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Q4 How Do (Some) Companies Earn Revenue from Social Media? 309

Google led the way in making digital advertising revenue with search, followed by Gmail and
then YouTube. Today, it doesn’t seem like any great insight to realize that if someone is searching
for information about an Audi A5 Cabriolet, then that person may be interested in ads from local
Audi dealers and BMW and Mercedes dealers as well. Or if someone is watching a soccer game
on YouTube, maybe he or she likes soccer? While not mind-boggling to imagine, Google was the
first to turn this notion into substantial revenue streams. Other tech companies followed.
Advertisers like digital ads because, unlike traditional media such as newspapers, users
can respond directly to Web ads by clicking on them. Run an ad in the print version of The Wall
Street Journal, and you have no idea of who responds to that ad and how strongly. But place an
ad for that same product in the newspaper’s online version, and you’ll soon know the percent-
age of viewers who clicked that ad and what action they took next. This knowledge led to the
pay-per-click revenue model, in which advertisers display ads to potential customers for free
and pay only when the customer clicks.
Another way to grow ad revenue is to increase site value with user contributions. The term
use increases value means the more people use a site, the more value it has, and the more
people will visit. Furthermore, the more value a site has, the more existing users will return.
This phenomenon led to user comments and reviews, blogging, and, within a few years, social
media. If you can get people to connect their community of practice to a site, you will get more
users, they will add more value, existing users will return more frequently, and, all things con-
sidered, the more ad clicks there will be.
Freemium

The freemium revenue model offers users a basic service for free and then charges a premium
for upgrades or advanced features. LinkedIn earns part of its revenue by selling upgrades to its
standard SaaS (Software as a Service) product. As of May 2014, regular users access LinkedIn for
free; individual upgrades range from $24 to $75 a month and offer advanced search capabili-
ties, greater visibility of user profiles, and more direct email messages to LinkedIn users outside
one’s network. Businesses that want to use LinkedIn for recruiting can purchase a Recruiter
Corporate account for $720 a month. LinkedIn’s revenue consists of about 20 percent from
premium subscriptions, 53 percent from online recruitment, and 27 percent from advertising. 17
By diversifying its revenue streams, LinkedIn has reduced its dependence on fluctuating ad
revenue and lessened the negative impact of ad-blocking software. A recent report by PageFair
indicated that 22.7 percent of Web surfers use ad-blocking software to filter out advertising
18
content and rarely, if ever, see Internet ads. It also reported that the use of ad-blocking soft-
ware is growing by 43 percent per year. SM companies that rely solely on ad revenue may see
their share prices plummet if the use of ad-blocking software becomes widespread.
Other ways of generating revenue on SM sites include the sale of apps and virtual goods,
affiliate commissions, and donations. In 2012 Facebook generated more than $810 million in
19
revenue from virtual goods. Wikipedia took in about $50.9 million in donations during 2013.
Interestingly some SM companies, like Pinterest, don’t generate any revenue at all. They just
focus on building a large network of users now and figuring out how to make money later.
Social media is the ultimate expression of use increasing value. The more communities of
practice there are, the more people, and the more incentive people will have to come back again
and again. So, social media would seem to be the next great revenue generator, except, possibly,
for the movement from PCs to mobile devices.

17 John Shinal, “LinkedIn’s Diverse Revenue Stream Is Its Strength,” USA Today, February 18, 2013, accessed June
19, 2014, www.usatoday.com/story/tech/columnist/2013/02/17/linked-in-facebook-zynga-groupon/1923379/.
18 Kashmir Hill, “Use of Ad Blocking Is on the Rise,” Forbes.com, August 21, 2013, accessed June 19, 2014,
www.forbes.com/sites/kashmirhill/2013/08/21/use-of-ad-blocking-is-on-the-rise/.
19 Wikimedia Foundation, “2013–2014 Annual Plan Questions and Answers,” WikimediaFoundation.org, accessed
June 19, 2014, https://wikimediafoundation.org/wiki/2013-2014_Annual_Plan_Questions_and_Answers.