Free on the Web!: The profitability of a radical price

This project examines companies offering their services for free to Internet users, by employing digital free business models. As a framework Chris Anderson’s classifications of “free” business models are used. A sample of eleven companies that provide “free”services was selected and divided into four groups. These were search engine, social networking/community, content based and others.

Their profitability was then measured in relation to their valuation with the help of P/E ratios within and among the groups. A regression analysis was also conducted to compare profitability of either one of two“free” business models used by the researched companies.Findings were that search engine and social networking/community companies appear to have profits for the period researched. No strong trend for overvaluation could be found in either of these groups, except for individual companies with high P/E ratios.

Neither company within the content based group showed any profits. Their marginal costs were too high but this may change with technological progress. Regression analysis could not show any significant results employing either the “Freemium” or the advertising “free”business model to be more profitable than the other. Significant results could be shown being a content based company and being unprofitable.

Comparison between specific companies gave mixed results but network effects appear to create dominant players within each group. Employing more than only the advertising “free” business model seems to be efficient in raising revenue per user for social networking/community companies.
Source: Uppsala University
Author: Luhr, Erik | Herrmann, Markus

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