Internet markets and online advertising

Internet markets and online advertising

Marco DelmastroAgcom

Head of Media Market Analysis

Summer School for Journalists and Media Practitioners: “Freedom and Pluralism of Traditional and New Media” European University Institute

3 June 2014

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Outline• Media markets

– Two-sided markets (or multi-sided markets)– Network externalities (direct, indirect, and cross-side)– Other characteristics: multi-homing, switching costs, sunk costs and

economies of scale, users’ preferences

• The Internet– The value chain– Web markets (upstream and downstream): device (smartphone, tablet,

desktop,..) & software (app, OS,..), horizontal (search, social networks,…) and vertical (information,…) web services, online advertising

– Competitive structures (the winner takes all?)

• Information– Traditional sources (TV, radio, newspapers,…)– New digital sources and services– Business models

Media markets: two-sided markets

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User/Audience side

Advertising side

Ad companies: newspaper, magazine, website, TV channel, radio channel

Content platforms: newspaper, magazine,

website, TV channel, radio channel

Audience measurement systems

Users Advertisers

Two sided market

pc≥0 pA>0

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Media markets: two-sided markets

Platforms

Users Advertisers

Ad companiesAudience

measurement

AAp

pA

pC

pA

CA

AC

Content Advertising

• Pricing:

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Media markets: two-sided markets• Pricing:

– Feedback loop between the two sides– Increase in price on one side causes a decrease in demand on

the first side (traditional direct effect) and on both sides (indirect effect due to externalities)

– Optimal price depend on the price sensitivity of demand on both sides, the nature and intensity of indirect network effects, and marginal costs

– Possible zero (or even negative) prices on one sides

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Media markets: newspapers

• Example: The price war in the UK newspaper market in the 1990s

Price ofnewspapers:Guardian,Independent,Times, DailyTelegraph

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Circulation ofnewspapers:Guardian,Independent,Times, DailyTelegraph

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Price of ads:Guardian,Independent,Times, DailyTelegraph

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Profits: Times

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% circulationrevenues:Guardian,Independent,Times, DailyTelegrap

Media markets: the Internet

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Networks (mobile and fixed)

Device and software (for surfing the web)

Web services: horizontal and vertical Online advertising

Access Backhaul/ switching

Backbone

Software (OS, browser)

Device((pc, tablet, console, connected TV,

smarthphone)

Search

Ad exchanges, ad networks, web

analyticsInformation

Social media

Users AdvertisersAd companies

p=0 free contentp>0 pay

Two sided market pA>0

Integration

Vertical integration

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The Internet: market structure

• Winner-Take-All (WTA) in web markets (?)– WTA: market share of the leader >80-90%

– Dominant position

• Predicting platform market structure • Factors:

– Strength of network effects• Direct

• Cross-side

• Indirect

– Economies of scale (natural monopoly)

– Multi-homing costs (and switching-costs)

– Users’ preferences for differentiated platform functionality

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The Internet: network externalities

• Network externalities – direct: within one side of the market

– cross-side: two-side network effects

– Indirect: between two different markets (in vertical relationship in the value chain)

“Early on, [Microsoft] recognized that consumers would benefit greatly if a wide range of hardware and software products could interoperate with one another. Among other things, (i) the products would be more useful if information could be exchanged among them, and (ii) development costs would fall and a broader array of products would become available if they could be developed for larger customer segments without the need to rewrite software to target narrow platforms. As more products became available and more information could be exchanged, more consumers would be attracted to the platform, which would in turn attract more investment in product development for the platform. Economists call this a "network effect," but at the time we called it the "positive feedback loop” (Bill Gates, 1998)

“Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook…For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance.” (Marc Andreesen, 2014)

The Internet: direct network externalities

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Web services Online advertising


Backbone



smarthphone)

Ad exchanges, ad networks, web

analyticsSocial networks

Users Advertisers

Ad companies

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• The evolution (2009-2013) of Facebook’s worldwide market share show the strength of direct network effects

• How many social networks can coexist?– Multi-homing is feasible, in

particular for different types of platforms (e.g. Linkedin), less for similar services

– Switching costs could be quite significant if the users is embedded in a (big) group

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• If the number of users exceeds a threshold network size than “bandwagon effect”

• Corner solution with one winner and many losers

Face

book

Printere

st

Twitter

VKontakte

Linke

dIn

Google+

Odnoklassn

ikiDigg

Altri

0

10

20

30

40

50

60

70

80

90

Mondo

Italia

Mondo Europa Italia

The Internet: cross-side network extern.

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Backbone



smarthphone)

Users Advertisers

SearchAd exchanges, ad networks, web analytics

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The Internet: cross-side network extern.

• When network externalities across the two sides of the market are strong a platform will emerge as a leader

• Search:– Advertisers claim for more users to be reached by their commercials – Users ask for more advertisers within a search platform

mar-01se

t-01

mar-02se

t-02

mar-03se

t-03

mar-04se

t-04

mar-05se

t-05

mar-06se

t-06

mar-07se

t-07

mar-08se

t-08

mar-09se

t-09

mar-10se

t-10

mar-11se

t-11

mar-12se

t-12

mar-13

0102030405060708090

100

Google Yahoo!Microsoft (MSN/Bing) Altri

The Internet: indirect network externalities

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Backbone



smarthphone)

Users Advertisers

Search Ad exchanges, ad networks, web analytics

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The Internet: indirect network externalities

• Indirect network externalities relates to a complementary positive feedback between different markets – Software-hardware: operating system (Microsoft

Windows) and software/web applications (Microsoft Office/Internet Explorer)

– Software-web ad services: operating system (Android) and web ad services (Google AdSense platform) (ongoing antitrust case in EU)

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The Internet: platform envelopment• Strategy: through envelopment, a provider in one platform

market can enter another platform market, combining its own functionality with the target’s in a multi-platform bundle that leverages shared user relationships

• Ingredients: bundling of services/products, economies of scope, network effects

• Example: Google has entered many platform markets by linking (bundle) new products to its search platform (Google Search), including audiovisual content (YouTube), maps (Google Maps), email (Gmail), social network (Google +), web browser software (Chrome), and mobile phone operating system (Android)

• Result: leverage effect

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The Internet: platform envelopment• Network of servers:

“there really are almost no companies in the world, just a handful, that are really investing in scaled public cloud infrastructure. We [Microsoft] have something over a million servers in our datacenter infrastructure. Google is bigger than we are. Amazon is a little bit smaller. You get Yahoo! and Facebook, and then everybody else is 100,000 units probably or less. So the number of companies that really understand the network topology, the datacenter construction, the server requirements to build this public cloud infrastructure is very, very small, very small.” (Steve Ballmer, 2013)

• Estimated value (rough):– Google: $4.0 - 6.5 B– Microsoft: $3.0 - 5.5 B– Amazon: $3.0 - 5.0 B

The Internet: platform envelopment

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The Internet: platform envelopment

Device&Software Horizontal web servicesOnline

adOS

(desktop)

OS (mobile)

Browser (desktop

)

Browser (mobile)

SearchSocial

networkPortals

-Leader (37%)

Leader (40%)

Leader (43%)

Leader (90%)

Minor (<1%)

-Leader (32%)

Leader (91%)

Minor (1%)

Second (29%)

Minor (3%)

Second (7%)

Minor (<1%)

Third (12%)

Minor(3%)

Second (7%)

Second (25%)

Fourth(8%)

Second (39%)

-Minor (<1%)

- -

- - - - -Leader(79%)

-Second

(4%)

- - - - -Minor (<1%)

Leader (26%)

Minor(3%)

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The Internet: online advertising• Online advertising: worldwide = $117 bn (+12% in one year, +

35% in 2 years)• Online advertising = search, display (& video), classified &

directory, other

2008 2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Search Display & Video Classified/Directory Other

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The Internet: online advertising• Market structure:

– a leader (Google)– a small number of international competitors (Facebook, Yahoo!,

Microsoft,…), but nearly 30 points behind– a huge amount of marginal operators

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The Internet: online advertising• Mobile advertising: increasing part of the market (10% in

2013, i.e. $17 bn)• A more concentrated market structure

– Google: ~ 50% (Android…)– Facebook: 13%– Others: < 3%

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Sources of information• International benchmark (2013): Pew, Ofcom, Agcom• For citizens the Internet is a key source of information• But TV is still the main media

TV Internet Radio Newspapers0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Italy (Acgom)

USA (PEW)(*)

UK (Ofcom/Kantar)

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Online informationWebsites used by Italian citizens as the main source of

informationCategory % web users

Traditional sources:

Online Newspapers (Repubblica, Corriere,…) 36.1%

Online magazines (L’Espresso, Panorama,…) 0.8%

Press (ANSA,…) 9.0%

Broadcasters (TGCom, RAI,…) 5.2%

New sources:

(only) Digital sites (Huffington, IlPost,…) 2.4%

Portals (Yahoo!, Libero,…) 6.7%

Search (Google, Google Search,…) 21.6%

Social networks (Facebook, Twitter,…) 8.1%

Blogs (Beppe Grillo,…) 0.1%

Other sites (Wikipedia,…), 1.7%

No source 8.2%

Political information % population (≥ 18 years) % voters

TV 51.8% 56.3%

Newspapers 20.9% 22.7%

Internet 19.1% 20.7%

- Online newspapers and magazines 3.1% 3.4%

- New digital sites 1.9% 2.0%

- Aggregators: search&portals 4.8% 5.2%

- Social networks 6.7% 7.3%

- Blogs 7.0% 7.6%

Radio 7.1% 7.7%

Magazines 13.7% 14.9%

Other 4.0% 5.2%

Nothing 16.5% 17.9%

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Online informationWebsites as the main source of information

Operatore % utenti webGoogle 21,5%

Repubblica 17,3%

Corriere della sera 9,5%

ANSA 8,9%

Facebook 7,1%

TGCom 5,1%

Libero 4,0%

Il Sole 24 Ore 2,4%

Wikipedia 1,6%

La Stampa 1,4%

Yahoo! 1,4%

Il Fatto quotidiano 1,3%

Twitter 1,0%

Tiscali 0,7%

Il Mattino 0,7%

Il Giornale 0,6%

Leggo 0,6%

Il Messagero 0,5%

Huffington post 0,5%

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Business modelsItalian newspapers (2012)

Circulation Advertising0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0.370.31

Circulation revenue

Advertising revenue

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

98%

89%

2%

11%

Paper Digital

• Source of revenues: digital still lacking

• Average per unit revenue: web vs. paper

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Business models• Paywall:

– Success for someone: Wall Street Journal/Financial Times/New York Times

– But not for all: The Sun

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12Jan-13

Feb-13

Mar-1

3

Apr-13

May-1

3Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

0

5,000

10,000

15,000

20,000

25,000

0

5

10

15

20

25

30

35

Unique visitors Visits Pages viewed

paywall

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Informazione onlineBusiness models

Pierre Omidyar, First Look Media (The Intercept)

«How does a company support itself given such ambition? We’re figuring that out. We’ll

experiment with new and old revenue sources and create entirely ones. We don’t have all of the

answers. But we’re really good at asking questions, and learning from our mistakes»

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Thank you!

Marco [email protected]

mailto:[email protected]

Education

Internet markets and online advertising