Social Networking A vertical integration strategy is when "a firm owns its upstream suppliers and downstream buyers" (QuickMBA, 2010). There are a number of different ways that this could manifest for a firm in the social networking business. The first is that one needs to consider who the upstream suppliers are, and who the downstream buyers are. The inputs in a social networking business are everything from servers and web development staff to the advertising company that helps to sell the content to advertisers. Many major tech companies will own and manage their own server farms, while smaller ones will rent space. A social networking site by definition needs to achieve a certain critical mass in order to be relevant to either consumers or advertisers. Thus, there is a case to be made for integration of servers and other back-end equipment. Owning these will allow the company to have a more scalable operation, and will allow for cost control.

The same can be said of the development team. While the design and construction of a basic website can be outsourced, a social networking site needs a lot of work just for maintenance, let alone the new features that it will need to be relevant. That is more difficult to outsource -- maintaining an in-house development team makes sense here. Most large social networking sites will keep key technology and functions in -- house for these reasons.

Additionally, the only way a social networking site can make...

Facebook and Google have two of the more prominent social networking sites, and both of those companies keep their marketing functions in-house. This allows them to have significant control over the cost of their advertising programs. This is important, because online advertising pricing is competitive and largely set by the market. For smaller sites, it is more likely that they would contract out the advertising function to Google, Yahoo or another major online advertising company. While the scale required to build a serious online advertising business makes this option appealing for smaller websites, the reality is that if our site did that, we would be giving a significant cut of the revenue to our competitors. Ideally, we would control our own advertising function and keep costs lower than what we would pay Google to do the same thing.
Cost control is one of the most important competitive advantages that can be gained from vertical integration (Kokemuller, 2012). If these functions are contracted out, the company will have less bargaining power over the price paid for these services. Major web design firms, server farms and especially online ad companies are much larger than we are, and will therefore have the ability to dictate prices to us. By keeping these functions in-house, we will hopefully be able to keep costs lower…