As of 2023, 91.8% of Americans go online to purchase products and services, connect with family and friends, seek employment, or find information on virtually any topic.
But since internet companies offer the majority of these services for free, it seems contradictory that all this activity can create big profits. It helps to understand that the primary way internet companies create revenue is through selling advertising.
Key Takeaways
- Despite giving away many services for free, internet companies are able to generate substantial profits.
- Selling advertising is the most common way internet companies generate revenue.
- Internet companies also profit from collecting data about their users.
- With increased competition, some internet companies are diversifying their income streams with other sources of revenue.
Profit Through Advertising
Internet companies such as Google (now Alphabet), Meta (formerly Facebook), X Corp. (formerly Twitter, Inc.), and many others have various ways to generate revenue while offering their unique services for free. One of the most common ways internet services companies generate profit is through advertising revenue.
Because site content on search engines and social media platforms is offered to consumers at no cost, millions of people visit these sites and apps every day. Each of these users represents a potential customer for other businesses that offer their products and services via the internet. Companies can purchase advertising space on these sites in an effort to reach consumers they might otherwise miss.
Sites charge fees to 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
Selling ad space to e-commerce companies is a profitable endeavor for free content sites because of their reach to millions of users. However, internet companies can also generate revenue by collecting data from those users and providing that valuable information to other companies.
Internet companies gather and store data on the millions of users that spend time on free content sites. This data includes users' location, browsing habits, buying behavior, and unique interests. E-commerce companies can use this data to tailor their marketing campaigns to a specific set of online prospects.
User data is also beneficial to companies offering products and services on the internet when it's 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 Meta and Google are on record as saying they do not make money from selling their users' data to other companies.
In April 2018, Meta CEO Mark Zuckerberg testified before the joint Senate Judiciary and Commerce Committees regarding how his company handles user data. Zuckerberg said:
There's a very common misperception about Facebook—that we sell data to advertisers. 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 obtained 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. The GDPR is 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.
For its part, Google says uncategorically that it does not sell users' personal information.
"We use your personal information to make our products more helpful to you. It’s how we can autocomplete your searches, get you home faster with Maps, or show you more useful ads based on your interests. But we never sell your personal information to anyone and you can use many of our products without signing in or saving any personal information at all."
Other Income Sources
While advertising is the largest source of revenue for many internet companies that offer free services, some of them are developing other sources of income, some of which can subsidize the free services. 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 more than 78% 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 also 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.
How Do Social Networks Make Money?
Social networking platforms like Facebook and X earn revenue largely through selling advertisem*nts, which appear throughout a user's experience on the site or app.
How Do Companies Make Money With Free Apps?
Apps that are free are typically supported through advertisem*nts. For example, if you use Instagram, which is a free photo- and video-sharing social platform owned by Meta, you're likely to encounter ads throughout your feed. Some free apps are supported by in-app purchases, and others use premium subscriptions to provide an ad-free user experience (while still offering free accounts with ads).
How Do Websites That Don't Sell Anything Make Money?
Even if a website appears not to be selling anything, it probably is—you just may not be the target market. Websites like these sell access to their user base in the form of targeted ads, which users then encounter during the process of using the site.
The Bottom Line
Although it may seem counterintuitive, many companies can offer their content and services to users for free and still turn a profit. The main way they're able to do this is by selling advertisem*nts to companies who want to get their business in front of the users that frequent the free apps and websites run by the internet companies.
When you spend time on free sites such as Google, X, or Facebook, keep in mind that you're not paying for the service, someone else is—the advertisers who want you to see their ads while you're scrolling.
