How Do Internet Companies Make Money With Free Services?

 

It may seem contradictory that companies that operate Internet businesses can make substantial profits each year despite offering their services for free. Companies that operate in Internet services have grown in number consistently over the years as more consumers are using the Internet to purchase products and services, connect with family and friends, search for employment, or gain access to information and news on virtually any topic. Most content provided through these Internet companies is offered to users at little to no cost, and consumers have grown accustomed to accessing information found on the Internet for free.

The truth is companies such as Google, Facebook, Yahoo, Twitter, and many others have various ways in which they can generate revenue while continuing to offer their unique Internet services at no cost to consumers. The primary way these companies make money on the Internet revolves around creating revenue through selling advertising.

 

How Do Internet Companies Make Money With Free Services?

 

Profit Through Advertising

One of the most common ways Internet services companies are able to generate profit without charging users for access to content is through advertising revenue. Because site content on search engines and social media platforms are offered to consumers at no cost, millions of users visit and spend time on Internet service websites such as Google, Facebook, and Twitter every day. Each of these users represents a potential customer for other businesses that offer their products and services via the Internet.

Companies that want or need exposure to potential customers can purchase advertising space on no-cost content sites in an effort to reach consumers to whom they may otherwise cannot deliver a marketing message. Sites charge fees to other e-commerce businesses for presenting a specific advertising message to those users, either as a broad or customized advertising campaign. Businesses advertising on free sites can pay for greater exposure to their intended audience through higher placement in search results or targeted messages to specific consumer groups.

 

Profit Through Data Collection

Advertising space purchased by e-commerce companies is a profitable endeavor for free content sites such as search engines, high traffic blogs, and social media platforms because of its reach to millions of users. However, free Internet service companies can also generate revenue through the collection of data from those users and providing that valuable information back to companies who want or need it.

Data is gathered and stored on the millions of users that spend time on free content sites, including specific user location, browsing habits, buying behavior, and unique interests. This collected data can be used to help e-commerce companies tailor their marketing campaigns to a specific set of online consumers.

User data is also beneficial to companies offering products and services on the Internet when used as marketing research. This collection of data helps a business understand how well a product or service is received by its consumers, what specific products certain consumers may be interested in, and how well the business is presenting its marketing message. Each of these aspects makes the data collected from free content sites incredibly valuable to e-commerce companies.

 

Privacy Concerns

However, not all Internet service companies make money directly from selling data they collect from users. Executives from both Facebook and Google are on record as saying they do not make money from selling their users’ data to other companies.

In April 2018, Facebook CEO Mark Zuckerberg testified before a joint Senate Judiciary and Commerce Committees regarding how his company handles user data:

“There’s a very common misperception about Facebook—that we sell data to advertisers,” Zuckerberg said. “And we do not sell data to advertisers. We don’t sell data to anyone.”

Zuckerberg’s testimony came on the heels of the revelation that political consulting firm Cambridge Analytica had got the personal data of at least 87 million Facebook users without their consent. The scandal resulted in considerable government scrutiny into how Internet companies use the data they collect from users.

In May 2018, the General Data Protection Regulation (GDPR) came into effect, a legal set of regulations that covers the collection and processing of data from individuals living in the European Union (EU). The GDPR requires websites to notify visitors of the data they collect and give visitors the ability to consent to information-gathering.

 

Other Income Sources

While advertising is the largest source of revenue for many Internet companies that offer free services, some of them are looking to develop other sources of income. Diversifying into other areas makes sense given the increased competition for advertising dollars among many Internet companies and the increased concerns over privacy issues from the data collection required to generate ad revenue.

While Alphabet, Inc. (Google’s parent company) generates over 70% of total revenues from Google advertising, the company is expanding its efforts into other areas. The company’s other revenue sources include Android licensing fees, cloud storage, apps, and subscriptions. The company is in the process of developing high-tech products—such as self-driving cars and cloud gaming systems—that could add considerable revenue to its bottom line in the years to come.

 

KEY TAKEAWAYS

  • Despite giving away many services for free, Internet companies are able to generate substantial profits.
  • Selling advertising is one of the most common ways Internet companies generate revenue.
  • Internet companies use the data they collect to customize and deliver targeted advertising messages to their users.
  • While Google generates more than 70% of its revenue from advertising, it is diversifying its income by developing products and services in other industries—such as self-driving cars and cloud gaming systems.

 

Source: www.investopedia.com

 

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