Working for a living

One of the most unusual things about Internet-based businesses is that few of them try very hard to make money. Of course, with a very few exceptions (such as Wikipedia) making money is certainly in the business plan, or there wouldn't be all that venture capital floating around, but in general the approach has been to come up with a good product or service first, and only look for ways to make it profitable after it's acquired a steady clientele. Hugely important and successful ventures like Google, YouTube and Facebook all started out operating at a significant loss. This pattern continues today: it's already hard to imagine the Internet without Twitter, but so far that service isn't earning its makers much money (though you can be sure they're looking for ways to do that.)

There are a number of reasons why this is so. One is the general expectation that Internet services should be free -- but that only raises the question of where that attitude came from. After all, early Internet-like services such as Compuserve and The Source were famous for their high fees, and few people balk at paying money for their Internet connection. So why do we think the Internet should be free? One reason may be the graphical quality of the modern Web. Those early services were largely text-based, and we expect to pay money for things like books, magazines and newspapers, but the graphic Web that evolved in the 1990s looked much more like television -- another medium where we pay for access to it but don't (in general) pay for the content. (It's also possible, of course, that early Internet services couldn't afford to charge because they had too much competition and too little track record; if Google had tried to get users to pay for searches, it's almost certain Yahoo would rule the roost today.)

One consequence of this is that as Web businesses try to find ways to make their product pay, they often wind up doing it in a somewhat disorganized way. After all, there's no guarantee that any given approach will work, so as debt accumulates they look for any potential revenue stream they can find. This may result in two important things: first, you may not be fully aware of how a Web site or service is making money off of you or your children, and second, with all those different revenue streams there's a good chance that one of them will compromise your safety or privacy.

With that in mind, here are the main ways in which Web sites and services make money, and some of the implications each method can have for privacy and safety. Keep in mind that most sites use more than one of these methods.

Sales or fee-for-service: This is the model most like traditional offline business: you purchase a single unit (a product or service) and pay for it directly. Canadians alone spent fifteen billion dollars online in 2010, and some of the most famous Internet businesses, such as Amazon (originally books; now just about everything) and Zappos (shoes) make their money this way.

Fee-for-service can be a direct and reliable way of purchasing a product or service. The major risk is an untrustworthy vendor: before sending any Web service your credit card information, you should always confirm a) that you are buying from an established vendor with a good reputation, b) that you are doing it from their actual Web site (hoaxers have created very convincing fake sites with nearly identical Web addresses) and c) that you are using a secure site (the Web address should begin with “https”, not just “http”.) Because some sites make it very easy to purchase items online, children and teens should not make purchases over the Internet unless they can set up an advance payment account, which limits the possible total they can spend. Another risk is that businesses will try to make a little money off of you through data mining (see below); always check the User Agreement and Privacy Policy so you know what the site will do with your personal information, and don't give out more personal information than necessary.

Subscription: In this model you pay a regular fee (usually by the month or the year) for continued access to a Web site. Some newspapers, such as the Wall Street Journal, use this model, as do many online games such as World of Warcraft.

Many of the same concerns about fee-for-service apply to subscription as well: as always, be careful when giving out credit card information. You're usually asked for a lot of personal information when you subscribe, but it's generally not all necessary: there's usually some sort of marker, such as an asterisk or bold type, to show you what information you absolutely have to give out. It's also important to read the User Agreement to be sure that you will only be charged the subscription fee: some sites charge additional fees on top of that for various things, so you can get a nasty surprise when you get your monthly bill.

Freemium: These sites offer their basic content for free but make you pay to access other content. Sometimes access to the whole content comes with a subscription: for instance, in Club Penguin you can play the basic game for free, but if you want to have your own igloo to decorate you need to subscribe. In other cases the added content comes as fee-for-service: some free online games charge you for special weapons or items, for example. In these sites the pressure of socializing and competition can be very powerful, and make it hard to resist paying for what was supposed to be a free experience. Finally, many games such as Farmville allow you to buy things which you would otherwise have to earn through constant play; because of the competitive, “social” aspect of these games, players are pressured to spend money to keep up with their friends who are doing the same.

In each case, it's important to read the User Agreement and find out exactly what's free and what isn't before getting too into a site. Finally, parents who let their children play freemium games should be careful to ensure that they cannot make any purchases: in one recent case a child was able to spend nearly a hundred dollars on one freemium iPad game because the device had retained his father's credit card information.

Brokerage: Sites that bring buyers and sellers together, such as eBay and Expedia, make their money by taking a cut of each deal they arrange. They don't always stand behind the sellers they bring you to, though, so it's important to check out the seller even if you trust the site you're buying through. Many sites of this kind, such as eBay, have ratings systems you can use to gauge the reliability of the person or company you're going to buy from (or sell to). You can also do a search for the person's name to see if they've ever had any complaints or conflicts. Keep in mind, too, that brokerage sites are sometimes paid to recommend a particular buyer or seller, so you should make sure for yourself that the deal they recommend is the best one.

This is the first of a two-part article. The second part of this article will look at two of the most important revenue sources for online businesses, advertising and data mining, and provide some tips on avoiding negative experiences with online commerce. For now, you can check out MNet's Cyber Security Consumer Tip Sheet for more information.