Strategies to Fight Ad-sponsored Rivals
Source: Harvard Business School Working Papers

Many companies choose to finance themselves using ad revenues and offer their products or services—from newspapers to software applications, television programs, and online search—free to consumers. Yet the emergence of ad-sponsored entrants in various industries poses significant threats to the incumbents in these markets whose business models are often based on subscriptions or fees charged to their customers. Faced with the threat from ad-sponsored entrants, incumbents must choose strategies to respond. HBS professor Ramon Casadesus-Masanell and University of Southern California professor Feng Zhu create an analytical framework to establish guidelines for incumbent firms facing these issues. The researchers consider four alternative business models: pure-subscription-based; pure-ad-sponsored; mixed-single-product; and mixed-product-line-extension. Analysis shows that the optimal strategic and tactical choices change dramatically in the presence of an ad-sponsored rival. This is the first study to provide a comprehensive analysis of the competition between a free ad-sponsored entrant and an incumbent that has the option of choosing different business models. Key concepts include:

• The presence of the ad-sponsored rival puts an upper bound on the number of ads that an incumbent competing through a mixed-product-line-extension can set. When the advertising rate is low, a mixed-product-line-extension model is inferior to the pure-subscription-based model.
• Even if the incumbent can avoid cannibalization by using a mixed-single-product model, the incumbent may still prefer to use the pure-subscription-based model, since the advertising intensities of the two firms are strategic substitutes.
• Sometimes the best response of the incumbent to an ad-sponsored entrant is to not change its business model and tactics. This happens only when the optimal business model under both monopoly and duopoly is the pure-subscription-based model, and when the quality difference between the incumbent and the entrant is large.

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This entry was posted on Sunday, November 15th, 2009 at 1:38 am and is filed under Business and economics, Consumer issues, Media and entertainment. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.