FREE SERVICES AND ADVERTISING REVENUES
The ubiquitous advertising on most Internet sites can be considered a special case of exploiting networkeffects by sites that offer it.
Indeed, the value of the service for consumers depends on the amount of advertising. The value of an ad depends on the number of users who will see it. This corresponds to the idea of the indirect networkeffect.
An example of a site that uses ad revenue in this way is Buy, an online supermarket that offers discounted items such as computers, software, books, videos, travel, and music.
This site encourages its use as an advertising tool, allowing it to offer discounts to consumers.
Advertising on the Internet can be tailored to the customer's purchasing behavior. Such a strategy cannot be used as effectively as in traditional discount supermarkets.
Because each new subscriber to a site generates ad revenue, subscribers can switch from customer status to resource status for a site.
This may justify providing the service for free and even offering negative prices or free services to customers.
The effective cost per subscriber for the site is negative if a new subscriber brings advertising revenue even though it costs the site. In this case, the site may therefore offer “negative prices”.
The impact of ad revenue financing on site entry and profitability remains an open question. If there is competition, it will tend to wipe out profits and pass on the benefit of advertising revenue to consumers. Therefore, its impact on company profit is uncertain.
It depends on the link between audience and ad revenue. Advertising finance offers a kind of economies of scale, especially when ad revenues are very sensitive to the audience. (revenue per listener increases with audience size)
In this case, the net unit cost of ad revenue per subscriber decreases with the viewership. A market that can compete without advertising financing may be highly concentrated because of this financing alone.
The second point is that on a theoretical level, advertising revenue and financing problems are very similar to product quality selection problems. From the point of view of a site's users, advertisements are one of the features of the service provided, the value of which can be positive or negative.
This is actually a dimension of service quality. As long as one interprets the value of income as negative (opportunity) cost, one obtains a quality model.
The ad can take a vertical (screen footprint) and horizontal (related products) size. Accordingly, the traditional consequences of quality choices should be looked at.
Particularly those related to product differentiation need to be expanded to a certain extent, with advertising choices serving as differentiation tools.
The difference is that the advertising medium is much more flexible than other quality choices, and vertical and horizontal dimensions are intertwined on the internet.
Some sites offer paid services with little or no ads, while others offer free services with ads. This corresponds to more vertical differentiation.
A horizontal dimension appears when sites target specific categories of users by selecting appropriate ads for them.
One of the innovations is the customization of services. With sponsorship opportunities, each user can be individually targeted with ads for special interests.
The horizontal and vertical distinction may later turn out to be irrelevant. Instead, advertising becomes an instrument of affirmative action. So, discrimination is not a priority.
It is clear that the role of web advertising is still evolving. We can expect to see innovations in this area. An open question is the capacity of such resources to finance the long-term development of activities on the Internet.
As a matter of fact, if we collect all revenues at the sector level, the financing of Internet advertising. must come from the revenues that this industry can generate because of the value of goods and services offered to individuals or companies.
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Currently, while sites like Yahoo profitably leverage ad revenue, most sites don't and don't cover their costs.
In this article, we have examined a few economic phenomena that stand out in particular when it comes to the use of the Internet as a tool for business activities. It is difficult to summarize an entire article that attempts to change perspectives on a single phenomenon.
The evolution of these economic exchanges is found in other areas of activity (increasing returns, reputation, loyalty, network effects, etc.). But it includes phenomena that take on a new dimension here.
For this reason, we will content ourselves with repeating that although the existing literature offers important lessons, there are many theoretical studies to be done on this subject.
These studies should focus on the role of intermediaries and field certification companies in managing information flows.
At the same time, this article primarily focuses on lessons to be learned from current studies in economics.
The development of the Internet depends on the lessons of economic literature such as community sites or free software. It is also clear that it gives rise to new phenomena and forms of organization. So, there's also a whole new area of research under construction.