Ever wonder why many of the largest tech companies have ad-based business models? In this post, we explore the pros and cons the ad-based business model presents for these companies and their users.

Pros

Companies can provide users a “free” service

Since the revenue comes from advertisers, users can enjoy the service for “free” leading to more overall users than in a paid model.

• No barrier for user adoption; consumers can simply try things for free.
• The lower barrier for consumer adoption is also the reason the vast majority of apps are “free” and supported by ads.
• This was especially valuable early on (late-90s, early-2000s) when the value of internet services was less clear to users.

Highly-scalable business model

Ads make a lot of money! Facebook and Google are two of the most valuable companies in the world. Platforms can increase ad revenue with two levers:

• Number of ads per user: showing each user more ads (e.g., more ads in your social media feed or in the video you're watching).
• Increasing the price per ad: platforms can charge more for highly targeted ads since these provide advertisers a much higher likelihood of converting customers (e.g., getting them to click on the ad).

Highly-defensible business model

Once a platform acquires tremendous scale, in terms of users, it becomes highly-defensible since the platform can provide advertisers with greater reach than smaller platforms. This makes it harder for smaller ad-based platforms to compete.

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Cons

However, despite all the benefits for companies, they do have some major flaws for the broader community and users.

Users have very little privacy and control‍

Users “pay” for the platforms with their data. They can opt out of seeing personalized/targeted content in some cases, but the underlying data is still collected. In fact, even if you don’t have an account on these platforms, in some cases your data is still collected and tied to your IP address or a unique device identifier. 

• User privacy protection is largely dependent on regulatory agencies (FTC in the US) and privacy legislation (GDPR in the EU, CCPA in California), since platforms have little incentive to improve privacy.‍
• FTC fines Facebook $5B over its privacy policies

Users are the product‍

The customers for these platforms are advertisers. Platforms sell advertisers highly targeted ads based on user data. This incentivizes maximizing engagement, often at the expense of user experience. 

• Content in feeds is determined by algorithms that maximize engagement. In our user studies, this has generally meant users see more content from brands and influencers than from friends and family. 
• Content moderation suffers since studies have shown controversial and negative content drives greater engagement compared to positive content. 
• This creates a catch-22 for platforms - do they remove the most engaging content and reduce their profits? Or leave it up and risk the potential consequences?

Makes companies a major target for hackers and creates privacy risks

‍Ad-based platforms must collect a ton of user data to effectively target ads. This makes them attractive targets for malicious entities (hackers, compromised insiders, state-sponsored actors, etc.). Below are links to coverage of some recent data breaches.

• Personal data of 533M Facebook users leaks online… (The Verge, 2021) 
• Former Twitter employees charged with spying for Saudi Arabia by digging into the accounts of kingdom critics (WaPo, 2019)
• Revealed: 50 Million Facebook profiles harvested for Cambridge Analytica in major data breach (The Guardian, 2018)
• The Cambridge Analytica Story, Explained (Wired)
• Facebook - Cambridge Analytica Data Scandal (Wikipedia) 
  

Now that you better understand the ad-based business model, do you think the pros are worth the cons?