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Will ad revenue be enough to sustain online content companies?

Online content companies have mostly transformed the way people surf the internet, may it be Google for the search engine optimization (SEO), Facebook for networking, Alibaba for e-commerce or Netflix for entertainment. These corporations have collectively and consistently inculcated the convenience factor in the minds of their consumers, who would hardly compromise on surfing the internet through the handiness of their smartphones and laptops. This is evident through the upsurge in daily online visitors, which has gone up from millions to billions in less than two decades. The growth in the internet users from 2000 to 2016 is a whopping 918.3% (Source: Internet World Stats).

This vast base of high-speed internet users has encouraged businesses to innovate and offer an ever-evolving array of online services. The convergence of food, travel, news, entertainment and convenience of shopping from the common online platform has created a true mass market and has led to the proliferation of a new offering in the form of online services.

The business structure/industry type of the selected big internet companies is displayed through the below chart. Online retail, search engine, media and gaming account for 63% of the online companies worldwide. 

A look at the diversified industry segment and the dynamic audience base reveal that the online content companies face a lot of challenges to sustain their business models. For instance, online content firms compete for user generated or licensed content, whereas SEOs focus on accessibility and reach. Similarly, social media websites engage users to increase the average time spent on their digital platforms. Moreover, most of the websites have transformed into multipurpose web portals where one can check emails, read the news, play games, watch videos, etc. and thereby, increase the traffic on these portals. The visitors to such websites have been steadily growing for the last five years, thus paving the way to make revenue through digital advertisements.

The charts below represent the number of monthly unique visitors and the average time spent per visitor for four selected internet companies. As one can analyse the number of visitors has tremendously risen from 2011 to 2015, this is due to the growth of the digital platform and resulted in the disruption of the traditional business models. However, the average time spent per visitor on few websites has steeply gone down. This demonstrates that users are increasingly seeking better experiences with limited attention investment per web page. Although the number of visitors and clicks are some of the metrics used to generate revenue through advertisements. The stickiness factor is becoming an important measure of performance, wherein, the average time spent by a visitor is measured to determine whether companies are providing the relevant user experience and bringing it to the prospect or not. Additionally, companies are increasingly competing to capture a greater share of users’ time on the internet.

The factors mentioned above are related to the advertisement based revenue model, where content offered by the websites is free and revenue is generated only through advertisements. Although the number of online visitors is rising, the companies must progressively generate useful content to retain such “freeloaders” and increase the stickiness ratio since a sole dependence on ad revenue, in the long run, is a very risky proposition. Hence these companies need to evolve and convert their free users to paid subscribers by providing premium content and add-on services. This may involve an increase in the cost such as the CPA (Cost Per Acquisition), marketing, content licensing, in addition to the usual website operating costs. The web portals can actualise their investments, only when a bigger challenge of significantly expanding paid services without alienating free users is tackled. Further, with so much free content on the whole gamut of websites, the industry has become very competitive with easy entrants giving users a wholesome package of online services.

The charts below depict the operating margins and revenue growth of the selected companies offering online services globally.

The operating margins of the companies were not in conjunction with the steep rise of visitors, in fact, in few firms, the margins declined. Even though the revenues have increased in absolute terms the costs of development and user acquisition has increased with higher proportions, suggesting that the companies are struggling to stay on the top with the competition. Moreover, the total revenue growth, largely consisting of advertisement revenue has dropped from 2011 to 2015 and further indicate towards the fall in margins as shown in the above chart.

In conclusion, it can be stated that although there is still a lot of potential for growth in the digital ad revenue, the declining operating margins suggest that companies need to identify other means of revenue generation in order to stay ahead in the increasingly competitive digital landscape.

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