Have you ever bought something from Google? Many will probably answer positively—maybe a tablet or a phone, or perhaps pay for a YouTube or Google One subscription. Back in the early 2000s, most would have responded negatively, though. At the time, the company was a synonym for powerful and mostly accurate web searches, and no one was even considering buying anything from them as the service was free (as in no cost for end users) — and still is today.
In 2002, Google announced the Search Appliance, a dedicated server that could be rack-mounted in corporate server rooms. As far as I know, that was Google’s first venture into the hardware business. The unit provided document indexing capabilities using Google search technologies. However, both hardware and the operating system were furnished by third parties. In August 2004, I contacted the company to inquire about the appliance and potential deployment for internal UNDP use. I was promptly offered a server with limited capabilities to test it before making a final purchasing decision. The server arrived in early September. The shipping box was relatively small but rather heavy, containing a bright yellow server resembling a hi-fi power amplifier with no front controls.
The next step was to install the machine in the corporate server room. I had the blessing of top management and got the agreement of the corporate IT division to add the device to the corporate network as long as I did it on my own. No problem, no sweat, I retorted. The installation was relatively simple. I probably spent more time finding the right corporate rack to mount the server. Once the server was running, the fun commenced. Indexing took quite a few hours, and by the end of that week, it had already crawled over 20k documents. A week or so later, I did a demo for senior managers, who were impressed. Fortunately, questions about the server and its contents were never raised. Their recommendation was to go ahead and purchase the miracle search machine. Note that Google was licensing its search algorithm, not selling it. Prices varied according to the number of documents the client wanted to crawl. Those aiming at 1 million documents would have to disburse 125k USD for a 2-year contract. We ended up licensing the unit for 50k documents at a discounted price of 40K for two years (or 67k, at 2024 prices).
Procurement processes at UNDP had stringent requirements and regulations, demanding a lot of paperwork. The requirements included at least three bids obtained after public RFP announcements from companies with at least five years of expertise, and matching annual reports and audit records. Google, of course, did not qualify since it did not have any of the five-year requirements. Moreover, the market for web search appliances was non-existent, so getting three bids was almost impossible. For the procurement committee, Google was a startup specializing in web searchers. It had no record whatsoever of making any sort of hardware! They were right on all counts and rejected the procurement proposal. I had to then make a case for a waiver from competitive bidding, which, after some back and forth, went through. The appliance survived for over a decade and was decommissioned once UNDP moved its server room to the cloud. I was asked to remove the appliance from the soon-to-be dead server room and ship it back to Google. Google stopped supporting the server around the same time, as the company had already entered the cloud business and was not eager to compete with itself, given the already intense competition with other cloud providers.
We can now rephrase our opening question: How does Google make money? Obviously, it needs to sell stuff to a wide variety of clients. However, its signature product, web searches, can be used gratis. If we think about Apple, Microsoft, and Amazon, some of the other digital behemoths, they must sell their signature products (iPhone/Mac, Windows/Office, online retail trade) to make a profit. There is no way I could use any of these products for free, at least legally. On the other hand, Meta/Facebook is more on Google’s camp: I can use most digital services for free if I create an account and reveal my identity. Fake accounts exist, but the company does its best to delete them. In 2024, over 2 billion such accounts were removed, for example.
The table below, taken from Google’s SEC report submitted in February of this year, details the company’s revenues (now called Alphabet) for 2023 and 2024.
Last year, advertising comprised 75.6 percent of all revenues, with Google Cloud a distant second with 12 percent. Revenues grew by 13.9 percent, spearheaded by cloud services that rose almost 31 percent, probably driven by GenAI-related infrastructural investments. Subscriptions, platforms, and devices grew 16.3 percent, outpacing Google advertising by 5 percentage points. The SEC report shows that 51 percent of all revenues came from non-US clients (tariffs, anyone?). The company also spent 14 percent of its revenues (close to 50 billion) on R&D and reported 183K employees by the end of 2024. It also invested 52 billion on land and equipment, and nearly 3 billion on acquisitions (buying other companies).
In 2004, when I was trying to get my hands on the power amplifier/search appliance, the company had a different profile. It had 3,021 employees and ninety-nine percent of all revenues (close to 3.2 billion or 5.3 billion in 2024 USD) came from advertising, with licensing struggling to reach one percent. YouTube did not exist yet, and the cloud was still in diapers. At the time, Google was still a two-sided digital platform focused on the then-emerging web search market. Advertisement was the only way to make profits, as the company’s 2004 SEC report says:
“Google is a global technology leader focused on improving the ways people connect with information. Our innovations in web search and advertising have made our web site a top Internet destination and our brand one of the most recognized in the world… We generate revenue by delivering relevant, cost-effective online advertising. Businesses use our AdWords program to promote their products and services with targeted advertising. In addition, the thousands of third-party web sites that comprise our Google Network use our Google AdSense program to deliver relevant ads that generate revenue and enhance the user experience… We place a premium on products that matter to many people and have the potential to improve their lives, especially in areas in which our expertise enables us to excel. Search is one such area… Communication is another such area… Gmail, our new email service (available in a limited test), offers a gigabyte of free storage for each user, along with email search capabilities and relevant advertising. Delivering an improved user experience in Gmail has similar computing and software requirements as our search service.” (my emphasis)
What I find most fascinating about the quote is how innovation was not limited to web search but also encompassed advertising. Advertising innovation was needed to allow businesses and others to place ads on a digital platform that was totally unfamiliar to them at the time. So Google developed advertising-placement algorithms to complement its core technologies and generate revenues. However, AdWords and AdSense do not rely on patents but on trademarks. Therefore, the core bet was on the volume of users, not royalties or licensing. The more eyeballs it could offer to advertisers, the higher the potential revenues and total net income. The classic media advertisement model revisited and upgraded, now thriving in the digital world.
Of course, Google is not a traditional media company. It does not produce direct content like a newspaper or a broadcasting company. As an early digital two-sided market, it sits between advertisers and potential consumers. It is thus a network intermediary that disintermediates analog processes and centralizes them under the domain of its exclusive digital real estate. Once that happens, it can create new digital intermediaries supported by the digital advertising model while sharing revenues with them. “Thousands of third-party web sites” thus work in tandem with the company to increase the number of eyeballs looking at digital screens and maximize revenues. If you cannot beat them, join them!
Quantitative and qualitative differences are also at work. On the former, Google offered a single platform to advertisers where millions of users worldwide could be reached instantly and cost-effectively. Any business trying to do so the “old-fashioned way” would have had to spend millions, a risky operation, especially in small or unknown markets where costs could easily kill revenues ipso facto. Qualitatively, the company could offer customer profiles developed based on email or web searches to advertisers, who could then target specific population segments where their products and services could be more relevant than otherwise. While web search remained free and did not require authentication, Gmail did, thus permitting more nuanced profile development on a person-by-person basis. That is the model that a few years later, Facebook completely mastered!
In 2006, Google bought YouTube and five years later, it entered the cloud market, after seeing the stunning success of AWS, which had been launched in 2006, coincidentally. We can conclude that Google has been a multi-sided digital platform since. And yet, its primary source of revenue continues to be advertising.
Raul
