Advertising is a major player in the entertainment world, sustaining two of the three revenue models. “In the national accounts, a business whose revenue comes entirely from advertisers is treated as providing all of its services to ad buyers” . This classification would imply, in the context of our three-party model in Fig. 5.2, that consumer welfare is not counted in the value added to gross national product by content producers. The media, much like broadcast television has been doing, sells advertisement services to pay for content, making their services an intermediate input. Consumer attention is being sold to the purchasers of advertisement space, with the transaction patched together by media firms, who themselves pay nothing or buy this attention at zero cost. In fact, consumers pay a low fee (and often it is free) for media content even as they are freely giving their private information to the very same firms. Under the same logic, “many internet services have that same treatment: Facebook and Google are counted as providing advertising services to businesses not services consumed by households” by national income accounts .
Economic theory posits consumer demand as being derived from fundamental preferences. However, what do these preferences actually cover? Is it functionality, that is, “what does the product do,” or is it the product itself? What should advertising properly target - product categories or product functionality? The former is conventional advertising that follows standard demographics such as age, income and gender. The latter targets people who would naturally respond to what the product does.
There are two types of advertising: informative advertising and persuasive advertising.20 Informative advertising increases demand by providing basic information about the product. This type of advertising works well for search goods, where quality is determined prior to purchase. Advertising could also provide complementary information such as prestige value by revealing consumption preferences of celebrities and major public personalities. Demand could be impacted in two ways. One, demand can increase (the demand curve can shift outward in the standard price-quantity graph) due to greater information about the product or the increased sales of complementary products. If iPhone sales increase, it is quite possible that iTunes sales will also rise since the two are paired products. Two, demand can be created if new product categories are created, such as the iPad. Informative advertising is the standard advertising model where businesses draw price sensitive buyers by pricing low and getting a large number of initial buyers.
Persuasive advertising is more relevant to the world of SM since businesses can leverage the gatekeeper function of fashion leaders or influential people by persuading them to buy a product. These influential people are not necessarily those who have lots of friends or are part of a network with a high percentage of connected neighbors or networks with a high clustering coefficient, but rather individuals who act as gatekeepers between highly embedded SNs. They can be the seed of a chain reaction in a network if individuals only care about their immediate neighbors’ purchases in a sequential decision process. From a strategy perspective, it is important to note that SNs exhibit some patterns. People tend to have common friends so there is some clustering in the network space. Advertising to this cluster is wasteful since the connections within the network will promote the product via WOM. Advertising to multiple gatekeepers within the larger network leads to a greater probability of covering the entire network since they act as seeds for information cascades and network effects.