Here’s How Alphabet Makes Its Money

Updated on May 18, 2020 at 7:59 am UTC by Osaemezu Ogwu · 7 min read
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Photo: Depositphotos
Photo: Depositphotos

Here’s a detailed outline of how Alphabet makes its money and the list of companies it operates. You’ll also find the company’s financial details, recent developments, and what gives it an edge in the competition with other tech companies worldwide.

Alphabet (NASDAQ: GOOGL, GOOG) is a multi-industry company based in California. It is among the top tech companies in the world based on revenue, which is also rated as one of the most valuable companies worldwide. Alphabet’s stock has the 4th largest market capitalization in the U.S., ranking it after Apple‘s stock (AAPL) and Microsoft’s stock (MSFT).

When the name Alphabet comes to mind, the company it is associated with is Google. The latter is because of the restructuring of Google in 2015 made Alphabet its parent company. Several other arms overseen by Google were also transferred to Alphabet. These subsidiaries include Verily, DeepMind, Sidewalk Labs, Nest, Firebase, etc.

What’s more, Larry Page and Sergey Brin, Google’s co-founders were the company’s executives. Page was Alphabet’s CEO while Brin was the company’s president before they left these positions in December 2019. According to Page, the aim of moving Google and other arms to Alphabet was to make the former more liable, transparent, and gain a clearer oversight on its operations.

Alphabet Makes its Money from a Range of Services

Alphabet generates revenue from its platforms such as the Google search engine, Google Play, and Android OS. The company also earns from YouTube, Google Cloud, and the Chrome browser.

In each of these services, revenue is generated from app subscriptions, advertising, etc. Advertising yields the most revenue for the company. On the other hand, its Android OS has seen a spike in revenue of late as a result of setting up a licensing fee.

Over and above that, there is a range of investments tied to the company’s name. For instance, Alphabet has invested in Waymo autonomous vehicles, Stadia cloud gaming service, and a range of other options.

Alphabet’s Financial Details

On April 28, 2020, Alphabet released its financial report for Q1 of 2020. Per the report, the company’s revenue for the quarter was $41.2 billion, and it is a 13% increment from 2019’s revenue. The company, however, added that even though there was an impressive performance in the first two months of the year, ad revenue slowed down in March. Nonetheless, most of the increment in revenue could be tied to people’s increasing reliance on Google services during the COVID-19 pandemic.

Specifically, the operating income for Q1 of 2020 was $7,977 billion, while the operating margin had surged by 19 %. The Google segment had the highest revenue of $40,975 billion. Sub-categories in this segment are Google advertising, Google Cloud, and other Google services.

Google advertising had the highest revenue given that its data stood at $33,763 billion. It was an increment from $30,587 billion raised in 2019. Google Cloud and other services revenue were $2,777 billion and $4,435 billion respectively. The remaining revenue was tied to Other Bets and hedging gains and these were $135 million and $49 million respectively. Its number of employees was 123,048, an increase from 2019’s 103,459.

Comparing the recent financial report to that of Q4 of 2019, the same impressive performance was evident. At the time, Alphabet had raised about $36 billion in revenue. Its market cap in the quarter also rose to $900 billion. Much more, the net income of $30.7 billion and revenue of $136.8 billion in 2018 was an increment from 2017’s $12.7 billion net income and $110.9 billion revenue. 2017’s net income was also a 36% decrement from that of 2016.

Alphabet’s financial report also revealed how much its assets are currently valued. These assets are worth $273,403 billion. The latter is, however, a decline from its asset’s valuation of $275,909 billion in 2019.

Businesses

Alphabet’s businesses are separated into a segment called Other Bets. This segment includes every other service asides from Google. According to the company, the reason for this categorization is because Google is the only segment that is reportable. Besides, other segments have not met the quantitative thresholds that will enable them to become a reportable segment. Which is why these segments are combined to form Other Bets.

Other Bets

To that effect, the list of services that are included in Other Bets includes Calico, Access, Verily, CapitalG, GV, and X. The autonomous systems from Waymo, Alphabet’s self-driving unit, and cloud gaming system from Stadia also fall in this category. The autonomous systems, in this case, are being tested extensively in several states in the U.S

There was a 24% surge in revenue in this segment in 2018 and the same increment was evident in most of 2019. However, the revenue from this segment has been mostly the same, without significant increments. As such, the Google segment accounts for most of the revenue each year.

Also, a loss in operating income has been reported in Other Bets segment since 2016. And in the first quarter of 2020, Alphabet’s report revealed that there was also a loss in the revenue for this segment. From $170 million in Q1 of 2019, $135 million was recorded for Q1 of 2020.

Google Revenue

Alphabet’s financial report for Q1 of 2020 shows that its Google revenue for the quarter had surged. This segment accounted for over 90% of its revenue for Q1 of 2020 and it was the same in the third quarter of 2019. It also made a significant part of the revenue throughout the first nine months of the previous year. Likewise, the operating income for this category surged by 14% throughout the first nine months in 2019.

Specifically, advertising showed the most impressive performance in this segment. It accounted for 71% of the revenue in the third quarter of 2019. The same performance was evident since 2016. At the time, advertising accounted for 70.5%, whereas it made up of 70.5% and 70.7% revenue for the segment in 2017 and 2018 respectively.

Key Recent Developments

In December 2019, Larry Page and Sergey Brin revealed that they won’t be in charge of corporate roles. Accordingly, Page is now a board member in the company and Sundar Pichai, Google’s CEO, has assumed the role of a leader at Google and Alphabet. The news led to a surge in Alphabet’s shares which was evidence it was a welcomed development to investors.

It may also be worth noting that Alphabet’s GOOG stocks surged even in the face of a global pandemic. As of May 11, 2020, GOOG had surged by 5% (Year-to-date) and its closing price was around $1,403 on the said day. The stock’s market capitalization had also spiked to $958 billion.

In May 2020, Alphabet’s subsidiary Loon LLC partnered with Vodacom to enhance internet access in Mozambique. As part of their collaboration, Loon’s internet solution will enhance Vodacom’s network in the East African country. The duo hopes that the partnership will provide internet access in regions in the country that are under-served or are unconnected.

Alphabet Battles Regulatory Issues in the EU

Another major development is the case Alphabet is battling with the EU authorities. In May 2019, the EU fined Alphabet $3.7 billion. Google was fined as part of the EU’s antitrust penalty and the company has been facing a regulatory battle in Europe. The fine, however, was tied to illegal practices pertaining to Google’s search advertising between 2006 and 2016.

The investigation is not the last of its kind given that the authorities are also looking into ways the Google search engine uses to source for its data. The U.S. Department of Justice also revealed it will carry out an anti-trust review of major tech companies and among these companies is Alphabet. And so far, the investigation has begun with several sentiments that the investigation could stir a campaign issue in 2020.

On the other hand, Waymo revealed it had raised $750 million in funding for its driverless cars. As such, the Alphabet subsidiary had raised a total of $3 billion in the funding round it began in March 2020. The company also noted that some of its major investors were outsiders and some investors were T. Rowe Price Associates Inc., and Fidelity Management & Research Co.

Conclusion

Alphabet is one of the major tech companies in the world with several subsidiaries tailored to different industries. Alphabet makes its money from Google products including the search engine, Android OS, among many others. Its stock prices have also surged for the past few months. And at a time where there were fears of a global recession, it still made gains. This and many more make Alphabet a potential company for anyone looking for a good company to invest in.

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