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Understanding the Online Financial Model

Find out how even "free" online sites stay in business

In the early days of the consumer-based Internet (about 1995 or so), some Web companies set about selling subscriptions to their sites. You would pay $29.95 a year to subscribe to AOL, for example, for which you got an Internet connection and this large portal of news, an email account, access to chat rooms and so on.

At some point, right around the crash in the late 1990s, Web companies realized that most people weren't really willing to pay for services. That's when everybody's high-tech stocks took a dive and many online services and sites essentially became free. Browse the Web today and you'll find free email accounts, free news, free mortgage calculators, free recipes, and on and on.

This begs the question, how do these companies make money? Ask most people how free online services and sites make money, and they'll answer in one word: advertising.

In reality, the primary way most free services tend to make money isn't by selling advertising space to other companies. What they sell, depending on their terms and conditions, is access to you and your information to advertisers, marketers, researchers and others who want your information for a wide variety of ethical, unethical or entirely illegal purposes.

In fact, you're still paying for these services, but what's changed is the currency — you no longer pay in dollars; instead, you pay in loss of privacy.

As you provide information online, it's important that you consider which parts are sold, bought or simply taken, and you should understand how that information may be used to create potential outcomes. Then you can select your comfort level and act accordingly.

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