FREE SERVICES AND ADVERTISING REVENUES

Pervasive advertising on most Internet sites can be seen as a special case of exploitation of network effects by the 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 notion of indirect network effect.

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.

Internet advertising can be adapted to the customer’s purchasing behavior. Such a strategy cannot be used as effectively as in traditional discount supermarkets.

Since each new subscriber to a site generates advertising revenue, subscribers can move from being a customer to being a resource 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 site subscriber is negative if a new subscriber brings in ad revenue even though it costs the site. In this case, the site can therefore offer “negative prices”.

The impact of ad revenue funding 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 earnings is uncertain.

It depends on the link between audience and ad revenue. Ad funding offers a kind of economies of scale, especially when ad revenue is very audience-sensitive. (revenue per listener increases with audience size)

In this case, the net unit cost of advertising revenue per subscriber decreases with the audience. A market that can be competitive without ad funding can be highly concentrated because of ad funding alone.

The second point is that on a theoretical level, advertising revenue and funding issues are very similar to product quality selection issues. From the point of view of the users of a site, advertising is one of the characteristics of the service provided, the value of which can be positive or negative.

It is in fact a dimension of the quality of service. As long as one interprets the value of income as a negative (opportunity) cost, one obtains a quality model.

The ad can take a vertical (screenprint) and horizontal (associated products) size. Accordingly, the traditional consequences of quality choices must be examined.

In particular, those related to product differentiation need to be expanded to some extent, with advertising choices serving as differentiation tools.

The difference is that the advertising medium is much more flexible than the other quality choices, and the vertical and horizontal dimensions are closely linked on the Internet.

Some sites offer paid services with little or no ads, while others offer free services with ads. This corresponds to a more vertical differentiation.

A horizontal dimension arises when sites target specific categories of users by selecting ads appropriate for them.

One of the innovations is the personalization of services. Through sponsorship opportunities, each user can be individually targeted with advertisements for particular interests.

The horizontal and vertical distinction may later turn out to be irrelevant. Instead, advertising becomes an instrument of positive action. Discrimination is therefore 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 these resources to finance the long-term development of activities on the Internet.

In fact, if we collect all revenue at the sector level, the financing of Internet advertising. must come from the income that this industry can generate due to the value of the goods and services offered to individuals or businesses.

In this article, we have examined some economic phenomena that particularly stand out with regard to the use of the Internet as a tool for commercial activities. It is difficult to summarize an entire article that attempts to change perspectives on a single phenomenon.
The evolution of these economic exchanges can be found in other areas of activity (increasing returns, notoriety, loyalty, network effects, etc.). But it includes phenomena that here take on a new dimension.

For this reason, we will only repeat that while 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 focuses primarily on lessons to be learned from current studies in economics.

The development of the Internet depends on lessons from the 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 is also a whole new area of ​​research being built.

To learn more about Dr. Ayavefe and his work, click here:
https://yasamayavefe.com/
https://milayacapital.com/

About Chris McCarter

Check Also

LIFESTANCE HEALTH GROUP, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

The following discussion and analysis of our financial condition and results of operations should be …