Business models

Web-Reloaded? – Driving convergence in the real world Chapter 3 Business models Comparison of revenue sources/margins F1 Google (2005) Several different business models are available for Internet sites. As the momentum Other (1%) behind Web 2.0 has intensified, the introduction of online advertising has become the most attractive basis for a business model. Business Models – It‘s all about advertising Advertising (99%) The success of ad-based business models is founded upon the mentality “for free” - a phenome- non which has become a widespread expectation not to say a key success factor for the uptake of F1 Yahoo EBIT-Margin: 52% sites among users. Users’ attitudes about free content even for sophisticated services have been encouraged by the proliferation of business models based on advertising revenues. A new Web 2.0-phenomenon appears to be the notion of needing to provide privileged “free service” to non- paying users, while tolerating “mediocre” performance for contractually bound paid customer service relationships. This apparent paradox results from the impact of downtime in terms of lost Premium services & other (18%) revenues to the businesses paying for advertising to audiences who are often very fickle, and will abandon a site which is not responsive, or whose accessibility is unsatisfactory. Separation of business and service model Advertising (82%) EBIT-Margin: 31% F1 France Telecom Users Transaction/sub- scription/licence fee Service/content Advertising (directories) (2%) Absorption Involvement Ad placement Web Player Segmentation Reach Advertisement fee Ad reach Subscriptions (98%) 3rd parties Business model Service model EBIT-Margin: 22% Source: Arthur D. Little Sources: Company data, Arthur D. Little analysis A 16 Web-Reloaded? – Driving convergence in the real world BKA Advertising models have always been popular on the Internet. After the dotcom bubble burst, Ad Expenditure for US & Europe the size of the European online advertising market consequently declined in 2001 and 2002. But in 2003, the popularity of online advertising among European advertisers returned. During 2005 (€ b) Online Advertising Classic Advertising spending levels grew by nearly 26%. The US experienced the same positive development, but at 150 131.0b 125.4b an even higher growth rate, reaching almost 30% in 2005. In 2006, total advertising expenditure in Western Europe is expected to grow at 5%, whereas total growth will be 4.5% in the US. 125 10.3 +31.6% 13.7 102.7b 97.0b  To maximise the Web traffic, reach is especially important for sites which use online advertis- 100 4.9 115.1 +2.1% 117,3 4.4 +10.0% ing as they are often paid per click. A major reason for the boom of online advertising spend- 92.6 +5.7% 97.8 ing is that advertising is the main revenue model on the Internet today, encouraged by the 75 prevalent “for free” mentality among users for content. 2005 2006 2005 2006  The advertising model is often used in combination with one or several other business mod- els. An ad-based business model can only be implemented after a high level of traffic has been Source: Initiative, Arthur D. Little analysis Sources: Initiative, Arthur D. Little analysis obtained. This means that many Web pages are frequently launched as a totally free service. Five major business models are found on the Internet:  Advertisement Based: The Web site provides content and services for free to customers; Types of business models the services are paid for by third party advertisers. The advertising model works best when the volume of the site traffic is large or highly specialised. This is the most common model for Internet sites today, and is often seen in combination with other business models.  Advertisement Based  Transaction Based: In the transaction based business models, the site or service brings buyers and sellers together and facilitates transactions. For each transaction the broker ena- bles it usually charges a fee or commission.  Transaction Based  Infomediary: In the infomediary business model, the service collects data and consumption behavior from its visitors and sells on to buyers or sellers who want to understand a given market.  Infomediary  License Based: Users are charged for one time usage or time-restricted usage of (premium) applications or content.  Subscription Based: Users are charged a periodic fee in order to use the Web service. The  License Based subscription model often includes advertising and is frequently used by community based services as well as by some publications (e.g. newspapers) where basic content is free but premium services require a subscription.  Subscription Based Sources: Initiative, Arthur D. Little A 17 Web-Reloaded? – Driving convergence in the real world Online Advertising – A challenge for traditional media As online advertising increases in popularity, it increasingly challenges traditional media for- mats. After TV, radio, press and outdoor, Internet is the fifth largest and fastest growing medium Advertising share by medium in % of NSU in Europe. total market size (Europe, 2006)  Total online advertising expenditure in Europe grew 25.5% from 2004 to 2005. Cinema (1%) Internet (3.7%)  The largest online advertising markets in Europe are the UK, Germany and France.