THE BLOG
06/29/2016 03:30 pm ET Updated Dec 06, 2017

The Booming Business of User Data

There's a well-worn saying in the tech world: If you're not paying for the product, then you are the product.

Put differently, Facebook, Google, LinkedIn, and Twitter, and other web-based services make oodles of cash while paradoxically being "free." (Alright, maybe not Twitter, but you get my point.)

Don't believe me? The tech landscape is littered with recent blockbuster deals that illustrate the cardinal import of user data. Exhibit A: Microsoft agreed to pony up $26.2 billion for professional social network LinkedIn. Looked at one simplistic way, Satya Nadella's company valued each of 400 million users at around $65.50 each. For its part, Facebook paid $1 billion for Instagram and its 30 million users--a move that looks especially prescient today.

Brass tacks: Free services mean big bucks, but how do you square this circle?

The answer lies in the hugely popular freemium business model, illustrated in Chris Anderson's seminal 2010 book Free: How Today's Smartest Businesses Profit by Giving Something for Nothing. Scores of powerful companies have embraced freemium--at least at their onsets. Many charge for premium services or curtail their free offerings once their products reach critical mass. Evernote is a recent case in point. At a high level, the goal is to convert as many users to paying customers as possible. Make no mistake: those two terms are anything but synonyms.

But there's another, less publicized way that ostensibly free services make mad stacks: by mining--and ultimately monetizing--their vast troves of user data. For instance, Facebook can sell user data to proper data brokers such as Acxiom. Alternatively, Facebook could act as a de facto broker. That is, the social network helps its many advertising partners improve the targeting of their ads. This allows local restaurants, speaking bureaus, and all sorts of businesses to local specific potential customers at the right place and the right time even if those ads don't appear on Facebook.

Despite Privacy Concerns, Business Is Booming

Data brokers would close their doors very quickly if no one wanted to buy what they're selling. Fortunately for them at least, today there's no shortage of demand for user data both from the private and public sectors. For this reason, you're likely to hear another colloquialism these days: "data is the new oil."

For some interesting facts on privacy and free services, see the infographic below courtesy of MBA@UNC, an online executive MBA program:

As Alexis C. Madrigal writes on The Atlantic, "For buyers, user data is dirt cheap. User profiles--slices of our digital selves--are sold in large chunks, i .e. at least 10,000 in a batch. On the high end, they go for $0.005 per profile, according to advertising-industry sources."

It's simple math, really. When companies amass hundreds of millions of users (or more than 1.6 billion in the case of Facebook), those pennies add up quickly. As a result, the data-broker business is not just alive and well; it's booming.

What to do?

Many people are shocked when they discover that Facebook and other tech behemoths routinely monetize their user data. This is doubly true in the United States where privacy laws differ dramatically compared to European countries. User outrage stemming from privacy-policy changes, however, typically abates within days.

This begs the question, If this concerns you, what should I do? First, remember that no one compels you to use Facebook, Twitter, LinkedIn, and their ilk. If you're uncomfortable with their terms of services, simply don't join in the first place or quit. Plenty of people have. Second, be informed. Finally, don't mistake private companies for non-profits and/or public utilities.