Article 6

'The Ongoing Battle for Markets in Internet advertising.'

This article, retrieved from The Wall Street Journal on May 12 2010 focuses on two firms Facebook and Yahoo and their competing struggle to maximize profits through display advertisements.
(http://online.wsj.com/article/SB10001424052748704250104575238661210740510.html?mod=WSJ_Tech_LEFTTopNews)

Our economy is constantly changing. Every year, new goods appear and old ones disappear. The 20 million firms in the United States differ in size and in the scope of what they do, but they all perform the same basic economic functions. Each firm is an institution that hires factors of production and organizes those factors to produce and sell goods and services. Facebook is a popular free social networking website that allows registered users to create profiles, upload photos and video, send messages and keep in touch with friends, family and colleagues it mainly provides social networking services  whereas Yahoo is one of the Internet's leading search engines  Yahoo mainly provides an internet search service.  Yahoo’s and Facebook’s main source of income is attained through the display advertising service they produce. Facebook makes the vast majority of its money by selling ads on its site. Yahoo’s main source of income is through display advertizing; such advertising is done for large national brands like Walmart, GM and Bank of America.

A Firm’s goal is to maximize profit. A firm that does not seek to maximize profit is either eliminated or taken over by another firm that does seek that goal and like all firms, facebook and Yahoo operate in a global oligopoly market where a few large firms compete worldwide for customers and where products and technologies change quickly. Its profits are constrained by technology, information and market constraints. Facebook and yahoo aim to maximize profit but facebook and yahoo face constraints imposed by the market and technology.

 What each firm can sell and the price it can obtain is constrained by the willingness of customers to pay and by the prices and marketing efforts of other firms. Technology is advancing, but to produce more output and gain more revenue with current technology, a firm must hire more resources and incur greater costs. At any point in time, the increase in profit that the firm can achieve is limited by the technology currently available. People who use social networks and search engines demand these services, and Facebook and yahoo supply them. 

Even though facebook and yahoo don’t produce identical products they target consumers with similar interest therefore they can be considered as an oligopoly. Oligopoly is a market structure in which a small number of firms compete. MySpace is Facebook’s biggest competitor and Wikipedia lists 189 other social networking sites. Google is Yahoo’s largest competitor but another 58 search engines compete for attention. 

The equilibrium price of social networking services and search engine services to their users is zero. But social networking and internet search providers enjoy economics of scope. They produce advertising services as well as their other service. A firm experiences economies of scope when it uses its specialized and often expensive resources to produce a range of goods and services. For example, Facebook and Yahoo hire specialist programmers, designers, marketing experts and sales representatives and use their skills across an enormous range of e-business systems and other products that meet the specialized needs of a wide variety of internet users. 

To generate revenue and profit, social networks and internet search providers sell advertising services. To attract advertising revenue, a social network or search site must be able to offer the advertisers access to a large potential customer base and target the people most likely to buy the advertised product or service. Facebook and yahoo are attractive to advertisers because they are able to deliver both of these features: hundreds of millions of users, identified by their interests and likely buying patterns. 

To maximize the use of their services, Facebook and Yahoo offer a variety of incentives to users. One incentive is the quality of the primary service: social networking or search. Facebook innovates to make its social networking services better than those of MySpace; and Yahoo tries to make its search technology as good as those of Google. Another incentive is a variety of related attractions. Yahoo’s photo-sharing service is an example. Facebook aims to attract even more users and to offer advertisers the most effective return on the marketing dollar. 

Although Facebook has seen explosive growth in users, Figure 1 shows that it is not producing 

revenues on the scale of the leading search engine. 

 

-->Figures 1 and 2 show that Yahoo is not upholding its place in the market for internet search. 

  The data shown in Figures 1 and 2 suggest that internet is a more effective tool for generating revenue and profit than social networking. The data also suggest that Google’s expansion is tightening the market constraint that Yahoo faces.

 

Doing some further research on facebook and its current situation, Figure 3 shows the current state of Facbook and its advertising market. Figure 3 shows that Facebook makes the vast majority of its money by selling ads on its site. But now we know just how much of its revenue comes from advertising: 85% in 2011, with the remaining 15% coming from payments and other fees.

For comparison, that’s actually slightly more diversified than Google, which still gets 96% of its revenue from advertising. And it’s even a significant change from 2010, when Facebook got 95% of its revenue from advertising.