How does Facebook make money if I don’t pay to use it?

We have radically changed our expectation of paying for things through technology business models. But it’s too easy to forget that what comes at no cost to us, the end-user, isn’t actually free for all involved . In those specific business models, the end-user is the inventory . That can be a good thing assuming the end-user benefits. Who pays for what, and how does it work?

Let’s take the example of Whatsapp, the app that allows you to send and receive unlimited text messages for free by using WiFi. The service is entirely free for the first year, and after that there is a fee of $0.99 for a one-year subscription. I use it to text people abroad and to send group texts, two things that the existing text functionality on my phone doesn’t do as well or as cheaply. I am getting distinct value, however I am not paying for it (or very little), and I have no intention of paying more than the extremely low yearly fee after the first year.

Now at the end of 2013, Whatsapp generated less than 3 cents in revenue for each user . In 2013, the business had generated a loss of $138.1 million. For the six months ending in June 2014, the loss was $232.5 million, almost double that for the whole of 2013. Whatsapp doesn’t generate revenue from advertising and remains ad-free thus far.

If you had put this forward as a business model thirty years ago, you would have been laughed out of boardrooms . And yet Whatsapp was bought by Facebook in October 2014 to the tune of $22 billion. At the time it was bought, Whatsapp had more than 450 million monthly active users, almost double the user base of Twitter at 241 million users. And Whatsapp was on the path to reaching a billion users. Facebook said they wanted to develop more experiences like Instagram and Messenger – Whatsapp fitted that vision perfectly with incredibly high engagement and growth. And it was the only app that had grown more quickly than Facebook itself.

But how does Facebook make money if they are buying assets that generate losses?

What Facebook wanted, and was extremely happy to pay for, is a growing database of engaged chatty people, as well as their phone numbers . In the meantime, the data is so valuable that Whatsapp and its owner Facebook are more than willing to give me the value that I’m currently getting, simply in exchange for my using the app. I paid by handing over my phone number, Facebook paid with the GDP of a small country, but they got exactly what they wanted (and value for money).

Business models abound where you think you are getting something for free but what is being sold isn’t the service you are using . Such a business model that people will be familiar with is Facebook itself, or Gmail: people use these services for free, but their data is sold for advertising purposes. Talk about booking a hotel for your next holiday in a Facebook status or in an email, and suddenly the surrounding ads will all be for hotels, car hire and activities in the region that you will be visiting.

This means that, by agreeing to the terms and conditions of Facebook and Gmail, you have allowed their powerful algorithms to parse your messages and match phrases to advertising keywords, like “hotel in Amsterdam”. The end user is actually the product being sold : their data, what they say they like, what they say they are interested in. Of course it poses the problem of awareness, and too many users are not aware yet that their data is being used, but this awareness is spreading . We can have access to very useful technology at little or zero cost, and this has made communication easier, with huge advantages to, for example, very small businesses. You can now run a business efficiently for the price of a computer and internet connection , by using all these free services. It has lowered the bar to being in business for yourself immensely and this affords more freedom and more money to untold millions.

This article first appeared in the Irish Post .

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