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Who Pays For Cloud Services Like Twitter, Gmail and Facebook

Udayakumar Nalinasekaren
Dec 23, 2010

Lots of good things on SaaS today are free services. Google Search, Wikipedia, Facebook, Gmail. Do these corporations run for charity? Some non profit organizations like Wikipedia do (and get funded based on donations) but the majority of others don't. There are serious investors in these run-for-profit companies. Investors bet money on the management of these companies expecting better returns than what most other enterprises in the market can return for their dollar.

Google's way of funding their Search and Mail is through text advertising. If you type in "Google Advertising" in a Google search form and hit return, you get a page full of search results. Notice the right hand side of the screen and you will see a column full of text advertisements. They look just like the classified advertisements you see on your daily news paper. Google does more that one billion searches each day. Even if Google charges 1 cent for each advertisement per page, we are talking millions already. On top of it, if Google said  they will charge for an advertisement only when that advertisement is clicked by the user, no advertiser will pass up such option easily.

People who want to advertise to you pay up Google to get a slot in this column. These advertisers are funding your Google search. For Gmail, this advertising space is just a single line and appears below the search box. Very non itrusive but sharply targeted at you. How?

Google learns a bit more about you everytime you use Google services. Hence Google has the capability to figure out your needs. Using this intelligence they channel the right advertisements your way. Advertisers love this intelligence. Advertisers pay a fraction of what they will pay elsewhere for such targeted advertising. Google laughs all the way to the bank with the advertising revenue. It is a win-win model.

Facebook's model is also predominantly advertisement funded. In addition, they also have one other trick to make you pay for use. Facebook used to have a gifting feature. I am not sure if it is there now. You can gift a goodie electronically to a friend on any special day. An electronic gift does not cost much for Facebook. Facebook therefore allows you to choose some gift content for free. Smartly, they also show richer looking and more attractive content in that same choice box. However if you choose those premium content, Facebook will want to charge you for that content. This concept is called Freemium. Freemium model enables a service provider to give you free content and get you attracted to the service in the first place. Next step is to migrate you to premium content where you pay for use. It is the same story with services like Picnik. Basic picture editing is free. If you want to do some rich additions to your photo (e.g. adding a premium look frame to your photo) you have to pay.

Skype is another SaaS. Skype offers free PC to PC calls and chat. They charge for calling real phones from a PC. Their charges are way less than what a Telephoe Service provider will charge for the same call.

If your bank provides your online banking portal, the charges of that cloud service are included in the service fee that you pay to maintain your account. Amazon's online store front charges are spread over the millions of purchases people make on Amazon. The charges therefore become negligible and unnoticeable.

However, not all cloud applications are advertisement funded or freemium. Today any mass market cloud application embraces this model. There are other business grade cloud software or services which needs either a subscription model or metered service model. 

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