Revenue Models for Social Networking Sites - Assignment Example

Running header: Ecommerce Student’s name: Instructor’s name: Subject code: Date of submission: Revenue models for social networking sites a) Facebook Of late, Facebook’s revenues have been on the increase especially since it was listed in the stock exchange. However, although many of its insiders know how the company generates its revenues, many of its users are ignorant of this especially it doesn’t charge access fees to its users. Facebook’s revenue model is a complex one although its income mainly comes from advertising. The following are the components of its revenue model; i) Advertising –this is its most important revenue generating channel. In fact, the company has been and will always be almost entirely ad supported. Over half a billion dollars of its revenue come from advertising. This is mainly from its self-serve advertising platform whereby advertisers set their own adverts on Facebook which are displayed in sidebars of the site’s pages. A notable advertiser in this category is Zynga which has the largest games on face book (Farmville and cafeworld). Other advertisers include doctors, small companies, and restaurants among others who also contribute a substantial amount of revenue for Facebook. Engagement ads also contribute substantially to Facebook’s revenue. These are Facebook’s solutions for large brand advertisers which are placed on its site’s homepage and when users log in, they are able to engage with the advertisements. Engagement ads include Brand lift and are estimated to contribute $250,000 to Facebook’s revenue. Microsoft banner advertising agreement and search have also been a substantial source of income for Facebook although they have of late been removed from its site (O’Neil, 2006). These ads had been contributing annual revenue of $150 million annually for Facebook. ii) Virtual goods and the gift shop- a substantial amount of Facebook’s revenue s generated from its gift shop. This is a product that enables users to send virtual gifts to their friends at a cost of $1. Last year, Facebook gift shop contributed $100 million to its revenues. iii) Facebook credits –Facebook credits programme is expected to contribute $150 million to face book revenue annually. Although Facebook uses a number of ways to generate its revenue, it is advertising that contribute the biggest amount of revenue to the company. With its ads becoming more and more popular, it is expected that the company will continue experiencing rising incomes even in the future. b) Google revenue model Just like Facebook, Google has multiple ways of generating revenues although advertising remains the major source of revenue. The three major components of Google revenue model include; i) Google checkout- this service is aimed at simplifying online purchases both to the retailer and consumer. For the consumer, the user creates a free Google checkout account and enters a credit or debit card number that is stored in a secure database. When the customer visits a retailer who subscribes to Google checkout, Google facilitates the transaction. Retailers on the other hand set up checkout accounts for free but Google facilitates any transaction at a fee. In 2008, the fee was 2% plus 20 cents fee per transaction. ii) Web advertising/ Google Ad words- this is where advertisers submit ads to Google including a number of keywords relating to the business, service or product. When a user searches the web using one or more of the key words, the ad will appear on the SERP in a sidebar and the advertiser pay Google for every time a user clicks on the add. iii) Google AdSense- instead of displaying ads on the SERP, the webmaster integrates ads into his/her site. Google spiders analyze the ads content and select ads containing keywords relevant to the Webmaster’s site. The webmaster customizes the location and color of sidebar containing the ads and every time someone clicks on the ads on the web masters’ site, the webmaster will receive a portion of the revenue while Google gets the rest. The above strategies have been effective in generating revenue for Google. In fact, 96% of Google’s revenue is generated through advertising mainly through ad words and AdSence. c) Friendster Friendster revenue model is also majorly pegged on advertising. The following are its components; i) Pop-up ad and image ads-these are pay per impression ads where advertisers pay based on the number of impressions .bearing in mind that the site receives millions of impressions daily, this is definitely a substantial source of income for the company. ii) Contextual ads from Google where the advertiser pays for every click by the user on his/her advertisement. iii) Sponsored links in the web search- in this case, advertisers pay per click on their adverts. iv) Friendster product selling service where the site facilitates transactions in return for some fees As observed above, Fraudster’s revenue model is mainly advertisement based. d) Flixster Flixster generates its revenues mainly from selling and renting movies. The company also generates some revenue from advertisement. They also charge movie studios for the advertisements they do on their behalf. However, the revenue model is mainly based on selling and renting movies as well as the fees received from movie stores. SWOT ANALYSIS a) Facebook The following is Facebook’s SWOT analysis Strengths The company has a huge user base of over 1 billion active monthly users The active monthly users base has actually doubled since July 2010 The company has been experiencing strong growth in emerging markets with active users in markets such as Brazil doubling in 2012. The company’s CEO has a large financial interest in the company’s future and hence has a strong drive to ensure the company becomes very profitable (Annette, 2013). The company’s mobile advertising space revenue amounted to $150 million last quarter a huge increase from the prior quarter’s $10 million The high barriers to entry bar new entrants The company actually ahs a monopoly in the social networking space A worthy competitor MySpace continues to fade away from users’ memories Weaknesses The company’s mobile ad revenue is greatly lacking since it only contributes 14% to the revenue although 60% of the Facebook users access Facebook on automobile devices The company has posted losses in two previous quarters The company’s share prices continue to fall even below the IPO price The strong user growth is expected to slow down as developed market user growth levels off and new markets start experiencing slower growth The company is still not allowed to operate in China Although the company is strongly growing internationally, it only gets 55 cents from a user in Asia and $3.20 per user in North America Less than 20% of its users live in North America although they account for 48% of its advertising revenue. This market is almost saturated meaning user growth will grind to a halt and hence its chances of having a strong domestic customer base are slim Opportunities There is a big room for expansion in the mobile advertisement market China is likely to eventually allow Facebook use hence offering additional customer base bearing in mind that China has over 1.35 billion population with over 538 million having internet access. It is expected that the company could offer 42 cents dividend in 2013 which is higher than 2012 9 cents per share. This could go a long way in boosting stakeholder confidence. Advertising prices are going up with ads prices rising by 7% in the last quarter Only about 15% of world’s population has Facebook accounts Threats Google launched its own social networking service Google plus which could pose a threat to Facebook Google has continuously dominated the Smartphone space controlling 55% advertising space while Google only has 3% control Facebook could disappear just like MySpace if they don’t use the right strategies Bad investor sentiments during IPO could hurt the company in the long run Bearing that a considerable number of users access Facebook through Android phones that are powered by Google, one wonders whether Google can act against Facebook interests bearing in mind that they are competitors Google’s SWOT analysis Strengths The company has one of the most recognized brands globally with strong brand loyalty They provide an ideal platform for advertising purposes since customers just have to input what they are searching for. This allows the company charge more for its advertisements. The company usually has decent year after year growth in earnings .this was nearly 10% from 2011 to 2012. The company ahs a price earning ration of 21.15 slightly above the S&P 500 average which is relatively low for a company with such high prospects for growth Its android software enables the company reach the mobile market thus generating more revenue since adverts are also run on the platform. Weaknesses The company offers a range of services for free although they cost a lot of money in running and updating. Its 2012 sales grew substantially while earnings didn’t reflect this growth which portrays increased pressure on margins (Daniel, 2013,) The company does not payout dividends and has no plans of doing so in future. Its future in China may not be certain due to censorships Opportunities The company only controls 16.6% of Chinese market which presents a great opportunity for improvement. The company’s acquisition of Motorola mobility provides an opportunity for the company to start selling its android services directly to the consumer Google stands to greatly improve its profitability if it could handle both its software and hardware. Its entrance into the social media market provides an opportunity for the company to boost its advertising revenue Threats Bing and other competitors are actively duplicating Google’s business model The newly acquired Motorola mobility segment generated a loss of more than 150 million dollars They have one source of income and incase they are unable to effectively reach their customers, they would have to start charging their customers thus driving them away The company is still threatened in the Chinese market as long as the government is not on its side. iii) Facebook short term prospects Facebook inc. short term prospects point to a bright future as far as its financial performance is concerned. This is because its latest innovations are expected to start bearing fruits in the near future hence e boosting its revenue greatly (Chris, 2012). This includes its new version of newsfeed that include upgraded videos and photo options which in no doubt will enhance advertising on Facebook and hence revenue. The company has also been very innovative in the recent past and has come up with more ads as well as new types of ads. Its mobile platform which is almost new is also expected to peak up and given in mind that almost half of its users access Facebook via the platform, this is expected to greatly boost its revenue. The revenue from the mobile platform advertising is expected to exceed the 1 billion dollar mark in the near future once its users get acquainted to it. Facebook short-term bright prospects are also supported by recent rise in online advertisement prices by about 7% which means revenues will go up and hence profits all factors remaining constant. In addition, Facebook of late started charging small amounts to businesses and individuals who have pages on Facebook to promote their services and products. Since there are numerous businesses on Facebook and the numbers are expected to rise in the near future, revenue prospects for Facebook can only get better. This is an indication that Facebook may perform better even compared to the giant competitors like Google who have already excelled in the above platforms and do not have much room for improvement. Facebook long term prospects Facebook inc. has of late recovered from the decline in share prices which is an indication of bright future and good financial prospects in the short run. Its book value, cash flow and return on investments are all currently above industry average. However, the company’s growth has been deteriorating while the industry it operates in is largely regarded as faddish. This casts a dull picture on its long-term prospects and if the company does not become more innovative to introduce new products and come up with new ways of generating revenue, it may have a difficult financial future in the long run. The major item that makes the company to have a good prospect in the short run is the expected maturity of its mobile monetization project (Ann, K2006). However, it would be realistic to imagine that Facebook will also face interest erosion as happened to texting, AOL and MySpace. This is because phone users are fickle and the plethora of applications can only lead to the death of Facebook in the long run if the company will not be the one that discovers an appropriate faddish substitute. Meanwhile the company will have already spent much in targeting the new market of mobile monetization. In addition, any shift in the company’s reputation especially as far as privacy is concerned will also have negative effect on the company’s prospects in the long run. This is bearing in mind that the company’s offering have numerous substitutes which may even have better rules of engagement than Facebook. Its recent privacy changes certainly eroded customers’ confidence on Facebook. Even the most loyal users were upset about its proposed ways to generate ads that the company was even forced to revert it. This implies that unless the company becomes more aggressive and introduces new innovative ideas, the company’s future prospect is not bright. 2a) Use of Facebook for e-education Facebook being one of the fastest growing social networks has helped people communicate efficiently with friends, core workers as well as classmates. This being the case, Facebook can be used for a number of activities including online education. This is because learners and teachers are all Facebook users and hence it provides an international platform where learners and educators meet. Employing Facebook for e-learning purposes could greatly inspire students to learn as it would make learning interesting. This is how this could be achieved. i) Facebook could upgrade its chart service into a kind of video conferencing that enables and learning software that facilitates interaction between the learner and the teacher on Facebook. Such software should enable the creation and sharing of presentations on Facebook (Joel, 2012). The participants can also add documents, MP3 audio and PDFs to develop a kind of webinar. ii) Educators can also use Facebook to share mathematical formulas and other solutions to their students and learners can see the formulas provided they have liked the teacher’s page whether they have the e-education application or not. iii) Such an application (to be known as Facebook reader) should enable sharing of information that is relevant to the teacher’s course with learners. iv) The e-education platform should also enable one create an events calendar which is editable and share it with learners. Notes could also be shared through the same platform. v) The e-education should also enable learners to create flashcards that helps them study on Facebook. Developing an e-education application on Facebook would be very effective in reaching many students and also using expert knowledge. This is because where there are few experts; such expertise could be taught through such a platform that does not require one to be physic ally present. In addition, such a platform eliminates the distance between the teacher and the learner and is also cheap since one need only to access Facebook. Where a student does not understand, the webinar and chart should enable interaction between the teacher and the student for clarification. This means that feedback would also be prompt. 2b) Use of Facebook for e-retail With over one billion users of Facebook, it in no doubt provides a very big market that retailers and buyers should take advantage of. The company should also take advantage of this platform to improve its revenue base. Facebook can take advantage of its huge traffic to promote e-retail in the following ways; i) Since there are many companies using its advertisement platform, the company should take advantage of them and convert them to retailers on Facebook (Johann, 2011). The over one billion users will in no doubt take advantage of this more convenient platform in their buying activities. The company in this case will act as transactions facilitator and hence enjoy commissions. ii) Since the company already has a virtual shop for virtual gifts as well as a Facebook credits facility, the same platforms should be used in selling real goods and services and the company through partnering with money transfer companies such as PayPal and MasterCard. iii) The company should establish Facebook stores that are updated automatically when the retailers vary their products where any user interested in any product or service should be able to find it. When the customer finds the item, the customer should be able to buy it through a credit card and Facebook facilitates the transaction as well as delivery at a commission. If Facebook is able to establish the Facebook shop described above, it is sure to attract a lot of participants given that it already have a wide market. Furthermore, friends can always refer other friends depending on the quality of service offered. This will be a great step in e-retailing. Customer-centric websites Anyone who visits a website whether for buying, learning or similar reasons is a potential customer and hence the website owner should design it in such a way that the potential customer will keep on coming back again and again. In other words, ecommerce websites need to be customer centric. This means that the website is designed around customer needs and wants. This will be key in driving royalty, sales as well as word of mouth advertising. As such, website owners need to be more effective in making decisions regarding offerings, content, design and processes available on their sites. As such, some ecommerce sites turn out to be badly designed while others are well designed. These are discussed below. Columbia sports wear http://www.columbiasportswear.be/ This is an example of a good customer-centric ecommerce website. It has the following features which might make the customer want to use it more often in his/her shopping and hence is effective in helping the company advertise its products; a) The website s designed in such a way that even a first time visitor immediately becomes aware of how/he or she will benefit from its contents and products. All their offerings are clearly displayed. b) The contents on the website are clearly organized and the site is easily navigable and the site provides links to each category of items on every page and the links re placed in consistent locations. c) The website’s content is free of grammar and spelling mistakes. d) The site provides an opportunity for customers to give feedback on products and services and even the site provides the company’s contact information where the customer can always contact the company. e) The site makes it easy for the customer to get what they want by categorizing their items clearly (David, 2013). It is very easy to order a product from the site by simple clicks which make the site very customer friendly. f) The site makes it easy for customers to contact the company online by providing support contacts through their email and various phone numbers or various regions. All in all, the website provides a lot of information on the various products offered by the company. It is easy to use and is compatible with majority of browsers in addition to using simple graphics. Through observing all the above features of a customer centric website, the company is keen on meeting customers’ needs and is hence more likely to emerge and remain a customer’s preferred provider given the vast competitive web market. Lingscar.com http://www.lingscars.com/ This is an example of a badly designed ecommerce website which may not be effective in meeting the company’s marketing needs. The following features make the site a bad ecommerce site. a) The site is badly designed with bad graphic hence making navigation difficult. b) The site has too flashy graphics which renders it boring and almost illegible. c) The site uses too much text which makes it almost confusing to the user. d) The website’s content is disorganized hence making navigation difficult e) Looking at the website, it does not become immediately clear on how to contact the site owners which implies that customers without much time may deny the company valuable business. f) The site has used a lot of informal language which many potential customers may not be comfortable with. Getting feedback from customers is also hard while ordering procedures may not be simple and easily available. The above features of the site make it undesirable. As such, the company may be loosing a lot of business and may need to redesign the site to a customer-centric one that will help it get business in the ever competitive web market place. References: David, G2013, The future of Facebook after the IPO, Tickers, vol.2, no.2, pp.25-29. Joel, B2012, Emerging issues in business, London, Rutledge. Johann, G2011, Weighing on Facebook’s future prospects, Tech news and analysis. Ann, K2006, Electronic commerce, Sydney, Prentice Hall Chris, D2012, Facebook business model, Journal of management development, vol.12, no.2, pp62-68 Daniel, R2013, How does Google generate revenue, Social media and society, vol.19, no.14, pp50-55 Annette, L2013, Social media trends for 2013 and beyond, Social media studies, vol.5, no.3, pp.78-85. O’Neil, H2006, Contemporary issues in business, Oxford, Oxford University press. Read More