An introduction to Google’s Business:
Google (NASDAQ: GOOGL) (Parent Company: Alphabet) is the leading search engine of the world, with the largest market share of around 87%. Founded in 1998 by Larry Page and Sergey Brin, the company has grown to become one of the four largest technology brands in the world. In January 2020, it became the third US-based tech company to join the $1 trillion club (market cap of Alphabet). Google’s fast growth in less than 22 years has been driven mainly by its intense focus on innovation and the continuous expansion of the digital advertising market. Apart from being the dominant search engine in the world, Google also dominates the digital advertising market. Digital advertising drives a substantial part of Google’s revenue. The company realized solid revenue growth in 2019. It is also enjoying more robust financial growth across nearly all its business segments.
However, it does not mean that all of Google’s challenges are over. The company has not enjoyed the same growth momentum as the other leading technology brands in the US, like Apple, Amazon, and Microsoft. Apart from that, it is also dealing with antitrust challenges. Diversification is another challenging area for the company since it needs to reduce its dependence on the advertising business, which was most severely hurt during the pandemic. Sundar Pichai handles several challenging questions on behalf of the company and its founders related to HR and employee welfare. Apart from setting a strategic direction for the company, he needs to handle other legal challenges that have continued to bother Alphabet. While the environmental uncertainty has grown, Google’s position in search and digital advertising continues to remain rock solid against the rivals.
Read more about Google in this strategic analysis.
External Analysis of the Digital Advertising Industry
The digital advertising industry has grown rapidly, driven mainly by the technological changes happening worldwide. The growing adoption of smartphone devices globally and other factors like more efficient targeting has also allowed the digital advertising industry to gain faster. Google and Facebook have together been ruling the digital advertising market. However, in recent years, Amazon’s share in search advertising has grown.
In the US, Google is the largest player in search advertising. According to a 2019 research by emarketer, Google was the largest company in search advertising, followed by Amazon and Microsoft. While Google’s share stood at 73.1% of the total in 2019, Amazon’s share was 12.9%, and that of Microsoft was at 6.5%. According to the study, the US search ad market was expected to grow to $55.7 billion in 2019. As Amazon’s market share in the search ad market continues to grow, Google’s will fall.
Google and Facebook are still the largest players in digital advertising, globally. In the US market, it is a triopoly. Apart from the first two, Amazon also holds a significant market share in the US digital ad market. A new study by emarketer published in June 2020 estimated that Google’s share in the total digital ad revenue generated in the US would fall in 2020. Facebook and Amazon are expected to continue growing, but with growth rates considerably lower than expectations. The overall size of revenue earned by the three leaders will be nearly the same as in 2019, increasing only by around $1.69 billion. According to the study, Google’s net ad revenue from the US will drop by around 5.3% reaching $39.6 billion, bringing Google’s share in the US digital advertising market down to 29.4% in 2020 from 31.6% in the previous year. Facebook’s market share is expected to grow by 4.9% and that of Amazon by 9.5% in 2020 compared to the previous year.
The pandemic has caused ad spending to fall throughout the globe. According to a June report by the World Economic Forum, ad spending was down by 9% on average across Europe. Germany and France experienced a decline of 7% and 12%, respectively. During the first three quarters of 2020, the adverse impact on ad spending is expected to be more severe than the economic crisis of 2008. In the advertising industry, a rise or fall in the GDP is followed by a corresponding rise or fall in the advertising expenditure. The advertising market had grown to $646 billion in 2019 since the global GDP was growing at a rate of between 3% and 6% over the past decade. Before the pandemic, the global ad market was expected to grow to $865 billion by 2024. According to the advertising giant Publicis, there are chances of a heavy reduction in ad spending worldwide during 2020. The Publicis CEO has warned that ad spending pullback could be more severe than 10% during 2009. The Publicis Group is the world’s third-largest advertising holding company in the world.
However, the pandemic has also brought a shift in consumer behavior that could be long-lasting. While the consumption of digital services, including entertainment services like online-streaming and social media has grown, people are buying more from e-commerce channels. So, this could also tilt the balance permanently in favor of digital marketing. China was the first country to start recovering from the pandemic, and as a result, Chinese digital companies started seeing a rapid improvement in their revenues from digital advertising. For example, Tencent recorded 32% growth year on year in its digital ad revenues during the first quarter of the year. In the Chinese market, consumers spend almost two-thirds of their media time online. It makes China an attractive market for digital advertising.
Another critical factor is the high level of uncertainty in the economic environment. Outside China, reduced ad spending has also affected prices. The impact of the pandemic is not distributed equally either across industry sectors. Among the most impacted sectors are the travel & tourism, retail, restaurants, and automobile sectors. It is expected that the pandemic will reshape the advertising industry in the long term. For now, the question of survival looms large before a large number of businesses worldwide.
SWOT Analysis of Google: Key Strengths
Search engine with the largest market share:
Google’s primary source of competitive advantage is its search engine, which enjoys the largest market share globally. The main reason behind the leading position of Google’s search engine is that it is a lot advanced than any other search engine currently in the market. Apart from being the fastest search engine, Google’s algorithms are a lot smarter than the rivals. According to Statista, Google’s search engine enjoyed around 87% market share in desktop search in July 2020. Bing is the second largest search engine after Google. However, compared to Google, Bing enjoys a trivial market share in desktop search. Bing’s share in the desktop search was only 6.43% in July 2020, followed by Yahoo’s at 2.84%. The other search engines, including China’s Baidu, had a less than one percent market share on desktop search globally.
Google is the dominant search engine on both the desktop and mobile platforms. In the case of mobile search also, Google enjoys the lion’s share as the world’s top mobile search engine. In September 2020, its share in the mobile search was more than 95% according to statscounter. However, its dominance in mobile search is since Google is the custom search engine for smartphones running on the Android platform. Overall, Google remains the undisputed search leader. Because of its continuous focus on refining and improving search results, the chances of any other search engine gaining a significant market share against Google in the near future are very low.
Lion’s share in digital advertising:
Not just the world’s largest search engine, but Google is also the most dominant player in digital advertising. Currently, two brands grab more than half of the revenue produced by digital advertising worldwide. Google and Facebook hold the lion’s share in the digital advertising industry. However, Google’s share in digital advertising is still a lot bigger than that of Facebook. Together the two firms held a 60% market share in the digital advertising industry during 2019. Google held a 37% share in the same year. Digital advertising has also evolved a lot in recent years. The main reason that Google and Facebook are leading in the digital advertising industry is that they use advanced technologies compared to the smaller rivals. Using Artificial intelligence and machine learning, these two companies can deliver better returns on investment to their clients than competing businesses.
In 2019, Google generated $134.8 billion from advertising, which was around $18 billion higher than the previous year. Driven by its use of advanced technologies for efficient targeting and greater reach, Google’s advertising revenue continues to grow faster. The world of advertising is changing, and with the number of internet and smartphone users growing, advertising is expected to shift online quicker in the future. These factors are going to aid the growth of digital advertising revenue for Google. The proliferation of the internet and digital technology is driving the most significant shifts in the advertising industry. Overall, Google will continue to rule the digital advertising industry with its advanced algorithms, machine learning, AI, and improved targeting methods.
Google’s strong financial position also becomes clear from its operating margin. While a robust operating margin varies by industry, an operating margin of above 10% is considered acceptable. Google’s operating margin, as of March 31, 2020, stood at 19%, according to Investopedia. In this way, you can see Google is enjoying a healthy operating margin. Its operating cash flow for fiscal 2019 was $54.5 billion. It again shows that Google is financially in a powerful position and can use this critical leverage to grow its market share faster. According to a report, Google became the most cash-rich company in the world after having overtaken Apple in 2019. It held $117 billion in liquid reserves as of the second quarter of 2019.
Google is among the five most prominent brands in the US. Apart from being the search leader in the world, it is also among the most innovative technology companies. Its focus on technological innovation has led to growth in the user base of its most prominent products like Chrome, Gmail, advertising, and its search engine. While technological advancement continues to drive the growth of Google, its focus on creating user-friendly technologies and products has also helped it gain market share and popularity quicker in emerging areas. As a technology brand, the company enjoys a solid brand image and a high level of user loyalty. In the tech industry, brand image and user loyalty are driven by several factors, including the quality of products and services, their user-friendliness, effectiveness, and innovation. Google has proved itself the most advanced technology brand in nearly all these areas worldwide. As a result, it has established itself as an innovative tech brand with a superior brand image. The result is higher brand recall and improved user loyalty. The highest focus of the company is on user experience and technological innovation for achieving growth and maintaining market share.
Large range of online services:
One of the primary strengths of Google is its broad range of online services. Its search engine remains at the core of the picture, driving most of the growth and popularity for Google. Apart from it, there are many apps and software made by Google used by billions of users worldwide. Among the highly popular products made by Google and used worldwide are the Chrome Browser, Google Maps, Gmail, YouTube, Google Play, and many more. Chrome is the leading browser used globally by the largest number of internet users to access a wide range of services online. According to stats counter, Chrome was the market-leading browser enjoying the largest market share worldwide, followed by Safari in 2020. Its market share during the period from September 2019 to September 2020 was higher than 66%. During the same period, the market share of Safari was around 17% and that of Firefox at about 4%. Gmail is also the most used email in the world. During 2019, the market share of Gmail was 27.8%. Google Play is the most used app store in the world. It housed more than 2.7 million apps as of the second quarter of 2020. It comes preinstalled on smartphones running on Android OS used by more than 2.5 billion monthly active users worldwide. These apps and services continue to drive Google’s global popularity and faster expansion of its user base.
Google has also achieved a lot of success in cloud computing and emerged as the third-largest player in the industry. After Amazon AWS and Microsoft Azure, Google Cloud is the third-largest brand in the cloud computing industry. The cloud industry has advanced a lot in recent years, driven by the growing use of online apps and services. Google’s revenue from cloud computing, in the meantime, also grew at a significant pace. Its two main rivals are Amazon and Microsoft. However, the pandemic has sped up the transition to cloud-based services and proved profitable for the three leading cloud players.
Globally, spending on public cloud services has grown very fast. In 2018, it increased by more than 27% compared to the previous year, rising to $182 billion. In 2020, according to a Gartner report, IaaS will be the fastest-growing cloud segment with a 24% growth rate. Gartner had forecast the public cloud services market to grow 17% in 2020 to $266.4 billion from $227.8 billion in 2019. Moreover, public cloud spending was growing more concentrated among the three largest IaaS providers, including Google. The annual run rate of Google grew from $10 billion in the fourth quarter of 2019 to $11 billion in the first quarter of 2020.
Moreover, Google Cloud Platform has been winning more massive deals. It has emerged as a concrete counterweight against AWS and Azure that are currently the two most dominant players in the cloud industry. As Google CEO Sunder Pichai spelled out recently, Covid-19 was an inflection point for digital shifts. It also means more growth for Google Cloud Platform in the near future. Google hit another success with its Google Meet that runs on its Cloud Platform and has emerged as an excellent substitute for Zoom.
Android market share:
Google is the dominant player worldwide in the smartphone operating systems. The Android OS for smartphones, created by Google, continues to rule as the most used and the most popular operating system for smartphones worldwide. Apart from having more than 2.5 billion monthly active users, Android’s share of the global smartphone market is more than 86%. Apple’s iOS is the leading competitor to Android.
Moreover, of all the internet-connected devices globally, it is the Android that enjoys the lion’s share. In 2017, Android enjoyed around 38% share of all the devices connected to the internet globally. However, Android’s share in the US market is lower than its global average. Its market share in the US mobile OS market was 62% in 2017 and 76.4% in the Chinese market. In 2019, Android users spent around $1.1 billion on apps in the Google Play Store. There were more than 2000 banks in the US in 2019, supporting Google Pay. These stats show that Google will continue to rule in the mobile OS market. Apart from Apple’s iOS, there is no better substitute for Android, either, which reduces the scope of competition for Google significantly. Android faces significant competition only in the premium smartphones segment and mainly from iOS. Apart from that, in the case of the more affordable or entry-level models, Android does not have any significant competitor in the market currently.
Growing non-advertising revenue:
Apart from its advertising revenue, Google has also experienced sharp growth in its non-advertising revenue. Traditionally, Google has depended mainly on digital advertising as its core source of income. However, the company is trying to diversify its business model by adding more non-advertising sources, including Google Cloud.
The sources of non-advertising revenues of Google include sales of apps, in-app purchases, digital content products, and hardware; and licensing and service fees, including subscription fees for Google Cloud offerings. From $10.6 billion in 2019, the nonadvertising revenue of Google grew to $25.9 billion in 2019. In 2019, the nonadvertising revenue remained around 16% of the net revenue of Alphabet, the parent company of Google. This is a good signal since the company will reduce its dependence on advertising revenue further in the future.
Growing Revenue from YouTube:
In 2019, Google released its earnings from YouTube ads for the first time. Between 2017 and 2019, its revenue from YouTube ads has continued to climb steadily. Google’s revenue from YouTube ads was $8.15 billion in 2017, which grew to $11.15 billion in 2018 and then to $15.15 billion in 2019. From 2018 to 2019, Google experienced a net growth of around $4 billion in its net revenue from YouTube ads. YouTube revenue of Google was higher than 11% of its net revenue from advertising during 2019. The total advertising revenue of Google in fiscal 2019 was $135 billion approximately.
Dependent on digital advertising mainly:
Despite the global scope of its business and growth in the cloud segment, Google depends mainly on advertising as its core source of revenue. While the development of the cloud industry and other sources of non-advertising revenue have helped it minimize its dependence on ad income, Google still depends on digital advertising for a substantial portion of its income. The total revenue of Google during 2019 grew to $161.8 billion. The company generated $134.8 billion from advertising during the same period. It means Google generated around 83% of its revenue solely from advertising. As Google’s cloud revenue continues to grow, the company could reduce its dependence on advertising during the coming years. However, it should try to diversify its portfolio in a manner that helps the company reduce its reliance on advertising further.
While Google’s position may be rock solid in most areas where it operates, its challenges are far from being over. One major problem that Google has been dealing with is related to the antitrust laws. Apart from the US, the company has also been facing antitrust challenges in Europe and other markets. Google has paid around $9.5 billion to the European commission alone for violations related to antitrust laws between 2017 and 2019. The most massive fine the company paid to the EC amounted to $5.1 billion in 2018. Apart from that, it had already paid around $2.7 billion to the commission in 2017 and again paid around $1.7 billion in 2019.
Antitrust probes against Google are continuing in the United States. According to various reports, the company is facing an onslaught of antitrust lawsuits. In September 2020, attorneys general from 48 U.S. states, the District of Columbia and Puerto Rico, formally opened an antitrust probe against Google. Not just Google, but its rival, Facebook is also facing similar investigations, and the pressure against the two continues to grow. It is also a sign that the antitrust challenges before the tech giants in the U.S. will remain there for long. Apart from the hefty fines that are likely, this will bring additional pressure related to business operations for Google. The company will need to fight tooth and nail to ensure it does not fail to retain its market share and market position.
HR Related Problems:
Google remained a favorite employer for the tech graduates for an extended period since its foundation. While the company still works to maintain a great work environment for its employees, various HR-related problems and issues have emerged in recent years. The company also lost some of the reputation it had achieved as an HR leader in the tech industry. Recently, shareholders had filed a complaint against Google that the company did not handle the allegations related to sexual misconduct and abuse with full responsibility. The two parties settled the case for $310 million in commitment to diversity and equality issues.
While Sundar Pichai has clearly expressed that the company is not going to turn back in time over these issues, Google’s reputation in HR has been harmed. Sundar Pichai will need to bring about cultural changes that can again drive Google to the front regarding HR and employee satisfaction. These developments at Google over the recent years have put a question mark on the company’s dedication to employee satisfaction as well as diversity and inclusion. While Sundar Pichai has tried to prove his commitment and resolve for employee welfare, it will need a lot of effort and dedication on his part.
One of the most critical areas where Google’s opportunities are growing fast is cloud computing. It is also among the most significant business areas for the company where it can achieve very fast growth in the coming years and make its position in the tech industry more solid. Google’s revenue from cloud computing grew sharply in recent years. Apart from that, the cloud industry is also growing at a sharper rate. Currently, Google is among the three largest players in the cloud industry.
In 2019, Google generated around $8.9 billion in the form of cloud revenue. Its annual run rate during the fourth quarter of 2019 was $10 billion which grew to $11 billion in the first quarter of 2020. The changes brought about by Covid-19 are significant and lasting. The pandemic has opened a new door of opportunities for the cloud businesses like Google. Google meet is one of the critical successes that Gogle achieved recently. Despite a much lower annual run rate as compared to AWS and Azure, Google has emerged as a solid counterweight to the two leading players. As its influence and market share in this critical area continues to grow, the company could achieve bigger milestones in the near future and thereby reduce its dependence on advertising which is its core source of revenue right now.
Apart from cloud, AI, IoT, and machine learning are also some areas where the number of new opportunities for Google is growing. Google is an innovative technology brand and it can exploit the opportunities in these areas to find faster growth and diversify its product portfolio.
Growing mobile advertising market:
Every year, the mobile advertising market is growing faster as the number of smartphone users around the world is growing fast. In 2016, the number of total smartphone users worldwide was only 2,.5 billion which grew to 3.5 billion in 2020 and is expected to grow to 3.8 billion in 2021. As the number of smartphone users grows worldwide, more people will be accessing a vast number of apps and online services from their mobile devices, thus opening up new vistas for mobile advertisers. Google and Facebook are the leading players in the mobile advertising market currently and the growing number of smartphone users worldwide will increase their profitability. Google’s focus on mobile advertising will help it grow its market share as well as revenue and profits in near future.
While the pandemic has brought around a digital shift and proved profitable mostly for the cloud players and leading tech business, it has also harmed Google’s business ona very critical point. Google’s main source of revenue is the income it generates from advertising. Its cloud business grew during the lockdowns and the initial months of the pandemic but the ad revenue of the company has kept sinking since the pandemic began.
Compared to the last quarter of 2019, the ad revenue of Google dipped significantly in the first quarter of 2020. Compared to $37.9 billion during the fourth quarter of 2019, the ad revenue of the company fell to $33.8 billion in the first quarter of 2020. Its revenue from Google search and other ad revenues excluding YouTube ads ws down to $24.5 billion in the first quarter of 2020 compared to the fourth quarter of 2019 when it stood at $27.2 billion. Revenue from YouTube ads also dropped in the first quarter of 2020 compared to the fourth quarter of 2019. Overall, the pandemic has hit Google the hardest at its core. Ad revenue accounts for the largest part of the total pie but it seems the negative impact of the pandemic is going to remain on Google’s ad business during the entire fiscal year.
Google faces a lot of competition from the other leading tech players including Microsoft, Amazon and facebook. While Facebook is the main rival of Google in the digital advertising industry, the other two players are ahead of the company in the cloud industry. Overall, Google is facing intense competitive pressure from rival brands. While it is finding fast growth in the clouds, the advertising business of Google has been challenged by the pandemic. Despite that, the company invests a major sum each year in research and development which is expected to drive continuous growth in most business areas. However, the most critical thing is that higher competitive pressure also drives the costs of operations higher for Google including its Traffic acquisition costs that grew to $30.1 billion in 2019 from $26.7 billion in 2018.
Regulatory threats will continue to exert pressure on big tech in the US. APart from the heavy regulation domestically, Google will also continue to face regulatory challenges in other key markets and mainly Europe. The company has already paid an exorbitant sum to the European commission over the past three to four years. The higher regulatory pressure has also led to higher operational costs and can impact profit margins in the longer run.
Trade wars between America and China:
The intense trade war between China and America has also affected Google. Just as the US has been regulating China based businesses, China has also adopted harsh measures to curb the growth of the US based businesses in its domestic market. As a result, the big tech companies like Google have been forced to change their strategies for operating in the Chinese market. Last year, when the US government applied a ban on Huawei, a chinese smartphone brand, Google was forced to pull its apps from Huawei devices. While the impact of the trade war could be less on Google overall compared to hardware businesses, it can still affect the revenues significantly since China is among the largest markets for the tech businesses.
PESTEL analysis of Google:
Here is a PESTLE analysis of Google analyzing how the PESTEL factors affect its business. There are a diverse range of forces in the macro environment of businesses that can have both a direct and indirect impact on its revenues and profitability in the short and the long run. Businesses need to analyze these forces before they form a business or marketing strategy for any specific market. The significance of the political, economic, technological and the environmental factors has grown especially very fast during the recent years.
The role of political factors in the sphere of international business has grown a lot as governments around the world have taken a more proactive stance in their regulation of businesses. Apart from economic policy formulation, the government’s direct regulation of businesses, taxation, as well as its role in the formulation of business laws, have all made it mandatory for businesses to consider the impact of political factors on their revenue and profitability. Political relationships between two nations also have a significant impact on the businesses operating in the two nations. For quite some time, the relationships between the US and China have continued to sour. It has resulted in a trade war that is having a negative impact on businesses operating in the US and China.
It was most clearly evident in the case of Huawei and Tiktok. In the case of Google, because of the nature of its business while Google may have felt the impact of the trade wars to a lesser degree still, there has been a significant impact on the business of all the leading US based tech firms operating in China. Whether in the form of growing tariffs or the impact on supply chain ( most large US based tech firms have a significant part of their supply chains and manufacturing units located in China), US based tech businesses have felt a severe impact on their profitability due to the trade wars between the two nations. China is strategically a very significant market for Google as well as other US based technology brands. The situation would have been considerably better given the political environment in China was more friendly towards foreign businesses. China, apart from being the second largest economy in the world, also offers a very large customer base for the tech businesses. However, for a large number of businesses entering the Chinese market and gaining a strong foothold becomes difficult because of the local political environment and laws.
Government’s regulation of businesses as well as scrutiny of online content makes it somewhat difficult for businesses like Google to operate freely in China. Internet businesses are among the most regulated in China. Recently, the authorities in China approved a new set of comprehensive regulations that are aimed at tightening the noose around internet business with regards to content violations. Apart from heavily censoring any form of negative content it will also make the internet businesses more liable to violations. Such tight control of the internet by the government and an overall political environment that favours local businesses more than the foreign businesses makes it difficult for Google to operate with full freedom in the Chinese market.
Apart from that, the tech laws are still evolving in most parts of the world. Even in the US, there are a large number of challenges before Google and the government is closely watching its every move there. Not just Google, but every large tech firm is being closely scrutinized by the government with regards to its business operations and policies. While this creates immense pressure on firms such as Google, the government’s scrutiny is expected to only increase in the coming years.
Economic factors have a prominent role in deciding the growth and profitability of businesses. Recessionary periods drive the revenue and growth momentum of international businesses down, whereas, during the times of growth, these firms have a more profitable ride overall. The past recession drove the employment and income level of people around the world down. As a result, people controlled their spending and the result was that most international businesses were seeing a decline in profits. For the past few years, the world economy has been performing well. As a result tech firms like Google, Apple, Facebook, Amazon, and Microsoft enjoyed faster growth. The employment rate and GDP growth of the US, which is also the core market of Google was high and the result was fast growth in revenue for the company.
However, things have changed quite a bit with the spread of the pandemic since a large number of markets including the US as well as several leading European markets and India applied extended lockdowns to prevent the pandemic from spreading. The result was halted economic activity and a growth in unemployment in various key regions of the world. Overall, a large number of businesses in various industry sectors were impacted badly. While the tech giants remained immune to a large extent, the core business of Google was still impacted adversely.
Google depends on advertising as its main source of income. However, since economic activity declined sharply during the period of lockdown and as a result, a large number of businesses that were experiencing very low sales, stopped advertising.
Overall, advertising revenues of Google declined sharply during the first quarter of 2020. The level of economic activity in the world is directly related with Google’s performance since its business depends on the advertising dollars spent by businesses worldwide including small and large businesses. A large number of sectors like aviation, tourism, manufacturing and supply chain as well as other sectors were affected poorly and had to stop operations for an extended period. Since these businesses had to stop operations suddenly, they were forced to stop spending on advertising. Once economic activity resumes in the key markets and the various industry sectors pick up, Google will again see a jump in its revenue and profits. Even if Google does not depend much on individual consumers, the fate of businesses around the world has also been poor and many even went bankrupt or reached on the verge of bankruptcy due to coronavirus. While Google’s cloud business picked up during this period offsetting some of the negative impact due to Covid-19, its advertising business has suffered.
Sociocultural factors are also having a distinguishable impact on businesses worldwide. Sociocultural trends can shape demand for particular products and make others obsolete. It is why marketers are focusing on sociocultural trends and how they shape demand to overall estimate their impact on businesses. The importance of sociocultural factors has particularly grown in the world of marketing. There are several examples industry wide where considering the local culture and including it in the business and marketing strategies has helped businesses find success quicker. Brands also try market localization practices to grow their penetration of local markets. Google delivers localized search results through its search engine in various parts of the world.
While in some regards, societies behave similarly, in other areas there are major differences between the cultures of various regions worldwide. It means something that works in Europe will not necessarily succeed in the Middle East. However, a few key trends worldwide like the growing use and acceptance of internet based services as well as the growing use of smartphones by people of all ages have been driving the demand and popularity of the products made by Google. The growing use of smartphones since a large number of smartphones run on Android OS has particularly proved profitable for Google. Other sociocultural and demographic changes like the higher popularity of digital technology and tools among the millennials is also driving the growth of internet businesses like Google or its rival Facebook.
Technology has remained the key driver of change industry wide in the 21st century. Apart from creating the demand for an entirely new range of products and services, technology has also helped a very large number of businesses including tech and non tech firms find faster growth worldwide. The faster rise of the tech giants including Google, facebook and Amazon shows how technological innovation has been driving faster growth across the industry. However, the tech industry is also marked by intense competition. Apart from Facebook, which is the main competitor of Google, there are more tech firms like Amazon and Microsoft that are competing with Google in various areas including search and cloud technology. Cloud is one of the fastest growing industry sectors which could be one of the leading drivers of growth for Google in the coming years. However, in the field of digital advertising too, technology has evolved very fast and is driving growth of revenue for Google. The search giant is making use of advanced technologies like AI and machine learning to offer more targeted advertising and deliver better ROI than competitors.
Google is one of the tech leaders and its growth and development are based purely on the amount of focus it places on technological innovation. Growing competition in the technology industry also makes it important for Google to stay dedicated to research and development. Technological changes are happening fast and Google invests in R&D to stay ahead of its rivals in the industry. Apart from the world’s best search engine, it has brought several more products that are a lot ahead of the competing products in the market like Chrome Browser and Gmail. In 2019, the company spent around $26 billion on research and development compared to only $21.4 billion in 2018. R&D expenses were more than 16% of its net revenue in 2019 compared to 15.7% in 2018. Overall, the focus on digital technology has grown worldwide during the pandemic and a large number of businesses switched to the digital business model to cater to demand and grow sales efficiently. The digital shift brought about by the pandemic will have a lasting impact. Even in the post pandemic world, these changes will prove highly profitable for Google. Overall, technology plays a central role in today’s industry environment and has the most significant impact on profits and revenues of all the macroeconomic factors.
Environment and environmental factors are also a key consideration for businesses throughout the globe. The environmental impact of businesses is important with regards to their reputation as well as performance. Leading internet businesses like Google and Facebook despite the low environmental impact of their businesses, invest in sustainability to maintain their reputation and protect the environment. Globally, consumers and governments favor the companies that have a low environmental impact. Apart from growing environmental awareness of businesses, the increased legal pressure has also worked to grow the focus of businesses worldwide on sustainability.
Google has invested in making its business processes more and more sustainable. It is also investing in key projects that help grow environmental safety. One of the most critical areas in terms of environmental impact for Google is the operation of its data centers. Google has created efficient data centers which consume much less compared to the average data centers. These data centers are designed to maximize efficient use of water, energy and other material resources. One of its data centers consumes just half of the energy consumed by a typical data center. The company has also grown its use of renewable energy for data center operations. Google depends 100% on renewable energy to run its products and processes from 2017. Apart from that, it has created sustainable workplaces for its employees. Not just this, but Google has also increased its focus on sustainability down its supply chain. Overall, minimizing its environmental impact will not just help it maintain efficient operations but also help it manage its reputation as a tech business.
Legal factors are also one of the most significant factors for businesses operating on a global scale. There is a complex web of laws affecting the technology businesses worldwide. The scrutiny of bigtech in the US itself has grown a lot, which apart from being the domestic market of Google is also the largest market for its products and services. In the other markets too including Europe and China, the company is facing intense legal pressure with regards to its business operations. The antitrust cases against Google are not coming to an end and are adding to its legal woes. This time attorney generals of 48 states have together brought antitrust cases against Google. The company has already paid the European commission a hefty sum in the form of antitrust fines. Overall, while the legal pressure against Google has kept rising, it will continue to add to its operational costs as well as exert pressure against the company’s operations domestically as well as overseas.
There are several more areas where the bigtech in the US as well as overseas has to remain careful in order to avoid being in a legal tussle. Labor laws as well as other laws related to technology and technological products like consumer privacy and data security also require Google to operate very carefully. Overall, legal factors have acquired a critical role of large technology firms like Google.
Five Forces Analysis of Google:
There are several forces in the tech industry that affect the market position of businesses and their competitive strength. One of the simplest tools used throughout the industry and in academic circles for analyzing the competitive position of firms and the level of competition in a particular industry is the Porter’s five forces model. This analytical model was named after Michael E Porter.
“Michael Porter is the founder of the modern strategy field and one of the world’s most influential thinkers on management and competitiveness. The author of 19 books and over 130 articles, he is the Bishop William Lawrence University Professor at Harvard Business School and the director of the school’s Institute for Strategy and Competitiveness, which was founded in 2001 to further his work and research.”
In a 1979 article titled How Competitive Forces Shape Strategy, published in the Harvard Business Review, Michael E Porter noted regarding his five forces model that it is the collective strength of these forces that ultimately determines the profit potential of any industry and it can range from intense to mild. The profit potential grows with the weakening of these forces. In each and every industry, a different force may grow more prominent than the others. Porter offers three examples in his HBR article. In the ocean-going tankers industry, the buyers are the most important force whereas, in the tires industry, it is the powerful OEM buyers coupled with tough competitors. On the other hand, in the steel industry, foreign competitors and substitutes are the most prominent forces.
In Porter’s words,
“Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces. The strategist, wanting to position his or her company to cope best with its industry environment or to influence that environment in the company’s favor, must learn what makes the environment tick.”
Michael E Porter in his HBR article, How Competitive Forces Shape Strategy.
Let us take a look at how these forces work in the digital advertising and the cloud industries and how Google can cope best with the level of competition in its industry environment.
Bargaining power of suppliers: Mild
The bargaining power of Google’s suppliers is low. First of all the company operates in industries where traditionally, the suppliers have enjoyed moderate or low bargaining power. Google is not a hardware business like Apple. It is mainly a software business or a provider of key online services including digital advertising, search services and other online services. Most of the services it provides are built inhouse with the help of Google’s developers and the advanced technologies that Google already owns. So overall, suppliers play a very limited role in the provision of the main products and services created by Google. This also limits the costs of operations of Google and helps it achieve higher operating margins. If Google became the most cash rich company in the world, it is mainly because it does not have to spend a avst sum each year on sourcing raw materials. Overall, the bargaining power of suppliers who mainly supply the components for some of the hardware products Google makes like Chromebook or smartphones as well as some components for the provision of Google’s services worldwide is very low.
The bargaining power of suppliers is high in the cases where the number of suppliers is low and the threat of forward integration by suppliers is very high. However, this is not the case with Google. The bargaining power of suppliers also grows in cases where they do not have to depend on a particular buyer. Again, this is not the case with Google since its ability to pay makes it one of the largest buyers which limits the bargaining power of its suppliers. If the product that a supplier offers is highly differentiated, and switching costs are quite high for the buyer, even in that case the bargaining power of suppliers would be high. The situation favors Google in this case also. It holds more bargaining power as compared to its suppliers.
Bargaining power of the buyers: Mild
The bargaining power of individual buyers in the case of Google is very low. There are billions of users around the world that daily use Google’s products and services. Its services like Gmail, Chrome and search enjoy the largest market share as compared to the rivals. In digital advertising too, the company enjoys the largest market share of all in the world. Apart from some large brands that spend a vast sum on advertising and are among the largest buyers of advertising services, the smaller businesses or buyers hold little to no bargaining power.
The main reason that the bargaining power of buyers in case of Google is low is that the number of buyers is just very high. If there were fewer buyers as compared to suppliers/sellers like Google, the bargaining power of buyers would have been higher. However, apart from millions of businesses worldwide, there are billions of individual buyers that consume its services which has led to higher bargaining power for Google. The bargaining power of the buyers also grows higher in cases where the availability of substitutes is high and the buyer can easily obtain similar products or services from other suppliers. Apart from that if the product offered by a supplier is not so highly differentiated then in that case too the bargaining power of buyers would be greater than the suppliers. However, while Google’s products are highly differentiated, its substitutes are also low in number. Overall, the company enjoys significant bargaining power as compared to the suppliers.
Threat from substitute products: Moderate
The threat of substitute products is low for Google. There are very few businesses that offer similar products and services, and apart from that, the quality of the products provided by Google is overall significantly better as compared to rivals. Google is a highly innovative technology brand, and therefore, its products and services are not just of better quality but generally more suitable in terms of usage. The threat of substitute products for Google mainly comes from the four big tech brands, including Facebook, Amazon, Microsoft, and Apple. While Microsoft is a leading competitor in search, it still holds a much smaller market share than Google’s search engine. Facebook is one of the top competitors of Google offering substitute products in digital advertising. However, again Google’s share in the digital advertising revenue is much larger compared to Facebook. The threat from substitute products is higher in the cloud industry where AWS and Azure offer a broad range of substitute products and also have a large clientele compared to Google. This is the main area where the threat of substitute products is high for Google. To reduce the risk of substitutes further, the company must try diversifying into newer areas.
Threat from new entrants: Mild (very low)
The threat from new entrants is considerably low for Google. Any new player in the industry cannot gain a significant foothold or market share in the sectors where Google operates. It is only the leading and larger players like Microsoft, Apple, and Amazon, or Facebook that can compete with the size and scale of Google. For any new business, it is next to impossible to achieve a comparable or even significant size and scale against Google in the digital advertising and cloud industries. Any new player would need to make a large capital investment, and apart from that, it will take a lot of time due to the intense competition to win a significant market share. Finding growth in the technology industry also requires a substantial investment in human capital, and brands like Google are quite aggressive about protecting their market share and leadership position. The growing web of laws also acts as a deterrent for new players trying to enter the industry. Apart from that, gaining customer loyalty in the industry is not easy. So, while the entry barriers are high in the sector, the exit barriers are also high. Due to all these factors, the threat from new entrants before Google is considerably low.
Level of competitive rivalry in the industry: (Strong)
The level of competitive rivalry in the industry sectors where Google operates is high. Even if the number of leading players that compete with Google directly is low, these are mainly the largest players in the tech industry. As a result, the battle for market share grows fierce. While Amazon is the largest spender on research and development in the entire industry, the other companies also invest aggressively in research and development. Google is one of the most innovative tech brands, and its focus remains on continuously improving its products and services to provide a higher quality of service to its users. The other dominant players in the advertising, search and cloud industry are also very aggressive about growth and market share. The battle for market share in the cloud industry is particularly very intense, where Google faces a lot of competition from the two leading players Microsoft, Amazon, and other significant players like Oracle and Salesforce. The overall level of competitive rivalry in the industry is very high.
VRIO Analysis of Google:
The resources and capabilities of a company are its drivers of competitive advantage. Nearly everything a business owns can be classified as a resource or capability. By understanding the resources and capabilities of different enterprises, one can understand why operational performance varies from one business to another. To achieve a source of sustainable competitive advantage, the resource or capability a firm owns must be valuable, rare, inimitable, and organized.
The VRIO framework comes to the help of managers when analyzing a company’s resources and capabilities. VRIO is an acronym for Valuable, Rare, Inimitable, and Organized. These four bricks of VRIO represent the four properties of the resources and capabilities that help at generating a sustainable competitive advantage. When the resource or capability satisfies all these requirements, the competitive advantage thus achieved will be sustainable, whereas, when it meets fewer standards, the competitive advantage will be temporary.
Moreover, a sustainable competitive advantage comes from core competencies that arise from resources and capabilities.
|Brand Image||Yes||Yes||Yes||Yes||Sustainable advantage|
|Customer Experience||Yes||Yes||Yes||Yes||Sustainable advantage|
|Product Range||Yes||Yes||Yes||Yes||Sustainable advantage|
|Market Position||Yes||Yes||Yes||Yes||Sustainable advantage|
|Customer Loyalty||Yes||No||No||Yes||Temporary advantage|
|Financial Position||Yes||Yes||No||Yes||Temporary advantage|
In the technology industry, brand image is a significant source of sustainable competitive advantage. While product quality is a leading factor that affects the consumers’ perception of a brand, there are more factors that can affect brand image. However, brand image is a decisive factor that affects consumers’ choice of products. This is also something that makes the entry of new players in the industry difficult. Apart from everything, it is the brand image that differentiates one firm from another. Google has set itself apart from the crowd of technology brands as a highly customer-oriented and innovative tech company. As a tech organization, its focus has remained on bringing products and services that make life easier for people and offer a superior level of customer experience. While the role of tech in people’s daily lives around the world has kept growing, there are several products made by Google that people use on a daily basis free of cost. Its user-friendly products and services have helped it acquire a customer-friendly image. Google remains dedicated to improving its brand image by investing in key areas including the efficiency of its products and services, pricing as well as in other areas like CSR and sustainability.
The tech industry is experiencing an intense level of competition, The big four or five players invest a large sum each year in research and development to maintain their dominance of the market. The technology industry is growing at a very fast pace with new technologies being released and digitalization continuing to gain pace worldwide. In an extremely competitive environment, growth is not possible without a continuous focus on innovation. It is a crucial factor that apart from product differentiation drives faster growth for technology brands. However, while investing in research and development is critical for the technology brands, it is not a sustainable source of competitive advantage, the primary reason being the aggressive focus of rivals brands on R&D. Like Google, the rival players such as Facebook, Amazon, and Microsoft also invest aggressively in research and development, Amazon has the largest R&D budget of all the brands in the industry. So, while R&D offers a temporary competitive advantage, it also requires continuous dedication and investment. Google’s rivals, apart from continuously updating their products and services, are also bringing new innovations to the market to grow their overall influence. As a result, Google cannot reduce its focus on innovation or it risks losing market share to its competitors.
Customer experience is one of the key focus areas for technology businesses. It is a major source of popularity for them. It is why all the leading technology brands including Google, Amazon, Facebook, and Apple focus on delivering a superior customer experience. There are several factors that affect the user experience in the case of Google products. Apart from speed and accessibility, pricing and the efficiency of products and services also affects the customer experience. From its browser to Gmail, advertising as well as other services including cloud services, Google has focused on delivering a superior customer experience. Since the apps and services made by Google deliver a superior customer experience, they are popular worldwide and enjoy a larger market share as compared to the rivals. In the case of Google, its focus on customer experience has resulted in a source of sustainable competitive advantage. It is because Google’s products including browser, advertising, search, and Android are all leaders in their segments because of the differentiated, innovative, and overall superior customer experience that they offer. Its products are not just innovative but also faster as well as easier to access worldwide.
In terms of advertising too, the company offers better ROI for its customers than its rivals. The overall result is that the user experience offered by Google is a lot better than its rivals in the core business areas. This has led to a sustainable competitive advantage for the brand and most of the segments where Google operates, it is a lot ahead of its competitors in terms of service quality and market share. Chrome browser is unbeatable in terms of speed and so is Google’s search engine in terms of efficiency and Gmail in terms of usability. Overall, there is a vast difference between the service quality of user products compared to those offered by rivals.
Product range & Market Position:
The large product range of Google is also a critical source of competitive advantage for the brand. It has brought a large range of interrelated tools and services for users worldwide which have helped it strengthen its core competitive advantage. From browser to email, search, maps, and other online services, the company offers a large range of products that can be used by individuals as well as corporate users. Google also extended its product offerings by including cloud computing products. Overall, Google offers a fuller range of services as compared to other internet companies like Facebook, Amazon, or Microsoft. In this regard, Google is considered unbeatable. From search to advertising and browsing, the internet is dominated by Google products. Together these products and services have differentiated Google from other brands making it the largest player in the internet industry. The result is that Google is far ahead of all competitors in this area. Overall, by introducing a full range of internet-based services, the company has been able to gain a sustainable competitive advantage which is bolstered by its mobile OS – Android. Its presence in mobile applications is also challenged by none else but only Apple to some extent.
Otherwise, Google dominates the web on both desktop and mobile devices. Google is further growing its range by introducing cloud-based services like Google Meet. These products will further strengthen its core value proposition and as is frequently cited Google operates as a monopoly. Breaking this monopoly has proved difficult even for the law and the governments in various regions including the US and Europe. Google’s market position and market share in the internet industry remain unchallenged where it is the undisputed leader. Despite the antitrust challenges against the company, shaking its position has remained impossible. Overall, Google’s dominance of the web world continues to grow. Thus, its large product range as well as its market position are both critical sources of sustainable competitive advantage for the brand. Comparing the market share of its search, browser, and email, as well as more products and services with those made by the competitors of Google, shows that none of its rivals is as strong to bring a line of products and services that could match the efficiency, scalability, and usability of Google products. As Google exercises its dominance on the web, neither the larger tech brands like Apple, Microsoft, or Amazon and nor any of the smaller ones including Facebook has been able to break a chunk of its market share in the internet industry.
Customer loyalty depends on various factors in the technology industry but most of all it depends on the quality, accessibility, and pricing of products and services. To an extent customer loyalty also depends on brand image and the company’s reputation in the market. However, when it comes to the quality of products and services as well as accessibility or innovativeness, Google is ahead of its rivals in the industry. It has brought a large range of products that individual users from across the world can use without paying. Its browser, email, and maps as well as more products are accessible to consumers around the world. Chrome is the fastest browser and used by the largest number of consumers worldwide. Google search is also the fastest and the most efficient search engine and therefore enjoys the largest market share. Smartphone buyers make use of the Android OS and Google Play for free.
Gmail is available for free use by individual users, and corporate users can avail of its services at affordable prices. The pricing strategy used by Google is also customer friendly which means its corporate customers get the twin benefit of higher affordability and efficiency. The result is that the company has successfully gained high-level customer loyalty. However, to retain its loyal users, the company has to stay focused on innovation. For that, it needs to invest a large sum each year in research and development, since, user loyalty also depends on user experience, the company invests in product innovation so that its products continue to deliver a seamless customer experience. These factors have led to faster market growth. However, like Google, its competitors have also gained highly loyal customers, including Facebook, Microsoft, and Amazon, as well as Apple, which to an extent, diminishes the strength of competitive advantage generated from this core competency. As a result, user loyalty is a source of temporary advantage for the brand.
The human capital of a tech brand is one of its core sources of competitive advantage. The tech businesses compete aggressively for acquiring the most talented employees. Apart from paying them fat salary packages, these firms also reward them with extraordinary benefits. Since the tech industry experiences a higher employee turnover rate, the businesses employ various methods to attract and retain talent apart from paying the highest salaries in the entire industry. Google had been termed an HR leader in its initial days, and the company continued to remain the most attractive employer in the tech industry for several years. In recent years, the number of HR issues faced by the company suddenly crept up, and Google was forced to respond to the law and other stakeholders on various points related to HRM. Apart from the allegations of sexually predatory behavior by executives, claims related to harassment also grew. While the company remains one of the most attractive employers in the tech industry, its reputation in HR has been a little diminished. Google is still facing these issues, but the company is among the richest and the salaries and benefits it offers. It continues to draw applicants from ivy league colleges in large numbers.
Moreover, being a software company, Google’s competitive advantage depends a lot on its people and talent. How talented Google’s employees are, decides the quality of its products and services, and the pace of innovation inside the company. Its rivals are also equally aggressive in terms of attracting and retaining talent that includes programmers, managers, and engineers mainly. Microsoft, Apple, Amazon, and Facebook all pay large salary packages and offer competing benefits. The competitive advantage that Google generates through HR is temporary.
The financial condition of the company is also a critical source of competitive advantage of the brand that is the most cash-rich in the world. Google overtook Apple in 2019 to become the most cash-rich company in the world. It enjoys strong operating margins and its revenues and profits from advertising as well as non-advertising sources have continued to grow year over year. Except for the decline caused by the pandemic that resulted in declining ad inventory and ad rates worldwide, the company had continued to find excellent growth in all the business segments including the cloud. Its cloud business segment has been far more successful than Google’s core business at beating the effects of the pandemic. The cloud revenue of Google has grown very fast and in the coming years, the cloud industry is expected to grow at a very fast rate. The transition has already begun with the pandemic and the demand for cloud-based services is expected to surge very fast now. Overall, Google is financially in a very strong position which also works as critical leverage for the brand. With more free cash than any other company, it can devote more resources to growing its business. The company can use the extra cash for acquiring new businesses and achieving superior growth momentum. While it is a critical source of competitive advantage, the financial position of the company is still a source of temporary competitive advantage because any other factors apart from free cash decide the market position of a firm in the tech industry.
Business Growth Strategy of Google:
Google is among the most impressive growth stories of the century. The company has achieved swift growth in its market share and revenue over the last decade. The main factor driving the growth of the company globally is technological innovation. The search giant is also the leader in digital advertising and one of the largest players in the cloud industry. Its dominance in its core areas has become a cause of worry for the governments including the US government. However, the company continues to remain dedicated to innovation and services quality. Let’s take a detailed look at the core pillars of its business growth strategy.
Expanding product portfolio:
Google’s product portfolio has expanded a lot since its foundation. The company has kept expanding its range of services in an effort to grow its user base from around the world. Apart from creating new products in house, the company also acquired several to strengthen its core business. For example, its acquisition of Android proved to be a great step in the direction of improving its presence on mobile devices. Today, Google dominates both desktop and mobile searches. Google’s strategy has been to build it or buy it. Not just Android, which Google acquired for only $50 million in 2005, but many more products that it today owns were not built inhouse but acquired from others like YouTube, Double Click, AdMob, and DeepMind. Today, Google has a large range of products and services to offer including voice search and it has also started making smartphones. Since it is the most cash-rich company, it can grow faster in the future through acquisitions which have helped it cement its position in the industry against its rivals.
Research and innovation:
Research and development have also been a core focus area for Google. Some of the most innovative services of Google like its search engine and Gmail were developed in-house by Google founders and engineers. The tech industry is marked by heavy competition and for businesses in the industry to grow and find success after, it is important that they focus on technological innovation. The industry is driven by fast change and new technologies and technological developments keep emerging at regular intervals. Due to the intense level of competition, the situation is challenging even for the tech leaders. However, the rock-solid position that Google enjoys in the industry is mainly because it focuses heavily on research and development. Its aggressive focus on R&D has also resulted in some of the most efficient products like a search engine that produces highly refined results in a fraction of seconds as well as the fastest browser and the best email service. The company is far ahead of its rivals in most of these areas which is an important advantage for Google. However, the entire etch industry invests heavily in research and development. Amazon is the highest spender on R&D in the entire industry. Google, on the other hand, has a very large number of patents to its name. In 2019 alone, Alphabet, the parent company of Google was granted 2,621 patents by the US patent and trademark office. In 2016 the company acquired the highest number of patents at 3,267. Research and development is a key part of Google’s business strategy which is clear from the number of patents the company has acquired each year between 2013 and 2019. While it has helped the company survive the competitive pressure efficiently, it has also helped it maintain its leadership position in the industry.
Focus on mobile users:
With time, Google has grown its focus on mobile users. Worldwide, the number of users of mobile devices has kept growing and is expected to surpass 3.8 billion by the year 2021. After its acquisition of Android and its release as the smartphone OS, Google gained a strong foothold in mobile technology and since then Android has become a leading focus area for Google helping it reach billions of users worldwide and grow its user base sharply. Since the number of smartphone users is growing year by year, and it has also led to growth in opportunities in mobile advertising, the company will be able to grow its revenue substantially from the mobile segment.
In mobile advertising, Google’s main rival is Facebook. However, Google’s share is still much larger as compared to Facebook. The growth of the company in mobile advertising is driven by the increasing Android user base worldwide. It is also one of the strongholds of the company and that will continue to bolster Google’s position.
Over time, Google has diversified its business a lot. Starting from search and email, as well as advertising, the company has entered new business areas including clouds. It further improved its position in digital advertising and social media through the acquisition of YouTube. Apart from that, Google has become one of the leading cloud players and its position in the cloud industry continues to strengthen. Google is not the only business that Alphabet owns. It also owns some other smaller businesses, many of which do not generate any substantial revenue. These businesses are collectively called Other Bets. The company also makes Pixel smartphones. Overall, Google’s product portfolio has grown highly diversified and the company is working to reduce its reliance on advertising through growth in cloud computing and other business areas.
One other key focus area for Google and a crucial part of its business strategy is talent acquisition. It hires only the best and strives to attract talented people into its organization. So, attract and retain the best talent in the industry, the company offers fat salary packages and attractive benefits. For a large number of tech graduates, a job at Google is like a dream come true. Moreover, since Google is mainly a software and services company, its progress depends on the talent of its staff. Google considers it one of the most significant focus areas. As competitive pressure grows in the tech industry, the battle for talent acquisition has also continued to intensify between the leading technology brands.
Financial Performance of Google over the past 2 years:
Google has enjoyed strong revenue growth over the past several years. The company has experienced a growth of more than 200% in its revenue in just five years. Apart from that, it also became the most cash-rich company in 2019. While Google still depends mainly on advertising as its core revenue source, the company has started diversifying its revenue base, and cloud computing also contributes significantly to its revenue now. Based on the negative impact of the pandemic on the company’s advertising revenue, it has become essential to diversify its revenue base and reduce its dependence on advertising.
The net revenue of the company in 2019 reached $161.9 billion, rising from $136.8 billion in 2018. The company’s net income also rose to $34.3 billion in 2019, rising from $30.74 billion in 2018. The company’s net operating cash flow rose to $54.5 billion in 2019 from $48 billion in 2018. The revenue that the company generated from advertising in 2019 was $134.8 billion compared to $116.5 billion in 2018. The company’s revenue from Google Cloud grew sharply in 2019 compared to the previous year and reached $8.9 billion in 2019 against $5.84 billion in 2018.
In 2020, while Google’s advertising revenue grew in the first quarter, it fell in the second quarter. The company generated $37.7 billion in the first quarter of the year and $29.9 billion in the second quarter of 2020. Overall advertising revenue of the company during the first half of the year remained nearly unchanged except for a small growth of around half a million compared to the previous year. Alphabet’s advertising revenue for the first half of 2020 was $63.6 billion in 2019 compared to $63 billion in the first half of 2018. The company’s net revenue grew during the first quarter of 2020 but fell in the second quarter. Its net revenue during the first quarter of 2020 was $41.16 billion compared to $36.34 billion in the same period the previous year. However, in the second quarter of 2020, the company’s net revenue fell to $38.3 billion compared to $38.9 billion during the same period in the previous year. Overall, the company’s net revenue grew by around $4 billion in the first half of 2020 compared to the same period during the previous year. The company’s net revenue for the first half of 2020 was $79.5 billion compared to $75.3 billion during the same period in the previous year. The pandemic harmed the company’s advertising revenue, which led to a decline in the second quarter of the year.
However, the company’s cloud revenue surged during both quarters of 2020 compared to the same period last year. During the first quarter of 2020, the company’s cloud revenue reached $2.8 billion compared to $1.8 billion in the first quarter of 2019. Again in the second quarter of 2020, the company’s revenue from the clouds was $3 billion compared to $2.1 billion during the same period last year. The cloud businesses have experienced a jump in revenue during the pandemic driven by a shift towards digital technology worldwide.
The US was the largest Alphabet market from where its revenue jumped during the first quarter but remained flat during the second quarter of 2020 compared to the same period last year. In the first quarter of 2020, the company generated $18.9 billion in net revenue from the US, representing 47% of the company’s total net revenue for the first quarter. During the same period last year, it generated $16.5 billion in net revenues from the US. However, during the second quarter of 2020, its net revenue from the US remained nearly flat compared to the same period during the same period the previous year. Its net revenue from the US market was $18 billion compared to $17.9 billion during the same period in the previous year. Overall, for the first half of the year, the US accounted for 47% of the company’s net revenue compared to 46% during the same period last year. Its US net revenue grew by around $2.4 billion in the first half of 2020 compared to the same period in the previous year. The company generated $36.9 billion in net revenue from the US market during the first half of 2020 compared to $34.4 billion during the same period in the previous year.
Conclusion and Recommendations:
While Google’s growth has been monumental over the past five years, it received a major setback during the pandemic this year. With Coronavirus hitting major economies globally, including the US, UK, and India hard, and activity across the industries with the highest ad spendings falling very low like automobile and tourism, the company’s revenues took a severe hit during the second quarter of 2020. The company needs to diversify its revenue base more urgently than ever. While the company’s ad revenue dropped during the pandemic, its cloud revenue surged, driven by a heavy digital transformation across all the industries. In the coming years, its revenue from cloud computing is expected to grow faster. This could work to reduce its dependence on advertising to some extent. Apart from that, the company needs an effective strategy to monetize its Android users.
The base of android users worldwide is growing very fast, and Android enjoys the largest share as the most preferred mobile OS in the world. Another area where Google must grow its focus to acquire faster revenue growth is premium smartphones. Its Pixel smartphone is positioned as a premium smartphone. If the company can successfully grow its Pixel sales in major smartphone markets, including the US, China, and India, that too could become a significant source of revenue for the brand. Apart from the growing smartphone user base, people’s reliance on their smartphones for various things from shopping to social media and entertainment has grown. Google can further diversify its business using its strengths in the internet and cloud industries to grow its revenue faster and acquire a larger customer base.