How profitable are VPN services?

If you ever spent an hour on YouTube, you have surely seen the greatly discounted offers of VPNs. This left me wondering, how profitable are these companies if they offer such discounts and pay for ads, commissions, etc. on top?

Unfortunately, these days, your ISP has the freedom to make money from their customers not just with their internet bill. In the US, they can even sell your personal information and internet traffic to advertisers to make a profit. This has resulted in a privacy-driven interest in VPNs. The result: a booming VPN marketplace that's bringing in millions of dollars per year.

A look at the VPN market

In 2021, there is a rising demand for VPN services. In fact, 95% of Americans are worried about how companies are using and selling their data online, which is an 80% increase compared to the previous year. Nowadays, 50% of people are looking for new ways to ensure their data is protected.

Although it could be assumed that the fear of cyber attacks and security risks would be driving the market - this isn't actually the case. 50% of people use VPNs to access better entertainment content. While only 18% use a virtual private network to hide internet traffic from the government. Localized Netflix and blocked Facebook are a more motivating driver than privacy, surprisingly. As far as internet security is concerned, 51% of people have had their online accounts compromised in 2020 alone.

The largest consumers are men at 62% and are generally younger than 34 years old. The number one consumer of VPNs is in the Asia Pacific region (likely due to strongly restricted Internet access in the region), harboring 30% of all VPN usage. Currently, the up and coming markets are Indonesia, India, and Turkey. Surely no coincidence.

This leaves the question: how are these businesses generating profit despite their generous offers?

Cost of Revenue

In Fortinet's case, their current costs are $597,900 TTM compared to the total revenue of 2.7 million dollars. Their average costs over the last four years have been $501,896 p.a. That's an average of 22% in the cost of revenue per year. In terms of profit, they have steadily gained an average of 20% in profits every year from 2017-2020. These trends show just how profitable VPN companies are becoming and how they are steadily growing into a billion-dollar industry.

In the case of NortonLifeLock, there is a stark difference between the total revenue and cost of revenue. Currently, the TTM for this year is over 2.5 million dollars, but the cost of revenue sits at an easy $362,000. With relatively low costs of revenue in contrast to the generally high revenue, it is a lucrative and flourishing market for VPN businesses right now.

High Profit Margins

With the cost of a single active user far lower than one dollar, the profit margin for VPN services are extremely high. Each customer can bring in anywhere from $40 USD to over $100 USD per year depending on the functionality, speed, and dependability of the service. Established companies, like NordVPN, made 7.8 million dollars in 2020. But NordVPN was not even the highest earning VPN service. Hotspot Shield made almost 9 million dollars in profit last year with over 6.1 million mobile installs.

Take a look at Fortinet, for example. They currently have a profit margin of 18.01%. Now, this may be in the average range, but Fortinet has a 2.02 billion gross profit for the trailing twelve months (TTM) and a 64.74% return on equity. NortonLifeLock has an even higher profit margin of 21.72% and current total revenue of 2.5 million dollars this year.

Sounds great, doesn't it? But where is the market heading?

VPN Market Growth Projections

In 2020, the VPN market grew to an unprecedented 30 billion dollars and is expected to grow even larger in the next 6 years. Projections are estimating a 15% CAGR increase by 2027. With more and more people gaining access to the internet, alongside the growing demand for corporate internet security, it's not surprising that VPN usage is on the rise. The estimated value projection for 2027 is 120 billion, a 300% increase from 2020.

One of the driving forces behind this demand for businesses is a rise in cybercrime, data breaches, and better access to entertainment. The reasons behind VPN usage vary greatly between regions. The Asia Pacific, Middle East, Africa, and Latin America use virtual private networks for entertainment content. Whereas Europe and North America use a VPN for internet anonymity. But, these two factors overlap quite a bit.

The majority of people believe that their online safety is in the hands of corporations and internet providers. On the other hand, 95% of businesses keep sensitive information in the cloud and 93% of IT professionals have admitted that they face challenges with data safety online. All in all, the consumer is not just a single person anymore but entire corporations seeking online privacy and security.

Summary

In conclusion, the VPN market is thriving all over the world due to a rise in internet penetration, local restriction of Internet access, demands for internet security, and, of course, entertainment purposes. The Virtual Private Network industry is showing no signs of slowing down. If you aren't up to operate a business, you can still benefit by investing in VPN public companies. This way, you make money on the rising CAGR of virtual private networks.