When I walk into a bank today, I might deposit my cash in exchange for some interest rate. The interest rate is my cut of the profits the bank made on my deposit through their trading and lending activities. The more assets under management, the more money a bank can make on its own account.
Like banks, web companies are in the business of maximizing gigabytes of user data under management.
When I use Google products like Gmail, Google Search, Android and Android applications, Google Chrome for browsing, Google Plus for social networking, Google TV, YouTube, clicking on Google Ads, I’m “depositing” my data with Google.
Google uses this panoply of data across their user base to generate tens of billions in revenue from advertising at 30% EBITDA margins. The profits of the advertising business subsidize all of their free products I mentioned above. Said in the reverse, all these free products attract users to deposit data with Google.
Data is the linchpin of Google’s revenue models. And because the marginal cost of storing user data is negligible and the marginal benefit of additional data is substantial, (more data means better ad targeting which means more profit), Google benefits from tremendous economies of scale. The same is true for Facebook, Yahoo, Aol, Demand Media, WebMD and every other consumer service.
But, the concept of maximizing gigabytes under management doesn’t stop at advertising businesses. In fact, it’s fundamental to many categories of internet companies.
Freemium companies like Expensify and Zendesk subsidize product use in exchange for user data to inform inside sales teams' funnels. Social networks like LinkedIn and PatientsLikeMe operate social networks in exchange for user data, selling subscriptions for data access. Amazon operates Prime (a “free” shipping service and a “free” video-on-demand service) at what must be negative operating margin to drive more browsing, for more data, to improve targeting and increase sales.
The most successful companies on the internet create a reinforcing cycle in with this idea: they use free products to acquire more gigabytes under management to drive more profits which are used to build better free products. Lather. Rinse. Repeat.
Published 2012-10-25 in Trends