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416 Part Three Key System Applications for the Digital Age

Service Provider
While e-tailers sell products online, service providers offer services online.
There’s been an explosion in online services. Web 2.0 applications, photo
sharing, and online sites for data backup and storage all use a service provider
business model. Software is no longer a physical product with a CD in a box,
but increasingly software as a service (SaaS) that you subscribe to online rather
than purchase from a retailer, or an app that you download. Google has led the
way in developing online software service applications such as Google Apps,
Google Sites, Gmail, and online data storage services.

Community Provider
Community providers are sites that create a digital online environment where
people with similar interests can transact (buy and sell goods); share interests,
photos, videos; communicate with like-minded people; receive interest-related
information; and even play out fantasies by adopting online personalities called
avatars. The social networking sites Facebook, Google+, Tumblr, LinkedIn, and
Twitter; online communities such as iVillage; and hundreds of other smaller,
niche sites such as Doostang and Sportsvite all offer users community-building
tools and services. Social networking sites have been the fastest growing Web
sites in recent years, often doubling their audience size in a year. However,
they are struggling to achieve profitability.

E-COMMERCE REVENUE MODELS

A firm’s revenue model describes how the firm will earn revenue, gener-
ate profits, and produce a superior return on investment. Although there are
many different e-commerce revenue models that have been developed, most
companies rely on one, or some combination, of the following six revenue
models: advertising, sales, subscription, free/freemium, transaction fee, and
affiliate.

Advertising Revenue Model
In the advertising revenue model, a Web site generates revenue by
attracting a large audience of visitors who can then be exposed to advertise-
ments. The advertising model is the most widely used revenue model in
e-commerce, and arguably, without advertising revenues, the Web would
be a vastly different experience from what it is now. Content on the Web—
everything from news to videos and opinions—is “free” to visitors because
advertisers pay the production and distribution costs in return for the right
to expose visitors to ads. Companies will spend an estimated $166 billion on
online advertising in 2012, and an estimated $39.5 billion of that amount on
online advertising (in the form of a paid message on a Web site, paid search
listing, video, app, game, or other online medium, such as instant messag-
ing). In the last five years, advertisers have increased online spending and
cut outlays on traditional channels such as radio and newspapers. In 2012,
online advertising will grow at 15 percent and constitute about 30 percent of
all advertising in the United States. Television advertising has also expanded
along with online advertising revenues.

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