How do Internet companies benefit from giving away their services?

It may seem counterintuitive that companies that operate Internet businesses can make substantial profits each year despite offering their services for free. Businesses operating on Internet services have steadily increased in number over the years as more consumers use the Internet to purchase products and services, connect with family and friends, search for jobs, or access information and news on virtually any topic.

Most of the content provided through these Internet companies is offered to users at little or no cost, and consumers have become accustomed to accessing information found on the Internet for free.

The truth is that companies like Google, Facebook, Yahoo, Twitter, and many others have various ways in which they can generate income while continuing to offer their unique Internet services at no cost to consumers. The main way that these companies make money online revolves around creating income through the sale of advertising.

Key takeaways

  • Despite offering many services for free, Internet companies can generate substantial profits.
  • Selling advertising is one of the most common ways that Internet businesses generate income.
  • Internet companies use the data they collect to personalize and send advertising messages directed at their users.
  • In 2020, Google generated more than 81% of its revenue from advertising and is diversifying its revenue by developing products and services in other industries, such as self-driving cars and cloud gaming systems.

Profit through advertising

One of the most common ways that Internet service companies can make a profit without charging users for access to content is through advertising revenue. Because site content on search engines and social media platforms is offered to consumers at no cost, millions of users visit and spend time on Internet service websites like Google, Facebook, and Twitter every day.

Each of these users represents a potential customer for other companies that offer their products and services over the Internet.

Businesses that want or need to expose themselves to potential customers can purchase ad space on content sites at no cost in an effort to reach consumers to whom they might not otherwise be able to deliver a marketing message. The sites charge fees to other e-commerce companies for presenting a specific advertising message to those users, either as a broad or personalized advertising campaign. Businesses that advertise on free sites can pay for greater exposure to their target audience through higher placement in search results or messages targeted to specific consumer groups.

Profit through data collection

Ad space purchased by e-commerce companies is a profitable endeavor for free content sites like search engines, high-traffic blogs, and social media platforms due to its reach to millions of users. However, free Internet service companies can also generate revenue by collecting data from those users and providing that valuable information to companies that want or need it.

Data is collected and stored about the millions of users who spend time on free content sites, including the user’s specific location, browsing habits, shopping 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 for market research. This data collection helps a business understand how well its consumers receive a product or service, what specific products may be of interest to certain consumers, and how well the business presents its marketing message. Each of these aspects makes the data collected from free content sites incredibly valuable to e-commerce businesses.

Privacy concerns

However, not all Internet service companies derive revenue directly from the sale of the data they collect from users. Executives at Facebook and Google are aware that they do not make money selling their user data to other companies.

In April 2018, Facebook CEO Mark Zuckerberg testified before the Senate Judiciary and Commerce joint committees about how his company handles user data. Zuckerberg said the following:

There is a very common misperception about Facebook: that we sell data to advertisers. And we don’t sell data to advertisers. We do not sell data to anyone.

Zuckerberg’s testimony came on the heels of the revelation that political consultancy Cambridge Analytica had obtained the personal data of at least 87 million Facebook users without their consent. The scandal sparked considerable government scrutiny on how internet companies use the data they collect from users.

In May 2018, the General Data Protection Regulation (GDPR) came into force, a set of legal regulations that cover the collection and processing of data from people living in the European Union (EU). The GDPR requires that websites notify visitors of the data they collect and provide them with the ability to consent to the collection of information.

Other sources of income

While advertising is the largest source of income for many Internet companies that offer free services, some of them seek to develop other sources of income. Diversification into other areas makes sense given the growing competition for ad money among many Internet companies and the heightened concern about privacy concerns from collecting data necessary to generate ad revenue.

While Alphabet, Inc. (Google’s parent company) generates more than 81% of Google’s total advertising revenue, the company is expanding its efforts into other areas. The company’s other sources of revenue include Android license fees, cloud storage, apps, and subscriptions. The company is in the process of developing high-tech products, such as autonomous cars and cloud gaming systems, that could add considerable revenue to its bottom line in the next few years.

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About the author

Mark Holland

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