Media companies are among the most profitable businesses in the world today. Nearly 99% of companies in the Fortune 500 have a large presence on social media sites. Yet so much of what we know as social media—Google, Facebook, YouTube, etc.—is free. How do media companies pull this off? Where does the money come from, and where does it go?
In the early online market, free services were a necessity. Companies could choose to either make things easy for the user or risk getting kicked out of the market. As the number of web users has exploded over the last 15 years, media corporations now have access to an abundance of new user data. The monetization of this data is one of the primary sources of revenue for media companies. According to CNBC Tech, over 80% of Alphabet’s $183 billion revenue in 2020 was derived from ads. In recent years, algorithms have only increased the monetizing capabilities of advertising.
Social media algorithms are quite business-oriented, with the primary objective being to keep the user online for as long as possible, so that they have higher ad exposure. Since large social media companies like Instagram and Facebook know the demographics of their population, it is easy to select personalized ads for each user. Algorithms of this fashion can take into account location, user bases, and even times of day to influence the cost of the advertisement. Such types of targeted advertisement are extremely profitable.
However, not all media companies use advertising as the main way to boost their revenue. Discord, for example, sells additional features in a premium bundle called “Discord Nitro”, which allows users to create custom emojis, decorate their profiles, and upload higher quality files. In other words, you pay extra for a better user experience. By July 2020, revenue from Discord Nitro was set to surpass $120 million. Nitro is an example of an informational good, meaning that its value mainly derives from the information used in its design. In result, Nitro is a cost-effective way to boost revenue while keeping maintenance costs roughly the same.
Although the financing of social media companies may seem distant from the average person, it is important to be aware of marketing strategies. Social media is a great way to promote your own business and make connections, but keep in mind that your data is a product of their trade. If something is free, you may just be the product.
