It is no secret that the software industry holds the potential for immense revenue and profits. With Facebook raking in revenue of $7.8 billion in 2013 and Twitter being valued at $18 billion, the internet industry seems to be a land of promise and fortune. But how do they convert internet traffic to profits? How is Mark Zuckerberg one of the wealthiest entrepreneurs in the world? How can Larry Page afford that 193-foot yacht?
Social networking websites like Facebook, Twitter and Google+ along with most other internet companies have multiple sources of revenue, but the bulk of it comes from digital advertising. With 3.02 billion active internet users, digital advertisements have become an incredibly effective solution for advertisers looking for a way to market their products and services. The larger the user base of a particular social media website, the more advertisers they attract. Such websites seek to generate a model to display advertisements in a way that doesn't obstruct the users from their activities while still making sure the ads are adequately visible. Striking the right balance determines whether the model is effective and is prone to attract marketers.
It is worth noting that credits sold for games like FarmVille and CityVille also account for a significant portion of Facebook's revenue, although digital advertising still reigns supreme, standing at 82% of total revenue in the first quarter of 2012. Websites like Linkedin also sell subscriber data. While that may not be valuable to other users, it is precious to advertisers seeking to maximize the efficacy of their advertisements. Knowing what kinds of ads attract what kinds of users could prove vital in ensuring optimum engagement.
Search engines like Google and Bing and video sharing sites like Youtube and Hulu derive most of their profits from digital advertising as well, although Hulu also obtains a substantial portion from its paid subscribers. Popular Youtube channels can receive compensation for placing ads in their videos after Youtube takes its 45% cut of the profits. Ever wondered how some of the more popular videos can afford such elaborate set ups and immaculate special effects? How that lunatic could afford to sacrifice a brand new iPhone 6 for a drop test? That's because top Youtube stars can earn six-figure incomes every year because of their enormous fan-base. In fact, according to YouTube analytics company SocialBlade, PewDiePie has the highest estimated income of $8.47 million a year (which makes me rethink my life decisions).
What about apps like Whatsapp and Snapchat then? How do they make the big bucks? Why was Instagram worth $1 billion to Facebook?
Honestly, other than through premium services and paid subscription, they are not profitable. Their objective is to garner enough popularity and inflate the number of users until they are acquired by someone who can monetize their assets. Back in April 2012, when Instagram was bought by Facebook, it had over 100 million users. That massive user-base and their data was what Facebook bought, that was worth $1 billion. Although arguably the threat of competition also played a part in influencing said decision.
For those curious about how your favorite tech company not covered in this article makes money, the following link neatly summarizes the sources of revenue of popular tech companies and presents them in a user-friendly way.
Adit Hasan likes to dabble, making him jack of all trades, master of none. The only constants in his life are penguins and mangoes. Send mixtape to facebook.com/adit.hasan.3