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

Abstract: This thesis examines companies offering their services for free to Internet users, byemploying digital free business models. As a framework Chris Anderson’s classificationsof “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, socialnetworking/community, content based and others. Their profitability was then measuredin relation to their valuation with the help of P/E ratios within and among the groups. Aregression 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 tohave profits for the period researched. No strong trend for overvaluation could be foundin either of these groups, except for individual companies with high P/E ratios. Neithercompany within the content based group showed any profits. Their marginal costs weretoo high but this may change with technological progress. Regression analysis could notshow any significant results employing either the “Freemium” or the advertising “free”business model to be more profitable than the other. Significant results could be shownbeing a content based company and being unprofitable. Comparison between specificcompanies gave mixed results but network effects appear to create dominant playerswithin each group. Employing more than only the advertising “free” business modelseems to be efficient in raising revenue per user for social networking/communitycompanies.