Google Cloud’s AI Monetization Strategy Explained

Google’s cloud division is already reaping significant financial rewards from its artificial intelligence investments, according to CEO Thomas Kurian. Speaking at the Goldman Sachs Communacopia and Technology Conference in San Francisco on Tuesday, Kurian outlined the company’s multifaceted approach to monetizing its AI services.

“We’ve made billions using AI already,” Kurian stated, emphasizing the real-world impact of Google’s technological advancements.

Beyond immediate revenue, Kurian highlighted the robust demand for Google Cloud’s services, with its backlog of customer commitments growing at an impressive rate.

“Our backlog is now at $106 billion — it is growing faster than our revenue,” he revealed. “More than 50% of it will convert to revenue over the next two years.” This backlog signals strong future growth and sustained customer confidence in Google Cloud’s offerings.

During its most recent second quarter earnings report, Alphabet reported cloud revenue of $13.62 billion, representing a 32% year-over-year increase. While Google Cloud continues to trail Amazon Web Services (AWS) and Microsoft Azure in overall market share, its growth trajectory outpaces its primary competitors, suggesting a narrowing of the gap in the evolving cloud landscape. Alphabet’s net income increased to $28.20 billion, up nearly 20% from the previous year, indicating a healthy financial position for the parent company.

Here’s a breakdown of how Google Cloud is monetizing AI, according to Kurian:

A key component of Google Cloud’s monetization strategy revolves around consumption-based pricing, aligning costs directly with customer usage. Kurian cited the example of AI infrastructure, where enterprises pay for resources like GPUs, TPUs, and AI models based on “tokens,” representing the granular units of text processed by these models.

“Whether it’s a GPU, TPU or a model, you pay by token — meaning you pay by what you use,” he explained. This model provides flexibility and cost-efficiency, particularly for organizations with fluctuating AI workloads.

For customer service systems, Google Cloud employs a pricing mechanism based on “deflection rates,” reflecting the business value derived by clients through metrics like uptime, scalability, AI-powered features, and robust security. To facilitate optimal utilization, Google Cloud offers tools like “deflection dashboards,” enabling customers to track and manage agent interactions effectively.

This consumption-based model aligns with industry trends, allowing businesses to scale their AI deployments strategically while optimizing costs. The granularity of token-based billing enables resource allocation to be finely tuned, maximizing efficiency and ROI.

Signifying Google Cloud’s growing market presence, the company secured a significant six-year cloud contract worth $10 billion with Meta last month. This win is particularly noteworthy as Meta has traditionally relied heavily on Amazon Web Services for its cloud infrastructure, while also utilizing Microsoft Azure increasingly.

In addition to consumption-based pricing, Google Cloud offers a range of services through subscription models, providing predictable costs and access to bundled features.

“You pay per user per monthly fee — for example, agents or Workspace,” Kurian stated, referring to Gemini products and Google Workspace productivity suite that are offered via various subscription tiers that include different storage options.

Google One, its personal cloud storage subscription service, offers a basic monthly service to users. Earlier this year, the company introduced a premium subscription offering called “Google AI Ultra,” providing exclusive access to its most advanced AI capabilities along with a substantial 30 terabytes of storage.

Kurian also emphasized strong growth in Google Cloud’s cybersecurity subscription offerings, highlighting the increasing demand for comprehensive security solutions in the evolving threat landscape. The subscription model offers a straightforward approach to managing costs while gaining access to cutting-edge cybersecurity features that benefit organizations that have limited in-house cybersecurity expertise.

Upselling represents a crucial aspect of Google Cloud’s overall growth strategy, leveraging existing customer relationships to expand revenue streams.

“We also upsell people as they use more of it from one version to another because we have higher quality models and higher-priced tiers,” Kurian explained.

By introducing customers to the capabilities of Google’s AI services, the company effectively encourages wider adoption of its broader product portfolio. This cycle of engagement leads to increased spending and enhanced customer lifetime value.

“That leads customers who sign a commitment or contract to spend more than they contacted for, which drives more revenue growth,” he added. This demonstrates the power of Google’s AI services to drive customer stickiness and increased consumption.

According to Kurian, Google Cloud is accelerating its pace of acquiring new clients, a trend that suggests its go-to-market strategy has gained substantial momentum.

“We’ve seen 28% sequential quarter-over-quarter growth in new customer wins in the first half of the year,” Kurian reported, noting that a significant proportion of its customer base is already actively using Google Cloud’s AI tools.

“Selling to existing customers is always easier than selling to new customers, so it helps us improve the cost of sales,” he concluded. This focus on deepening relationships with existing clients translates to operational efficiencies and enhanced profitability.}