The Google Revenue Equation

January 23, 2010 | Willis Wee

google A discussion I had in a class has inspired me to write this post.

A couple of days ago, my Professor asked a intriguing question: “Do you think Nexus One is able to overtake the iPhone?” Immediately, the body language of my peers suggests a definite no.

It isn’t hard to explain why. Some said that the sheer number of iPhone apps are enough to kill, while some said that Google doesn’t have the ability to market a physical product.

While it is true that Google is trying to get a significant part of the pie in the mobile phone industry, it is not for the mere profit of selling phones. Google is not in the business of selling phones, it is in the business of selling ads.

And that explains the “Google Revenue Equation.”

I have taken this term from Ben Parr, who has written a beautiful piece about it.

In a nutshell, the Google Revenue Equation is simply:

Revenue = Time Spent On Web

Yes, Google’s business model relies heavily on advertising; and more time spent on the web means more exposure to Google ads. Whatever it owns, acquires and creates are all geared toward making us spend more time on the web. Reality is, almost all websites in the world are hosting Google Ads.

google products

Google has probably predicted long ago that mobile would be the next big thing. Not only has it introduced the Nexus One, it has also acquired AdMob for $750 million. Serving mobile ads makes perfect sense. The more time you spend on mobile web and apps, the more money Google makes. Whether Nexus One can turn a profit isn’t the issue, the key is to get people to go mobile.

In Q4 2009, android phones accounted for 27% of Smartphone mobile ad impressions in the U.S. The growth is looking good and is expected to leap with the launch of Nexus One.

smartphonewebads

Andy Rubin, vice president of engineering at Google, made the company’s goal clear:

“Our primary business is advertising… a superphone [like Nexus One] is a great way to access the Web, and that… supports our whole business model, which is advertising,” he said. The new phone and store represent “the next front of our core business,” he added.

Google is not trying to make a profit on sales of the Nexus, said Rubin. Instead, it’s trying to “make sure we have great access to Google services… and the best possible Web experience,” he explained. “You buy this and the advertising model takes off.”

With $6 billion revenue, seems like this equation is working, huh?

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Tags: Business, Google, google revenue

matthart

I think that Google's slow foray into all things connected is disrupting every traditional business model. Rather than consumer pays - for phones, for GPS devices, for applications - Google will actually pay for the phone, GPS device, and apps via advertising. Stocks in companies that provide GPS mapping data tanked when Google introduced its navigation beta into Android phones. My Droid works great for GPS, with more details spoken than my Maggelan. What happens when Google pays car makers to include a Droid, that includes phone service? "Exit right in half a mile. Check out the Radio Shack after you exit for great deals on remote control cars."

- Matt H

Willis Wee

yeap. spot on! that's their business model.

And having google droid in cars is always a possibility. It's google that we're talking about :)

vitasecondumnex

I think from a very long time ago, Google had its main revenue source from Online ads (viz. AdSense/AdWords)

The mobile is one of its innovations and cannot be considered as a revenue generator. As far as I know, google is very clear on it's revenue making model via online advtg.

Wonderful article. I loved the statistics, especially. Very detailed.

Willis Wee

thanks ! :)

Tarek Amr

As I can see from your post, Google's main goal is to make people spend more time online with their mobile phones, and not selling more mobile phones. So does this mean that they will ignore many useful phone feature and focus on the primary goal instead? Also since selling mobiles is not their main goal, I - as a user - shouldn't trust their mobile phones?

Willis Wee

good angle Tarek. But i doubt Google would neglect quality in its phones. Note that google is interested to gain a sizable market share in the smartphone market and only quality can bring you that far.

Another angle would be to assume that Google (in the future) might slash the price to make the phone more affordable to the masses. Since the phone profit doesn't really matter.

John Christian

I am amazed how the people inside Google really think far far ahead of the internet business. Able to search on the phone is really great. I was into a middle of conversation and a nice topic popped up that we needed to verify the facts. My friend immediately googled it using his phone, and huala! We verified the information instantly and the conversation became more smooth.

Willis Wee

cool. i glad this piece helped :)

The Google Revenue Equation

Revenue = Time Spent On Web

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