Google has a fast-growing new business with ‘Apple-like’ rocketship potential: making you pay for subscriptions.

Google is certainly not the only company that has found that the AI ​​boom is bringing a new way for consumers to pay for these features, but for Alphabet, it opens up even greater opportunities in a new segment that is still grow its business.

Twenty years after Google became a publicly traded company, the lion’s share of its revenue still comes from search advertising. However, in recent months, the search giant has dropped several hints that subscriptions are becoming an important part of the business.

In January, Alphabet CEO Sundar Pichai said that paid subscriptions generated $15 billion in revenue — a five-fold increase from 2019 — most of which came from YouTube at the time.

Over the past three quarters, the revenue growth of Google’s “subscriptions, platforms and devices” division — known only a year ago as “Google Other” — has outpaced search growth, according to a Business Insider analysis. The subscriptions segment includes the company’s various YouTube subscriptions – Music, TV, Premium – and its Google One service. It also includes Pixel sales.

A Google spokeswoman declined to comment for this story but pointed to the company’s Q2 earnings call, where Alphabet president Ruth Porat noted that the company’s subscription business “is driving most of the growth in revenue” in this category.

Search marketing is a volatile business (and for Google, it’s under threat of regulation). That’s why Wall Street wants to see if the company can grow subscription revenue as a more reliable business, says Dan Morgan, Synovus’ portfolio manager.

He told Business Insider: “It would be good to create a large registry out of some of the ebbs and flows out of research.” He said that while Wall Street is enjoying Google Cloud’s growth from AI, “we’re not talking too much about YouTube Premium going up. It’s a big number.”

For business units that are already strong, such as Cloud and YouTube, Google is losing their money when reporting earnings. Investors would undoubtedly like a better idea of ​​how much income investments are generating in general.

Noting that Google subscriptions are tied to other revenues, Morgan estimated that Google subscriptions account for more than 10% of its revenue.

“That would be an Apple-like number,” he said.

The Apple effect

Apple is very successful in subscriptions. Last year the company announced that it had 1 billion subscribers paying for its “services,” a set of subscriptions that include Apple TV+, Apple Music, and iCloud storage. By 2023, 22% of its online sales came from this “services” segment, which includes the percentage of App Store sales that Apple takes for itself.

A recent consumer survey by Consumer Intelligence Research Partners found that paid iCloud storage was the most popular Apple service used by its customers.

It’s the same tactic that Google takes with its storage subscription. Previously, it offered a large amount of free cloud storage to users. Over time, the amount of storage allocated for free decreased as Google encouraged users to pay for a subscription to Google One, which allowed them even more. storage for photos, emails, and documents.

It seems to be working for Google, too: In January, Photos announced that the company had surpassed 100 million Google One subscribers.

The potential of AI

Passing that 100 million mark coincides with Google integrating its new Gemini Advanced service into Google One—a smart way to get users hooked on the new technology the company is investing heavily in. it.

Indeed, users have been conditioned to expect a certain level of free service from Google. The company allows anyone to use the basic version of the Gemini chatbot and the development tools for free, but keeps the more powerful versions and advanced features, such as image generation, behind a paywall.

Bernstein senior analyst Mark Shmulik compared the tactic to AOL’s CD campaign, where the company distributed a large number of CDs that offered users a free trial of its service. The campaign was a huge success and helped turn the company into an internet juggernaut in the 1990s and early 2000s.

“Offering new AI features with a free 1-year subscription is interesting,” Shmulik said, referring to a promotional offer Google made for buyers of its Pixel phones and Chromebooks.

For everyone, Google has wisely bundled access to its “Gemini Advanced” feature into Google One, so customers will get it along with extra storage for Gmail, Drive, and Photos—services that people billions are already using them.

None of this includes what Google charges customers for its Workspace products to access advanced AI features—which appear in Google’s earnings reports under its Cloud division and are an alternative registration that the company is currently focusing on.

Google still needs to convince users that these additional AI features are worth the extra dollars and will increase user productivity. It may be harder to sell them when they don’t come with must-have features like extra email storage.

One of Google’s rivals discovered this. A pharmaceutical company recently canceled its subscription to Microsoft’s Copilot AI, citing a lack of quality. The company is also reportedly facing operational issues with some customers.

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