How Do Free Apps Make Money? The $935 Billion Secret

It’s a strange thing, isn’t it? One of the biggest head-scratchers in modern tech.Free Apps

Think back to 2014. Facebook (now Meta) bought WhatsApp for a mind-boggling $21.8 billion. People in the tech world thought Mark Zuckerberg was absolutely crazy. Why? Because in that very same year, WhatsApp—a simple app for sending messages—managed to lose $138 million.

That’s not a typo. They lost $138 million.

Fast forward to today. WhatsApp is still 100% free for you and me. Nothing has changed about its main job. Yet, it’s one of Meta’s most valuable assets, serving over 2 billion people and raking in an estimated $2.4 billion every year.

This all makes you wonder, right?

How on earth are these free apps making any money?

If you ask your friends, you’ll probably get two answers: “they sell our data” or “they just show ads.” And while that’s not totally wrong, it’s like saying a car runs on wheels—it’s true, but it’s a tiny part of a much bigger, more complex story.

The real game behind the “free” apps on your phone is a $935 billion industry.

We’re going to pull back the curtain and look at the exact business models that power the apps you use every single day. The answer is a lot more fascinating than you think.

The $935 Billion ‘Free’ Illusion

Before we get into the how, you need to understand just how big this whole thing is. As a planet, we spend an unbelievable 4.2 trillion hours on mobile apps every year. That’s a number so big it’s almost meaningless. Let’s try: it’s about 479 million years.

You’d think companies would charge a few rupees for every download. But they don’t.

• On the Google Play Store, 96.9% of all apps are free.
• On the Apple App Store, 95.1% of all apps are free.

The entire mobile app market is worth $935 billion. For perspective, only 21 countries in the entire world have a GDP higher than that.

But here is the most shocking statistic of all:

Around 98% of that $935 billion in revenue comes only from the free apps.

The paid apps, the ones that ask for money upfront, only contribute about $6.09 billion. That’s almost nothing in the grand scheme of things.

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This proves it: “free” isn’t an accident. It’s the most profitable, dominant business model in the world. So, how do they pull it off?

The 7 Hidden Engines: How Free Apps Really Make Money

The truth is, there isn’t just one magic trick. It’s a mix of seven different “engines” that power this massive money-making machine. Let’s break them down one by one.

Engine 1: Advertising (The Obvious One)

This is the one everyone guesses first, and for good reason. The deal is simple: you get to use the app for free, and in return, you “pay” by watching their ads.

There are billions of brands out there desperate to find customers. They are willing to spend huge amounts of money to get in front of your eyes. In 2023, the average company spent over 13% of its entire budget just on marketing and ads.

These companies pay app developers (or platforms like Google) to show you their ads. This model keeps the app’s lights on and, if they get enough users, turns a tidy profit.

Engine 2: Premium Conversion (The ‘Freemium’ Trap)

“Freemium” is just a fancy word blending “Free” and “Premium.” It’s one of the most common tricks in the book, and it works in two main ways:

1. The Limited Trial: You get to use the app for free, but you hit a wall. Maybe an AI image app like DALL-E only lets you make 15 free pictures a day. After that? You’ve got to open your wallet.
2. The Ad-Supported Upgrade: This is the Spotify and YouTube model. You can listen to any song or watch any video you want, all day long. The catch? You’re constantly interrupted by ads. The app is betting that you’ll eventually get so annoyed that you’ll pay their premium fee just to make the ads go away.

The entire goal is to get you hooked. They want to make their app so essential to your daily life that you’ll finally be willing to pay for it.

Engine 3: Recurring Subscriptions (The Holy Grail)

This is the ultimate goal of the freemium model. Why? Because it’s safe, secure, recurring revenue. This is the money they can count on, month after month.

Let’s take Spotify as an example. The numbers here are genuinely mind-blowing:

• Total Users: 696 million
• Paid Subscribers: 278 million

Wait, less than half their users actually pay? You’d assume most of their money comes from ads, right? Wrong.

In 2024, Spotify reported €15.67 billion in revenue.

• Revenue from Ads: €1.85 billion
• Revenue from Premium Subscribers: €13.82 billion

That’s not a typo. 88% of Spotify’s entire income comes from its smaller, paying user base.

This is why every app begs you to subscribe. Once you turn on auto-pay, you’re probably not going to turn it off. A report from McKinsey found that 70% of people who start an auto-pay subscription just… never cancel it. Even crazier, a Stanford study found that almost 50% of people are paying for subscriptions they don’t even use or need anymore. For the app, that’s pure, free money.

Engine 4: In-App Purchases (Banking on Ego and Impatience)

This one? This is the granddaddy of them all, at least for the gaming world. It’s the entire reason PUBG, Clash of Clans, and Freefire even exist.

Think about it. These games are 100% free to play. They don’t have subscriptions. They don’t (usually) force you to watch ads.

So how do they earn? By cashing in on your ego and your impatience.

You don’t have to pay to play the game. But you do have to pay if you want that cool-looking gun skin, that unique character outfit, or that special skill that makes you stand out. You pay real money to buy “game currency,” which you then use to buy these virtual items.

I know what you’re thinking. It sounds completely foolish, right? Who would pay real money, thousands of rupees, for a virtual jacket that you can’t even touch?

But these items give players a sense of status. It shows they’re a serious player. It makes them look different from the crowd. And that desire—to look cool and show off—is a powerful one.

And boy, does it work:

• PUBG Mobile (not even counting BGMI) makes $1 billion a year.
• A simple game like Candy Crush also pulls in over $1 billion a year.
• Fortnite makes an insane $6 billion a year, all from these in-app purchases.

Engine 5: The API Economy (Selling to Businesses, Not You)

You’ve probably heard the saying: “If you’re not paying for the product, you are the product.” This model is the perfect example.

For an app like WhatsApp, you are not the customer. You’re the product. The real customers are other businesses. WhatsApp sells them access through something called an API (Application Programming Interface).

Let’s make that simple. An API is like a waiter in a restaurant.

• You (the customer) place an order (e.g., you book a flight).
• The chef (the airline’s system) cooks the food (confirms your ticket).
• The waiter (the API) takes your order to the chef and brings the food back to you.

That instant confirmation message and boarding pass you get on WhatsApp from an airline? That’s the API. The airline pays WhatsApp a small fee for the privilege of using its “waiter” to send you that automated message.

Just by doing this, WhatsApp earns an estimated $382.6 million every year. It’s the same with many AI tools. They’re often just using OpenAI’s API in the background and paying OpenAI a tiny fee for every question you ask.

Engine 6: Data Monetization (The Real Way They ‘Sell’ Data)

When it comes to this method, Google is the undisputed king. But it’s not what you think. Google isn’t selling a list with your name, address, and phone number to some shady company. The reality is much smarter.

Google knows everything about you. It knows where you go, what you search for, who you talk to. It takes all of this data and builds a super-detailed profile of what you need.

Then, Google acts as the ultimate matchmaker.

• You search for “best running shoes.”
• A shoe company (like Nike or Adidas) wants to sell running shoes.

Google doesn’t “sell” your data to Nike. It uses your data to connect your need with their product. It shows you an ad for those exact shoes at the very moment you’re ready to buy. The shoe company happily pays Google for this perfect, pre-qualified customer.

By doing this, Google earned a staggering $264.59 billion from ads in 2023.

Engine 7: Transaction Fees (Taking a Tiny Slice)

Finally, we have the last method: just become the middleman for everything. These apps don’t sell their own product; they just provide the platform and take a small fee for the convenience.

When you order from Zomato or Foodpanda, they take a cut from the restaurant and often charge you a delivery fee. When you buy something on Amazon, it takes a big commission from the seller. Even some of the UPI apps have started charging a small “platform fee” for things like mobile recharges.

Each fee is tiny, maybe just a few rupees. But when you multiply that by millions of users making millions of transactions, you’re building a billion-dollar empire.

The Harsh Reality: Why 99% of Apps Fail

So, after hearing all this, you’re probably thinking, “Wow, this is a golden opportunity!” Instagram was bought for $1 billion when it was making nothing; now it makes $67 billion. TikTok seemed to come from nowhere and now earns $23 billion a year.

With all the new AI tools, you can probably build an app in a single weekend. Should you do it?

Well, here’s the part of the story most people leave out.

• There are about 4 million unique apps on the Apple and Google stores.
• The market is worth $935 billion.
• The Catch: The top 1% of apps (your TikToks, PUBGs, and Spotifys) earn 95% of all the money.

This leaves the “other” 99% of apps—that’s 3.96 million apps—to fight over the remaining 5% of the cash ($46.75 billion).

If you do the math, the average “other” app earns just $1,180 a year.

But it gets worse. From that, you have to pay a 15% commission to Google or Apple. You have to pay for servers, databases, and maintenance. After all those costs, the average app developer is lucky to take home $800 a year. That’s about $67 a month (roughly PKR 18,000).

That’s not a path to becoming a millionaire.

So, What Does It Really Take to Win?(Free Apps)

Here’s the truth: becoming the next billionaire by launching an app is possible, but it’s not a lottery ticket. You need one of two things:

1. Massive Funding: The founder of OpenAI (which made ChatGPT) was Elon Musk. Microsoft has poured billions into it. And even with all that, OpenAI still reported a net loss of $3.5 billion in just six months of 2023. You need incredibly deep pockets to survive the early years.
2. A Powerful Distribution Network: You need to already have a massive audience, so the moment your app launches, millions of people download it and start generating revenue.

At the end of the day, the “free” app world is a cutthroat business. It’s built on a deep understanding of human psychology, B2B services, and analyzing massive amounts of data.

It’s a tough world, which makes me wonder: with so much talent here in Pakistan, why haven’t we produced a globally dominant, phenomenon-level app yet? What do you think is holding us back?

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