How do Google make their billions?

I was recently asked a question concerning Google. How do Google make their billions when their core service (their search engine) costs nothing for users? As of 2018, Google is the third most valuable brand in the world with a brand value of $120.9 billion. Although this figure has increased from last year by 10%, Google has been overtaken by Amazon and Apple in the rankings of most valuable brands in the world (where Google was number 1 in 2017). But how are Google able to compete with such large companies. The answer to this is advertisements.

Approximately 85% of Google’s revenue is generated through their advertising platforms. Next time you search for something on Google, you may notice several ads on the results page. These are essentially Google’s “money-makers”. Google’s two main platforms for advertising are Google Adsense and Google Adwords. Search engines can generate money from ads by working through a “pay-per-click” scheme, where they are paid a percentage of money every time someone clicks on an ad they have displayed.

Companies will bid for the advertisement rights of specific keywords or phrases that are searched on Google in order to grab the attention of their target markets. When these words/phrases are searched on Google’s search engine, the ads of the company that have won the bids will be displayed. For example, JD sports might own the rights to the keyword “trainers”, so every time someone searches a phrase like ‘new trainers’, ads from JD sports will be displayed around Google’s search results. So essentially Google earn revenue just by displaying ads from advertisers, earning more when users actually click on the ads.

However like every other wealthy business creator, the owner of Google and his team have looked for other ways to earn its revenue with successful results. An example of this is the ‘Google Play Store’ on android devices. Google receives at least 30% commission on all app sales that are generated by app developers on the Play store. The number of installations that occur on this store is increasing every day and it’s no surprise that Google’s 30% share of sales is generating an insane amount of revenue for the company. In 2014, Google reported that it had earned $10 billion from Android apps and that number is obviously a lot larger today. However apps aren’t the only thing. Google also make profits from movies, E-books and music on the Play Store.

Furthermore, Google also delved into the technology sector with particular focus in the hardware industry. Their most successful output from this business venture was the release of their line of Nexus and Google Pixel gadgets. The first gadget by Google was the Nexus one, which was released in early 2010 and the popularity of this smartphone brand increased exponentially with there being 8 new phones released in the next 5 years. However the Nexus brand was eventually discontinued in 2016 and replaced by the new Google line ‘Pixel’, which has been a great success with the release of phones, tablets and laptops.

But what next for Google? It’s almost certain that the new innovations from Google will not stop here with the brand showing glimpses of their future projects involving robotics, self-driving cars and even space exploration. Maybe these new business ventures can help get Google back into that number one place in the rankings for most valuable companies.

The Invisible Hand: Is Greed good?

The ‘Invisible Hand’ is a theory that proves how there is nothing wrong with people acting in their own self-interest. In a free market, the combined force of everyone pursuing his or her own individual interests is to the benefit of society as a whole, supplementing everyone. I was recently taught about this idea and it helps explain why free markets have been so essential to the growth of complex modern societies.

There are two aspects to the invisible hand theory: a seller/producer trying to make a profit from selling goods and a consumer looking to purchase cheaper goods. Both of these contribute to create a more efficient economy which can lead to market equilibrium in different industries.  People pursuing self-interest can contribute towards societies’ well-being even if they don’t mean to.

However, not all implications of the invisible hand are positive. A main problem that can arise from this is monopoly power. With no government regulations and price controls, firms with monopoly power can push prices above the equilibrium. As a result of this, firms can become inefficient due to a lack of competition making them potentially stagnant.

Furthermore, the invisible hand theory can be used to support selfish actions that could actually negatively affect society, which is an incorrect approach. It is important to be able to distinguish between self-interest and pure selfish greed when implementing a free market economy. Someone purely driven by greed might choose to cheat the law in an effort to benefit himself to the loss of others.

Russia: The centre of economic activity this summer

The 2018 World Cup in Russia is nearly here and this got me thinking about how major sporting events naturally have a large impact on many lives. For most, it’s the entertainment aspect: supporting your country, seeing your favourite players play or just watching thrilling games of sport. However these events have a much wider economic impact that many overlook.

Russia had to compete with many other countries to claim the rights to host the 2018 world cup. But why do all these countries desperately want to host such significant sporting events, especially when it has cost Russia nearly 11 Million pounds to host it? It’s all for the boost in the respective country’s economy, being in the international spotlight. Not only will the Russian economy be boosted by sales of match tickets but also by jobs in industries indirectly affected by this world cup like tourism, construction and even leisure.

World cup organisers expect around 500,000 foreign fans to attend the world cup. This is a huge boost to Russia because each of these tourists will have to spend money on accommodation, food and other necessities whilst in Russia, resulting in a large injection in revenue for the Russian tourism sector from abroad. Furthermore with all these tourists coming into Russia, there has been money spent into the development of airports in Russia (especially Moscow-based ones), which would be beneficial to the transport sector as these improved facilities will allow growth in this industry to continue even after the world cup is finished.

However, it could be argued that this economic boost could be short lived for Russia given the short duration of the tournament and the vast size of the country’s economy. The world cup will significantly improve Russia’s external accounts but i do not expect the added support to last long term.

Will the Sugar Tax work?

After many months of debate, the sugar tax was finally brought into action in the UK earlier this month. A sugar tax is a form of surcharge introduced to reduce the overall consumption of sugary drinks within a country. The tax is an example of a pigouvian taxation, which is designed to discourage unhealthy diets.

A study conducted in 2010 showed that consuming one or two sugary drinks a day gives you an increased risk to developing diabetes by 26% (according to a Wikipedia article on sugar tax). With type II diabetes becoming a growing health concern in both MEDCs and LEDCs, governments are beginning to realise the negative effects caused by consuming excess sugar. For this reason, a sugar tax is being introduced to combat the negative effects of sugar consumption on the UK economy.

But what exactly are these negative effects and will a sugar tax have a big enough impact to prevent them?

The main problem caused by the consumption of sugar can be linked to the negative externalities that arise from this particular market. A negative externality is a cost suffered by a third party as a result of an economic transaction. The consumption of sugar causes health problems, which consequently leads to a fall in productivity and an increase in costs for the public health sector. The marginal social benefits of sugar consumption are lower than the marginal private benefits. The socially optimal level of sugary drinks consumption is where social marginal costs equal social marginal benefits.

This sugar tax is a form of government intervention in order to minimise the problems caused by negative externalities.  By introducing a sugar tax, sugary drink manufacturers are forced to increase their costs, which would consequently lead to them having to increase the price of their products. This rise in price could potentially reduce the demand for sugary drinks as price and demand have an inverse relationship. However, this depends upon how price elastic the sugary drink products are.

Personally, I believe that the demand for sugary drinks would be fairly elastic as the good is not a necessity so most consumers would be put off by increases in price. However, this depends on the brand of drink and the consumer behaviour. If some consumers purchase sugary drinks on a regular basis then a slight increase in price may not have much of an effect on their buying habits. Furthermore, brands that control the sugary drinks market like Coca Cola and PepsiCo are able to increase the price of their goods without affecting quantity demanded too much. 

The sugar tax will be an effective way in reducing the external costs from sugar consumption as the rise in price of sugary drinks (due to the tax) will cause customers to reduce the amount they purchase and when this happens on a large scale in the country, the overall sugar consumption will decrease. This will therefore reduce the number of people under risk of sugar-related illnesses like diabetes, which therefore reduces the demand for health services.

On top of this, the introduction of a sugar tax will raise tax revenue. It is estimated that a 20% sugar tax could potentially generate approximately £1 billion. The government can use the money raised from the tax to fund spending towards preventing growing health problems. For example clinics specifically targeted for diabetes patients and national campaigns to educate people on the dangers to health caused by sugar.

For these reasons, I am convinced that the introduction of the sugar tax is a smart move by the government as it will certainly have an impact on the demand of sugary drinks. However,  this is an ongoing process and the government must continue to intervene into this market to further minimise the risk of sugar-related diseases within the UK.