Avatar or Lemonade – or indeed the designers of Google’s platform and the algorithms that it uses – only have to make one original. The initial cost of production may be very large indeed, but the more people who use or buy the product, the more the cost is spread. The economic logic here favours larger companies who are in a better position to spend the money upfront.

This tendency towards monopoly or oligopoly – the dominance of a few powerful players – is also evident in the pattern of company take-overs. Small start-up companies will often do a great deal of the speculative research-and-development work, pioneering and testing out new products and services. Once the product appears to be commercially viable – and ideally, before it becomes too much of a threat – these companies will then be bought by large companies like Apple, Facebook and Google/Alphabet (all of whom were small start-ups in their time, of course).

For example, back in the mid-2000s, Google bought the companies AdWords and DoubleClick, which gave it the means to successfully combine search and advertising. Its purchase of YouTube in 2006 was greeted with scepticism by some commentators, but it has proven extremely lucrative, not least because users provide all the content while simultaneously creating the opportunity for the company to advertise and track consumer preferences. (I’ll be writing another post on the so-called ‘sharing economy’ shortly.) According to an article on Wikipedia, Google has bought an average of one company a week since 2010.

Google-Alphabet Techweez.com

[Source: techweez.com]

The larger companies also have the ability to undertake speculative projects themselves, and to diversify into other areas. Some of Google’s ‘moonshots’ may not seem so promising, but the company has more or less successfully diversified or bought into e-mail (Gmail), browsers (Chrome), maps (Google Maps, Street View), social networking (Google Plus, Google Hangouts) and document sharing and editing (GoogleDocs), as well as older media such as photography (Picasa), books (Google Books) and of course television and video (via YouTube). It even provides the leading academic search engine, in the form of Google Scholar. Like Facebook, Google has been accused of attempting world domination – a charge that might be a little melodramatic, but maybe isn’t too far from the truth.

Finally, a more cynical – but entirely accurate – answer to my question would be to note that Google (like Facebook and Amazon, for example) has been extremely skilful in the business of tax avoidance. There have been many news stories about this over the past five years, but it is only very recently that the company’s tax affairs have been challenged by the UK parliament and the European Commission. It hasn’t broken any rules, but it has paid very little in ‘corporation tax’ (taxes on businesses) over the years, not least because it uses off-shore tax havens, often with the collusion of governments.

Nothing I have described here is necessarily ‘evil’, in the words of Google’s famous corporate motto. Some people would argue that it’s just how modern capitalism works. Allowing a company to gather data about our every move online can certainly be seen as a threat to privacy, but some would see it as a reasonable price to pay for services that are convenient to use, and apparently ‘free’. The key question, in my view, is whether we really understand what is happening. The Ofcom figures are fairly alarming, but I would argue that very few users understand what goes on ‘under the hood’ of Google and other companies like it. And that’s another reason why we need Media Studies.

 

NOTE: I’m currently experimenting on this blog with writing that’s targeted more at students and at a general readership. The aim is to take current media phenomena and link them to Media Studies research and theory, but with a light touch. I’ll continue to write pieces aimed mainly at specialist teachers and researchers, but I’m also trying to write things that will be more widely accessible. Like my earlier posts about Rihanna and Selfies, this is one of those posts. Feedback is most welcome!