Web-based business models in 2013
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Slides of the lecture "Web-based business models" taught by Eduardo Larrain at HEC, a French business school (Strategic Management Master) during 4 classes in February 2013 ...

Slides of the lecture "Web-based business models" taught by Eduardo Larrain at HEC, a French business school (Strategic Management Master) during 4 classes in February 2013

2014 class with updated slides is here : http://fr.slideshare.net/EduardoLarrain/201402-web-based-business-models-lecture


1. What’s the web?
2. What’s a business model?
3. Why study Internet-based business models?
4. What are the key elements of a business model?
• Value proposition and revenue streams
• Drill-down of key Entertainment markets: music, video games, book publishing
• Customer channels, customer relationships, key partners, activities, resources, cost structure
5. What are the business models of Internet heavyweights: Facebook, Google, Zynga, Linkedin, Groupon
6. What are the most promising business models among the world’s most valuable companies: Digital 100, Twitter
7. Conclusion and farewell
8. Appendix: group project and individual test

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Web-based business models in 2013 Presentation Transcript

  • 1. WEB-BASED BUSINESS MODELS Slides of class #1 #2 #3 #4 – February 2013 Prof. Eduardo LarrainEduardo Larrain - Linkedin - Website 1
  • 2. This lecture was taught at a French business school by Eduardo Larrain Eduardo Larrain • HEC 2005 – Strategic Management • Founder of an Internet start-up called Kel Quartier • Strategy consultant at Roland Berger Strategy Consultants and Atos – 40 projectsEduardo Larrain - Linkedin - Website 2
  • 3. Agenda of the web-based business model lecture1. What’s the web? …………………………………………………………………………………………………………………………………………………….……… 42. What’s a business model? ……………………………………………………………………………………………………………………………………….…….. 163. Why study Internet-based business models? ……………………………………………………………………………………………………….……..… 234. What are the key elements of a business model? • Value proposition and revenue streams ………………………………………………………………………………………………………….….. 40 • Drill-down of key Entertainment markets: music, video games, book publishing ………………………………….………….. 82 • Customer channels, customer relationships, key partners, activities, resources, cost structure …….....….……….….. 1155. What are the business models of Internet heavyweights: Facebook, Google, Zynga, Linkedin, Groupon ……….…………… 1306. What are the most promising business models among the world’s most valuable companies: Digital 100, Twitter ..…… 1737. Conclusion and farewell ………………………………………………………………………………………………………………………………………………… 1848. Appendix: group project and individual test ………………………………………………………………………………………………………………..... 185Eduardo Larrain - Linkedin - Website 3
  • 4. What’s the webEduardo Larrain - Linkedin - Website 4
  • 5. What’s the Web? ICT Internet WebDefinitions• Web (or World Wide Web or WWW) is a global set of documents, images and other resources, logically interrelated by hyperlinks. Web = HTTP, HTML, CSS, JPEG,…• Internet (or Net) is a global system of interconnected computer networks that use the standard Internet protocol suite (TCP/IP) to serve billions of users worldwide. It is a network of networks that carries an extensive range of information resources and services, such as the inter-linked hypertext documents of the Web and the infrastructure to support email. Internet = Web + mail + data transfer e.g. FTP incl. P2P, VoIP, streaming media, video conferencing, mobile apps (not HTML 5 based)• Information and Communication Technology (ICT) is the use of computers and telecommunications equipment (IT) which also encompasses other information distribution technologies such as television and telephones (C). ICT = Internet + IT + CWikipediaEduardo Larrain - Linkedin - Website 5
  • 6. Is Internet only about Web presence?• In the European Union, two-thirds of all businesses have a Web presence (McKinsey, 2011)• Exhibit - Looking at top 100 French websites: NEWS ECOMMERCE SOCIAL MEDIA BLOGS PORN TV SEARCH VIDEO PROFESSIONAL EVERYDAY LIFE LEGEND Category Ranking Unique visitors per monthTitiou Lecoq / Diane Lisarelli, Encyclopédie de la Web Culture, January 2011Eduardo Larrain - Linkedin - Website 6
  • 7. Is Internet only about Web presence?• Exhibit - Looking at top 100 websites in UK, France, Germany, Italy, Spain, Switzerland, Brazil, US and Australia Number of unique users, January 2010BBC, SuperPower: Visualising the internet, January 2010Eduardo Larrain - Linkedin - Website 7
  • 8. Is Internet only a distribution channel for online retail/ecommerce?• In retail alone, G-20 consumers researched online and then purchased offline (ROPO) more than $1.3 trillion in goods in 2010Boston Consulting Group, The Internet Economy in the G-20, March 2011Eduardo Larrain - Linkedin - Website 8
  • 9. Internet is not just a distribution channel or just about Web presenceEduardo Larrain - Linkedin - Website 9
  • 10. Is Internet an Industry?• 75% of the economic impact of the Internet arises from traditional companies that don’t define themselves as pure Internet players (McKinsey, 2011)• Exhibit - Looking at top 100 USdes grandes through sociétés US Profits des 100 plus 100 plus grandes time: Chiffre daffaires companies sociétés US100% 100% Conglomerate Conglomerate Professional, Scientific, and Technical Services Services Professional, Scientific, and Technical 90% 90% Finance and Insurance Finance and Insurance 80% 80% Information Information 70% HealthHealth Care andAssistance Care and Social Social Assistance 70% Wholesale Trade Trade Wholesale 60% 60% Retail Trade Trade Retail 50% Utilities Utilities 50% Transportation and Warehousing Transportation and Warehousing 40% 40% Manufacturing Telecommunication Manufacturing Telecommunication 30% 30% Manufacturing Automotive Manufacturing Automotive Manufacturing Manufacturing 20% 20% Metal Métaux Métaux 10% 10% PétrolePétrole Petroleum Agriculture, Forestry, Fishing and Hunting 0% 0% Agriculture, Forestry, Fishing and Hunting 1955 1955 1960 1960 1965 1965 1970 1970 1975 1975 1980 1980 1985 1985 1990 1995 1990 1995 2000 2000 2006 2006Analysis based on Fortune 500, 2007Eduardo Larrain - Linkedin - Website 10
  • 11. Internet is not just an industry Internet is touching every part of the economy (like electricity)Eduardo Larrain - Linkedin - Website 11
  • 12. Internet is a technology on which are based numerous activities acrossindustriesInternet-based activities1. Web activities using Web as a support • Ecommerce, content, online, advertising2. Tecommunication based on IP communication • Internet service providers3. Software and services activities linked to the Web • IT consulting, software development4. Hardware manufacturers, maintenance providers of Web-specific tools • Computers, Smartphones, hardware equipment, servers used for the InternetMcKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011Eduardo Larrain - Linkedin - Website 12
  • 13. Internet accounts for 3-4% of worldwide GDPExhibits – Economic impact of the Internet by McKinsey and BCGMcKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011Boston Consulting Group, The Internet Economy in the G-20, March 2011Eduardo Larrain - Linkedin - Website 13
  • 14. Though, the Internet economic impact goes beyond GDP generatingconsumer surplus when there is not monetary rewardReal economic impact of the Internet• Free services value are excluded from GDP: • Emails • Search • Collaborative services (wikis, blogs and social networks)• Similar to housewife activities excluded from GDP• E.g. • Craigslist has generated consumer value though reducing classified ad revenues of the US newspaper industry • Facebook has generated consumer valueMcKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011Eduardo Larrain - Linkedin - Website 14
  • 15. Question raised at class#1What’s the issue with mobile apps and HTML5?• HTML5 is a new technology that allows developers to build rich web-based apps that run on any device via a standard web browser• Go to www.audacy.fr or www.webformy.com using your smartphone browser to get a view on what is HTML5• For mobile applications, choosing a technology can have a large implications on your business model… • Native technologies (iOS, Android, RIM, Symbian, Windows) are great for: • Using the phone features (photo,…) • Using lots of data (offline mode) • Security (harder to crack) • When you need real time data • HTML5 technology is great: • When you want to launch fast and cheap a mobile application • Because you are not reliant on App stores indexation • Other technologies (Adobe AIR,… ) are great for other specific needs• … and those of main Applications Stores: iTunes App Store, Chrome Web Store, Facebook App CenterEduardo Larrain - Linkedin - Website 15
  • 16. What’s a business modelEduardo Larrain - Linkedin - Website 16
  • 17. What’s a business model?Basic definition • A business model is a coherent way to manage and develop an economic activity. • A business model describes the rationale of how an organization creates, delivers, and captures value. • A business model describes how an enterprise proposes to make money.Eduardo Larrain - Linkedin - Website 17
  • 18. What’s a business model?Very basic definition • A business model is “show me the money”. • It is a simple expression of the strategy of the company on how to make money without going into too much details • In French, we use the english word « business model » rather than translations: • Modèle économique • Modèle d’activité • Modèle d’affaires • Modèle de revenus, modèle de profitEduardo Larrain - Linkedin - Website 18
  • 19. A Business Model is not a Business PlanWhat’s a Business Plan?• A Business plan is a document that describes how a project can be implemented.• A Business plan usually aims at selling the project because “you can’t have a funding without a Business Plan”• A Business plan usually includes a description of: • The team • The Business Model • A Financial Analysis (e.g. financial spreadsheets) • A Business Environment Analysis (e.g. market, competitors and competitive advantage analysis) • An Implementation roadmap (e.g. operation plan, milestones) • A Risk analysis (e.g. SWOT, Critical Success Factors)Eduardo Larrain - Linkedin - Website 19
  • 20. A Business Model is not StrategyWhat’s Strategy?• Strategy is a plan of action and the allocation of resources necessary for carrying out these goals• Michael Porter’s view on Strategy: • Strategy is a plan to differentiate the company and give it a competitive advantage • “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” • Then decisions can only be defined as strategic if they involve consciously doing something “differently” from competitors and if that difference results in a sustainable advantage • e.g. making existing methods more efficient (“operational efficiency”) are not strategic since they can be easily copied by othersEduardo Larrain - Linkedin - Website 20
  • 21. A business model describes what makes an company unique looking from thevalue propositions to cost structureKey elements of a business modelAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 21
  • 22. A business model is an ecosystemRationale beyond those key elements Cost-side Value-sideAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 22
  • 23. Why study Internet-based business models Business Internet- Models basedEduardo Larrain - Linkedin - Website 23
  • 24. Business models have been studied for 30 yearsTraditional business models: trying to explain success with profit models 1. Customer Solutions 2. Product Pyramid 3. Multi-Component Invest to know the customer, create a solution, develop the At the base are products and services that are low price and Several of the components represent a disproportionate relationship high volume; at the top products and services that are high share of the profits E.g. GE price and low volume E.g. business seminars at hotels, advertising (Google, Yahoo, E.g. Air France Group: Air France for business and long haul Facebook)? Profit zone Profit flights, Transavia for leisure and Hop! for local flights Profit Basic activity 0 Other components Time Time 4. Switchboard 5. Time Profit 6. Block Buster profits Multiple sellers communicating with multiple buyers. The Takes advantage of uniqueness, profit margins erode as Revenue realized is so powerful and fast that in a quick more buyers and sellers join the great the organization competition seeks to imitate. Time profit companies must swoop the model pays for development and marketing costs builds on itself take the lead and maintain a "two year" lead over their E.g. movies, books E.g. eBay, Alibaba, Amazon, Monster, Seloger competitors E.g. Intel, Microsoft Or the opposite: desintermediation (Dell) F/unité Project return Seller Buyers Time Project typesAdrian Slywotzky and David Morrison, The profit Zone, 1998Eduardo Larrain - Linkedin - Website 24
  • 25. Business models have been studied for 30 yearsTraditional business models: trying to explain success with profit models 7. Multiplier 8. Entrepreneur Profit 9. La spécialisation Strong customer brand Hierarchical design with multiple subsidiaries to maintain Specialist are several times more profitable than the E.g. Disney, Google closeness with the customer generalist. Characterized by lower cost, higher quality, E.g. Biotechnologies, Google stronger reputation, shorter selling cycles, and better price Small teams realization E.g. Home Depot Different offers Return Specialists Basic activity Generalists Key asset 10. Install Base 11. Defacto Standard 12. Brand Initial product sales or profits are slim and profit is realized The more players who buy that enter in the system, the The Company expends significant marketing investment in on the follow-up products and services more valuable the network order to build awareness and is reinforced by customer E.g. HP printers and Gillette Razors, Ryanair E.g. Microsoft, Oracle, Skype, Linkedin, spotify, Facebook experience. You know Brand is working when a consumer says, "I wont change because I trust AT&T". E.g. Google Margin Margin Price Complementary products Brand price Basic product Average market price Market shareAdrian Slywotzky and David Morrison, The profit Zone, 1998Eduardo Larrain - Linkedin - Website 25
  • 26. Business models have been studied for 30 yearsTraditional business models: trying to explain success with profit models 13. Specialty 14. Local Leadership 15. Transactional Scale Specialty companies enjoy a higher premium for their Many businesses and their company economies are totally Transactions go up but the cost to provide the transaction products and services until competitors start to imitate local. Risk occurs when these companies fail to recognize does not go up as quickly E.g. Merck, 3M, Photoshop they are a local business model E.g. investment banking, real estate, transportation E.g. Wal-Mart Marge Local return Transaction return 5 years ago Nowadays Leading Leading Common 0 Common Local market share Transaction size 16. Value Chain 17. Cycle Profit 18. After-Sales Profit Industries characterized by distinct and powerful cycle. The The companys profit does not direct come from the sale of Specific activities pass through a chain of specialist offering company can not control the cycle, but it works to maximize hte product, but the after sale financing or services of the value its position within the cycles grip. As capacity tightens the product E.g. softwares, Intel companies lead price increases, as capacity loosens, its lag E.g. General Electric, banking price declines E.g. Dow Chemical, Toyota Return by unit produced After-sales offers Basic offer Capacity / OccupancyAdrian Slywotzky and David Morrison, The profit Zone, 1998Eduardo Larrain - Linkedin - Website 26
  • 27. Business models have been studied for 30 yearsTraditional business models: trying to explain success with profit models 19. New Product Profit 20. Relative Market Share Profit 21. Experience Curve Profit As new products are introduced profit margins are high and Companies with high market share tend to be more Experience drives down the transactional cost growth rapid. As the product mature the profit margins fall profitable. Large companies have price advantages due to manufacturing experiences and volume economies, such as purchasing capability and economies of scale Diffusion Return Unit cost Time Relative market share Cumulated experience 22. Low Cost Business Design The company trives on reducing the cost per unit through cumulative experience E.g. Southwest Air, Dell, Internet as an channel distribution (fnac.com,…) Unit cost Traditional Low costAdrian Slywotzky and David Morrison, The profit Zone, 1998Eduardo Larrain - Linkedin - Website 27
  • 28. Why study Internet-based business models?Two reasons i. The technological revolution increased exponentially the number of business models types: • Marginal cost of digital information comes closer to nothing • Long tail enables larger segmentation of customers • Better assets rotation can enable new businesses with low margin ii. After 30 years, we are better at understanding complex business modelsEduardo Larrain - Linkedin - Website 28
  • 29. (i)The technological revolution (IT, Internet, biotechnologies, nanotechnologies,…) Ray Kurzweil video on TED, 2005 The accelerating power of technology 14’00-19’10Eduardo Larrain - Linkedin - Website 29
  • 30. Marginal cost of digital information comes closer to nothingBasic economics• In basic economics, price falls to the marginal cost which increases with production… Exhibit – Market supply and demand Exhibit – Costs of one company Price Price Marginal cost Supply Average cost Demand Quantity Quantity• … Though with the technological revolution, marginal cost of digital information comes closer to nothing • Moore law: “number of transistors on a chip doubles every 18 months”Eduardo Larrain - Linkedin - Website 30
  • 31. • The great power of the eBay business model is the fact that a small number of salaried employees and outsource partners can handle a huge and growing volume of business: • Doubling of transaction volume can be accomplished with relatively modest investments • Software and servers do the heavy lifting eBay Headquarters, San Jose CaliforniaEduardo Larrain - Linkedin - Website 31
  • 32. Long tail enables larger segmentation of customersLong tail• Long tail is about selling less of more: • They focus on offering a large number of niche products, each of which sells relatively infrequently • Aggregate sales of niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues • Long Tail business models require low inventory costs and strong platforms to make niche content readily available to interested buyers• Add-on by a student: Internet by lowering search costs and accessibility costs can even increase the size of the “Head”Chris Anderson, The Long Tail, 2006Eduardo Larrain - Linkedin - Website 32
  • 33. • Amazon sells blockbusters products but also niche hard-to-find products (online book stores bring access to increased product variety) • Customer customization has enabled Dell to sell a large volume of products in small numbers Amazon warehouse, somewhereEduardo Larrain - Linkedin - Website 33
  • 34. Better assets rotation can enable new businesses with low marginBetter assets rotation• Technological revolution increase assets productivity decreasing the amount of assets immobilized Formula of Return on Capital Employed (ROCE) ROCE = Net Income (R) / Equity (K) ROCE = (R / K) * (Income / Income) * (Assets / Assets) ROCE = (R / Income) * (Income / Assets) * (Assets / K) ROCE = Gross Margin * Assets rotation * Financial leverEduardo Larrain - Linkedin - Website 34
  • 35. Better assets rotation can enable new businesses with low marginDesign to cost• Then, new business models with low margin can be designed and have the same return than more profitable activities • E.g. Logan, the low-cost brand new vehicule, was designed to be sold at 5 000€ (ultimately 8 000€ in France) Exhibit – Different business positioning with same ROCE Gross Margin Assets rotationEduardo Larrain - Linkedin - Website 35
  • 36. Better assets rotation can enable new businesses with low marginPyramid base: targeting tier 5 population• Developing countries are inventing new business models in regions with very low purchasing power where populations where traditionally excluded from any economical business modeling. E.g. Tata vehicule costing 2 500€ even cheaper than Logan• 4 billion people live with less than 1 500 USD per yearC. K. Prahalad, The Fortune at the Botton of the Pyramid, 2006Eduardo Larrain - Linkedin - Website 36
  • 37. Better assets rotation can enable new businesses with low marginMobile banking case• Half population is unbanked worldwide leaving: • People with no official financial service to save or to borrow: • Unofficial lending rates range between 50% and 400% p.a, microfinance rates are 20-40% • One day per month is lost in Morocco to pay invoices • Enabling mass tax avoidance from States with low budgets • Raising the cost and complexity for companies t pay their employees• Though new mobile banking offer are emerging in developing countries. E.g. half public servant in Kenya are paid with mobile banking 120% Portugal Royaume-Uni Suède Irlande Moy. UE 110% Autriche Espagne Finlande Danemark Russie Allemagne Pays-Bas 100% Pologne Mobile penetration 2008 Belgique 90% Roumanie 80% Chili Afrique du Sud France Jamaïque Etats-Unis 70% Tunisie Algérie Colombie 60% Botswana Moy. Afrique Canada Mexique Brésil Maroc 50% Guatemala Guyane 40% Nicaragua Arménie Chine 30% Pakistan Namibie Sénégal Vietnam Egypte Côte dIvoire 20% Kirghizstan Kenya Lesotho Tanzanie Inde 10% Ouganda Djibouti 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Banked population 2008Eduardo Larrain - Linkedin - Website 37
  • 38. Other big trends in creating new Internet-based companiesThree current trends • Pyramid based strategy: create a business model based on people very low purchasing power • Blue ocean strategy: look for a new ocean rethinking differentiation and low-cost and go beyond industry boundaries • Cloning strategy: clone successful internet sites and replicate them in other countriesEduardo Larrain - Linkedin - Website 38
  • 39. (ii) We are better at understanding business modelsOne Business Model CanvasAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 39
  • 40. 1 - The proposition valueDefinition and scope• The value proposition describes the bundle of products and services that create value for a specific customer segment• Value proposition is marketing territory: • It can be functional (solves a customer problem, physiological need,…), social (need to belong, status,…), emotional, relationship… • It is an aggregation of the benefits that a Company offers customers (solve a customer problem or satisfies a customer need) minus sacrifices (price, technical process when buying or when recycling, travel time,…) • It is a unique combination of benefits and sacrifices • It is not a list of products and services, technologies or distribution channelsAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 40
  • 41. 1 - The proposition valueElements that can contribute to customer value creation• Newness: some value propositions satisfy an entirely new set of needs that customers previously didn’t perceive because there was no similar offering. E.g. mobile phones, ethical investment funds• Performance: improving product or service performance. E.g. bringing more powerful PC, more disk storages and better graphics• Customisation: tailoring products and services to the specific needs of individual customers. E.g. mass customisation• Getting the job done: helping a customer get a certain job done. E.g. Rolls-Royce airline engines.• Design: a product may stand out because of superior design. E.g. fashion and customer electronics• Brand/Status: customers may find value in the simple act of using and displaying a specific brand. E.g. Rolex• Price: offering similar value at a lower price e.g. Bic• Cost reduction: helping customers reduce costs• Risk reduction: reducing risks customers incur. E.g. giving a one-year service guarantee• Accessibility: making products and services available to customers who previously lacked access to them. E.g. NetJets popularized the concept of fractional private jet ownership, RIP Merrill Lynch bring Wall Street to Main Street in the 60s• Convenience/Usability: making things more convenient or easier to use. E.g. iPod.Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 41
  • 42. 1 - The proposition valueDefining a promise helps understanding the proposition valueDefining the promise or tagline• The promise is not only advertising territory but it shapes all the business model• A good promise or tagline must not only deliver a clear message but also advertise an offering truthfully • A good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic promise or tagline• The promise can still be simple and concise even for large international and complex companies • Zara (Inditex) promise is “fast-fashion” which has shaped all the company operations• What are the promise of those companies? • Starbucks • Ikea • Easyjet / Ryanair • Toyota • Lego • Danone • Yves RocherEduardo Larrain - Linkedin - Website 42
  • 43. • Starbucks promise: a “third space” of conviviality between home and workEduardo Larrain - Linkedin - Website 43
  • 44. 1 - The proposition valueDefining a promise helps understanding the proposition valueCompany promise or tagline• What are the promise of those companies? • Starbucks • A “third space” of conviviality between home and work • Ikea • Functional home furnishing, low price and design • Easyjet / Ryanair • Simple airline flights at low price faster than the car • Toyota • Auto reliability • Lego • Learning though the joy of building • Danone • Health through food and beverages to a maximum number of people • Yves Rocher • Beauty based on plantsDenis Dauchy, 7 étapes pour un business model solide, 2010Eduardo Larrain - Linkedin - Website 44
  • 45. 1 - The proposition valueThe proposition value has to take into account all customersTwo customers • Most of the time, the buyer is not the user of the product or service Customer 1 Customer 2  Distributor  Consumer Mass-market products or services Services to  Company  Employees corporations (food, transportation,…)  Students  Companies (management Web-based business consulting firms, investment models class banking,…)  Prescriber (dentist, general  Patients, social security Pharmaceutical drugs practitioner GP,…)Denis Dauchy, 7 étapes pour un business model solide, 2010Eduardo Larrain - Linkedin - Website 45
  • 46. • Companies have long engaged in head-to-head competition in search of sustained, profitable growth • Yet in today’s overcrowded industries, competing head-on results in nothing but a bloody ”RED OCEAN” of rival fighting over a shrinking profit pool • This strategy is unlikely to create profitable growth in the future • Leading companies will succeed not by battling competitors but by creating “BLUE OCEANS” of uncontested market space ripe for growthEduardo Larrain - Linkedin - Website
  • 47. 1 - The proposition valueDifferentiate from competitors or innovate within the valueRed Ocean Strategy vs. Blue Ocean Strategy• Similar to Michael Porter definition of strategy as a differentiation plan, Blue Ocean Strategy aims at changing the proposition value to gain profitable growth• Red oceans will continue to be an important part of a company’s strategy (a lot of tools and framework already exists) but invest in blue oceans will create profitable growthW. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 47
  • 48. 1 - The proposition valueDifferentiate from competitors or innovate within the valueFour questions to challenge an industry’s strategic logic and business model• First, capture the current state of play in the known market space in order to understand competition and the principal factors (price, quality, design…)• Second, reconstruct buyer value elements trading-off between differentiation and low-cost • E.g. is the company over delivering without payback? (typical of a company caught in the Red Ocean)W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 48
  • 49. • In the 80s, Circus was a declining industry with decreasing audiences because of increasingly attractive alternative forms of entertainment • There were star performers but none could compete with movie stars, multiple show arenas and a audience of families • There was also increasing sentiment against the use of animals in circuses by animal rights groups • Cirque du Soleil launched in 1984 and is now one of Canada’s largest cultural exports. Why?Eduardo Larrain - Linkedin - Website 49
  • 50. 1 - The proposition valueCirque du Soleil created a new value curve offering the best of both circusand theater and eliminating or reducing everything elseCirque du Soleil canvas• By offering unprecedented utility, Cirque du Soleil has created a blue ocean and has invented a new form of live entertainment, one that is markedly different from both traditional circus and theater• Cirque du Soleil strategically priced its tickets against those of the theater because it attracted an adult theater audience• Cirque du Soleil tagline is: ”a mix of circus arts and street entertainment”W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 50
  • 51. • With which industry do Southwest airlines compete? • In what do they focus, in what they differ and what are they tagline?Eduardo Larrain - Linkedin - Website 51
  • 52. 1 - The proposition valueSouthwest airlines created a new curve offering high-speed transport withfrequent and flexible departures at prices attractive to the mass of buyersSouthwest Airlines canvas and the low-cost model• Southwest Airlines created a blue ocean by breaking the trade-offs customers had to make between the speed of airplanes and the economy and flexibility of car transport• Southwest emphasizes only three factors (focus) and differentiate on four others factors from the industry’s average profile (divergence)• Southwest promise or tagline: “the speed of a plane at the price of a car… whenever you need it” DIVERGENCE FOCUSW. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 52
  • 53. • With which industry do Logan compete? • In what do they focus, in what they differ and what are they tagline?Eduardo Larrain - Linkedin - Website 53
  • 54. 1 - The proposition valueLogan created a new curve offering a new car for the price of an used-carLogan canvas• Logan promise or tagline: “for the price of an used-vehicule, have a new car” FOCUS DIVERGENCEHigh Low price new vehicule Used-vehicule LoganLow Price Spaciousness Garanty Resistance Design Accessories Status• Similarly, Amazon launched Marketplace not only to compete with second-hand cultural goods marketplace like eBay but to close the gap between new and second itemsEduardo Larrain - Linkedin - Website 54
  • 55. 2 – Revenue streamDefinition and scope• Revenue stream is the cash a company generates from each customer segment• A business model can involve two different types of Revenue streams: • Transaction revenues resulting from one-time customer payments • Recurring revenues resulting from ongoing payments to either deliver a Value proposition to customers or provide post-purchase customer supportEduardo Larrain - Linkedin - Website 55
  • 56. 2 – Revenue streamWays to generate revenue streams• Asset sale: selling the ownership rights to a physical product. E.g. Amazon selling a book• Usage fee: selling the use of particular service. E.g. A telecom operator charging by the minute• Subscription fee: selling continuous access to a service. E.g. Club Med Gym, WOW/World of Warcraft online• Lending/Renting/Leasing: temporary granting someone the exclusive right to use a particular asset for a fixed period in return for a fee. E.g. Autolib• Licensing: giving permission to use protected intellectual property in exchange of licensing fees. E.g. media industry• Brokerage fees: intermediation services performed on behalf of two or more parties. E.g. credit cart providers, real estate agents• Advertising: fees for advertising a particular product, service or brand.Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 56
  • 57. 2 – Revenue streamEach revenue stream might have different pricing mechanismsPricing mechanismsAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 57
  • 58. How do you set a priceEduardo Larrain - Linkedin - Website 58
  • 59. Price is determined by what a buyer is willing to pay and the competition is allowing to be charged (not by markup on cost) Price is determined by strategyEduardo Larrain - Linkedin - Website 59
  • 60. 2 – Revenue streamReminderPricing strategy depending of the product life cycle• Product introduction: • Market skimming strategy setting up a very high price . E.g. Electronic goods, luxury • Or Penetration strategy: real low price even below cost to gain market share• Growth: decrease price because of volume• Maturity: decrease price because of competition• Decline: special offer because price is the main factor of valueChris Anderson, Free the future of a radical price, 2009Milton Friedman, Theres no such thing as a free lunch,1975Eduardo Larrain - Linkedin - Website 60
  • 61. How can a product be freeEduardo Larrain - Linkedin - Website 61
  • 62. 2 – Revenue streamIntroduction to FreeDefinition and scope• Free is giving without a cost… all included• Free is not to be mistaken with “free” used by advertisers when it’s not really free: • Free “buy one get one free” is just another way of saying 50 percent off when you buy two • Free gift inside • Free shipping• Basic economics: theres no such thing as a free lunch • The "free lunch“ refers to the once-common tradition of saloons in the United States providing a "free" lunch to patrons who had purchased at least one drink. All the foods on offer were high in salt (e.g. ham, cheese and salted crackers) so those who ate them ended up buying a lot of beer.• You can make money on free (revenue stream) but also free can lead to fast growth: • Before the 2000’s, Dell was known to be the first company to have reached one billion sales after been launched in less than 10 yearsChris Anderson, Free the future of a radical price, 2009Milton Friedman, Theres no such thing as a free lunch,1975Eduardo Larrain - Linkedin - Website 62
  • 63. 2 – Revenue streamIntroduction to FreeThe penny gap theory• The penny gap is the difference between cheap and free• For small payments, there is not a constant elasticity in price • Zero is one market and any other price is another market • Zero can attract lots of people because from the consumer’s perspective charging even a penny makes us think about the choiceChris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 63
  • 64. 2 – Revenue streamIntroduction to FreeThe economics of abundance (vs. scarcity)• Digital technologies have become too cheap to meter creating a economy of abundance (e.g. information)• Digital free theory: • “If it’s digital, sooner or later it’s going to be free” • “When something halves in price each year, zero is inevitable” • “Waste is good” • “Every abundance creates a new scarcity” (e.g. time)• Though, externalities for the consumer still exist: technical process when buying or when recycling, travel time,…Chris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 64
  • 65. 2 – Revenue streamIntroduction to Free4 revenue streams around: first two been very old but evolving and the last two are emergingwith InternetA. Direct Cross-Subsidies: give a free product that have high probability to make people pay for something elseB. The “three-parties” (or two-sided markets): one customer segment subsidizes another (the most common)C. Freemium: premium paid versionD. Non-monetary markets: people choose to give away with no expectation of paymentChris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 65
  • 66. 2 – Revenue streamA – Direct Cross-SubsidiesDefinition and scope• This is the oldest and most familiar model where the cost of one product is shifted into the price of another• Free attracts customer in masses. Then cross-selling or up-selling validate the business model: • Give a product (equipment) and sell a service (maintenance) or another product (supplies)• Key success factor is the increase the equipment rate with products with better profitability• It has other names: Gillette and razor blades, Equipment and Supplies, Equipment and MaintenanceChris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 66
  • 67. 2 – Revenue streamA – Direct Cross-SubsidiesHow can you sell airlines tickets far under cost?« People pay attention on ticket price not on the extra’s »Chris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 67
  • 68. 2 – Revenue streamA – Direct Cross-SubsidiesFamous examples of direct-cross subsidies Free or far under cost Where the money comes from Companies Printer Ink Printer manufacturer Coffee machine Capsules Nespresso Razor Razor blades Gillette Real estate loan, credit card, Cross-selling because customer Retail banks savings account is stuck with the same bank for 20/30 years Airline ticket Hotel room, rental car, cruise Go Voyages, airline companies and vacation package Elevator Maintenance and security Elevator companies upgrades Alarms Electronic surveillance Security companies Equipement Reagent supplies Medical biology companies Telephone Communications CarrierEduardo Larrain - Linkedin - Website 68
  • 69. 2 – Revenue streamA – Direct Cross-SubsidiesMore examples of direct-cross subsidies• Give away services, sell products (Apple Store Genius Bar Tech support) • Or Give away products, sell services (free gifts when you open a bank account)• Give away software, sell hardware (IBM and HP’s linux offerings) • Or Give away hardware, sell software (video game console model)• Give away cell phones, sell minutes of talk time (many carriers) • Or Give away talk time, sell cell phones (many of the same carriers, with free nights and weekend plans)• Give away the show, sell the drinks (strip clubs) • Or Give away the drinks, sell the show (casinos)• Free with purchase (retailer “loss leaders” e.g. gas sold in a supermarket)• Free samples (gift boxes)• Free trials (magazine subscriptions)• Free parking (malls, supermarkets)• Free condiments (restaurants)Chris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 69
  • 70. 2 – Revenue streamB – Three-parties or Two-sided marketsDefinition and scope• A third party pays participate in a market created by a free exchange between the first two parties. Thus one customer segment subsidizes another• The most common of the economies built around free is the three party system• Advertising is the most famous one where advertisers pay for media to reach consumers:Chris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 70
  • 71. 2 – Revenue streamB – Three-parties or Two-sided marketsMarkets with three-parties revenue stream• Three-parties is not limited to advertising Market First-party Third-party Second-party Consumer examples Search Internet user Advertisers Google, Yahoo! Online recruitment Job seeker Recuiters Monster, cadreemploi, keljob Free newspapers Readers Advertisers Metro, 20 Minutes Free softwares Readers Software publisher Adobe Debit card Card owners Retail Banks Ecommerce platform Sellers Buyers eBay, Amazon marketplace Outdoor advertising Municipalities Advertisers JC Decaux, Clear ChannelDenis Dauchy, 7 étapes pour un business model solide, 2010Eduardo Larrain - Linkedin - Website 71
  • 72. 2 – Revenue streamB – Three-parties or Two-sided marketsMore examples of three-parties• Give free voice calling (in the US), charge advertisers (Facebook Messenger app)• Give away content, sell access to the audience (ad-support media)• Give woman free admission, charge men (bars)• Give children free admission, charge adults (museums)• Give away listings, sell premium search (match.com)• Sell listings, give away search (craigslist housing)• Give away travel services, get a cut of rental car and hotel reservations (travelocity)• Give away house listings, sell mortgages (Zillow)• Give away content, sell information about the consumers (practice fusion)• Give away content, sell stuff (Thinkgeek)• Give away content, charge advertisers to be featured in it (product placement)• Give away resume listings, charge for power search (Linkedin)Chris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 72
  • 73. 2 – Revenue streamC – FreemiumDefinition and scope• Freemium is giving a free basic version to most of people and charging for a premium version to a few people• Freemium or contraction of Free and Premium was invented by Fred Wilson in 2006.• Freemium is different with direct-cross subsidiaries because the ratio of free to paid is high (e.g. 90%, 95%) when giving free sample has a low ratio • This ratio is enabled by Internet because the cost of serving the basic version is close to zero • Si it’s not the same thing as "premium with a free sample.“• Freemium is one of the most common Internet-based business model even though not every product or service can work as freemiumChris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 73
  • 74. 2 – Revenue streamC – FreemiumDifferent kind of limitation of the basic free version• Functionnalities • e.g. Linkedin, Flickr, Skype, Evernote, WordPress• Time • e.g. legal online streaming• Capacity • e.g. sending large files, DropBox (cloud backup system)• Storage • e.g. webmails• Others factors • e.g. • Spotify and Gmail invitations • Seat limited (first customers get free seats) • Customer type limited: free for small and young companies, universities (licence model)Eduardo Larrain - Linkedin - Website 74
  • 75. 2 – Revenue streamC – FreemiumWhy go for Freemium business model?• Marketing: • By definition, having a free product makes it really easy to get customers • Even though a free user might not convert, they can invite other free users who might (referral)• Network effects (like fax): • A network effect is what happens when a product or service becomes more valuable the more people use it • A phone isnt very useful if you cant call anyone else with it. But once everyone you know has a phone, it becomes a pretty valuable thing to have • If youre in a market that lends itself to network effects youre going to want to have a free basic product because if you dont someone else will and will use the network effects to crush you • E.g. Skype has 600 million users who make calls for free over the internet and only a small percentage of those pay to make calls to landlinesBusiness Insider, What Is The Freemium Business Model, 04/2011Eduardo Larrain - Linkedin - Website 75
  • 76. 2 – Revenue streamC – FreemiumKey success factors (if not, choose another business model)• Get lots and lots of free users: • Freemium is a numbers game: if only 1% of your users are going to pay you, then you need to have lots and lots of free users (millions, typically) to make that 1% enough money • If your product is more niche, go for premium instead of freemium • If your product is not sticky, go for advertising instead of freemium• Have a product or service whose value to users increases with time: • This is the biggest thing that most people • The value of your service needs to increase the more people use it • E.g. Spotify: where you create all your playlists and organize your music. Once youve done thatyoure much more likely to pay up. The value of Spotify to you has gone up from being just music to music, your playlists and your friends playlists, so paying starts to make sense• Keep costs low: • Freemium works because the marginal cost of each additional user is low, so you need to keep your operating costs correspondingly low• Time: • It takes a long time to be profitable because users take longer to convert as the value of the product to them increases over time, and because you keep adding (hopefully) new free users, freemium businesses take a long time to reach breakeven point • As people get older, people migrate into paying customer (premium part of freemium) because they get richerBusiness Insider, What Is The Freemium Business Model, 04/2011Eduardo Larrain - Linkedin - Website 76
  • 77. 2 – Revenue streamC – FreemiumExamples of freemium• Give away basic information, sell richer information in easier-to-use form (BoxOfficeMojo)• Give away generic management advice, sell customized management advice (McKinsey)• Give away Web content, sell printed content (everything from magazines to books)• Give away online games, charge a subscription to do more in the game (penguins)• Give away demo software, charge for the full version (most video games)• Give away computer-to-computer calls, sell computer-to-phone calls (Skype)• Give away free photo-sharing services, charge for additional storage space (Flickr)• Give away basic software, sell more features (QuickTime)• Give away ad-supported service, sell the ability to remove the ads (Ning)• Give away "snippets" sell books (Google Books)• Give away virtual tourism, sell virtual land (Second Life)Chris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 77
  • 78. 2 – Revenue streamD – Nonmonetary marketsDefinition and scope• People give away content with no expectation of Payment • Gift economy is based on the principle that the action of individuals have a global impact • People give for different reasons: to gain reputation e.g. blog writers, altruism e.g. Wikipedia or unintentionally/passively (web content helps Google) • Labor exchange: paying something with labor even without knowing it • E.g. free content in exchange of Captcha solving (used by spammer in exchange of free porn but also used by Google Street view to decipher street numbers, names and trafic signs) • E.g. voting on Digg, Yahoo Answers or using Google 411 (phone directory in exchange of speech sound) • Piracy: when piracy is so powerful that content producer have accepted that, form them, doing the activity is not a moneymaking business • E.g. online musicChris Anderson, Free the future of a radical price, 2009Eduardo Larrain - Linkedin - Website 78
  • 79. • Google is getting the public to identify house numbers and signs from Street View photos as part of its reCAPTCHA anti-spam technology and feeding the data into its online mapping serviceEduardo Larrain - Linkedin - Website 79
  • 80. reCAPTCHA is a free CAPTCHA service that helps to digitize books,newspapers and old time radio showsAnswers to reCAPTCHA challenges are used to digitize textual documents Comparison of the accuracy of standard OCR versusExample of a CAPTCHA reCAPTCHA transcriptionsOCR: Optical Character Recognition programsEduardo Larrain - Linkedin - Website 80
  • 81. Features with poor usability can be an opportunity for revenuesCAPTCHA can also be used for advertising and generate revenuesAdyoulikeEduardo Larrain - Linkedin - Website 81
  • 82. • How’s the music industry going?Eduardo Larrain - Linkedin - Website 82
  • 83. 2 – Revenue streamLooking at the music industryGlobal recorded music sales are decreasing since end of the 90’s due to digital piracyExhibit – Global Recorded Music Sales (bn USD, trade value)IFPI, press report, 2012Synchronization rights: revenues from music acquired for movies, advertisements and music videosEduardo Larrain - Linkedin - Website
  • 84. 2 – Revenue streamLooking at the music industryMusic downloads still accounts for 80 per cent of digital music revenues but the market ismaturing• Piracy has made difficult of charging a price for listening songs or albums• Though consumers still find value in downloads from iTunes Music Store, VirginMega, FnacMusic and others because of the sacrifices of the free music downloaded illegally (quality, security, complexity, accessibility…)• Even if downloads of music from iTunes Store and others still account for 80 per cent of digital music revenues, this market is maturing and spending is flattening in all key territoriesEduardo Larrain - Linkedin - Website 84
  • 85. 2 – Revenue streamLooking at the music industryStreaming and downloads make the digital proposition value• Consumers are finding great value in: • Having access to millions of songs (sellouts are impossible) • Creating and sharing playlists • Listening to music in on all devices everywhere (accessibility = cloud storage, remember Philipp comment on the “head” part of the long tail) • Listening to music even offline • Sharing his songs and getting recommendation on social networks• Fremium streaming music services such as Spotify will be the key growth drivers over the next years as usage and spending grow rapidly: • Spotify Open: free but limited in number of songs and number of hours • Spotify Unlimited: a monthly fee limited on a laptop • Spotify Premium: a monthly fee for listening to music in on all devices and even offline • All Spotify offers enable users to share easily on social networks such as Facebook:Eduardo Larrain - Linkedin - Website 85
  • 86. 2 – Revenue streamLooking at the music industryMusic streaming business model is already the largest market in Sweden, a country with arobust culture of Internet piracy• Music revenues are increasing the Swedish music industry market due to digital sales• Streaming is even cannibalizing downloads in Sweden• Music licensing for online videos is a growing market as more and more people watch videos that are accompanied by musicIFPI Svenska Gruppen, press report, 07/2012Eduardo Larrain - Linkedin - Website 86
  • 87. 2 – Revenue streamLooking at the music industryDigital recorded music is expected to overtake physical sales in 2015PwC, Global Entertainment & Media Outlook, 2012Eduardo Larrain - Linkedin - Website 87
  • 88. 2 – Revenue streamLooking at the music industryWhat about content production and consumption?The amount of content being produced and consumed in music is believe to be growing• 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote/Sony db > Shazam db)• Growth of the Gracenote database obviously includes a lot of older music that has only recently been indexed and that is been rediscovered – E.g. Oscar Wilde - Los Vidrios Quebrados (1967)• The trend still looks like the amount of music available to consumers is steadily growing• At the other side, overall sale of music (including albums, singles, digital tracks,…) exceeded 1.5 billion transactions in 2010 (up from 845 million transactions in 2000)Floor 64, The Sky Is Rising, 01/2012Eduardo Larrain - Linkedin - Website 88
  • 89. 2 – Revenue streamLooking at the music industryWhat about musicians revenues?• Psy with its Gangnam Style song, viewed more than 1 billion times, would never had been a success outside South Korea without Youtube – It generated 8 M USD from advertising (50/50 split)• Ticket prices and merchandise have become major sources of income for many popular rock stars like Lady Gaga, Madonna, Bruce Springsteen and for bands like U2• It’s not easy to duplicate the experience of a live show, so concerts have become a source of revenue for musicians and aren’t negatively affected by the availability of free downloadable music - in fact, free music can encourage fans to attend live performances• There’s actual scarcity for live music• Other trends: – Algorithms may be replacing humans in some parts of discovering new talent (or at least discovering talent more cost-effectively) – Gracenote, Shazam,… are datamining music metadata in order to serve better music recommendations to consumers or to predict which artists will be popular with target demographic groupsFloor 64, The Sky Is Rising, 01/2012Eduardo Larrain - Linkedin - Website 89
  • 90. 2 – Revenue streamWhat has the Entertainment industry learned from the Music industry?Other Entertainment industries continued to grow in the past years when the Music industry,newspapers and consumer magazine publishing took a hitPwC, Global Entertainment & Media Outlook 2012-2016, 2012Eduardo Larrain - Linkedin - Website 90
  • 91. 2 – Revenue streamWhat has the Entertainment industry learned from the Music industry?Some Entertainment industries have found new business models successful with the Digitalera, others no… well not yet… thus a business model challenge• For consumers, today is an age of absolute abundance in entertainment due to the digital era and piracy• New business models based on Digital sales are emerging in each Entertainement industry to take over decreasing physical salesIFPI, press report, 2012Eduardo Larrain - Linkedin - Website 91
  • 92. 2 – Revenue streamWhat has the Entertainment industry learned from the Music industry?Though not all new business models can be based on Advertising since advertising is ahuge but finite market and volatile (reliant on the economic situation )PwC, Global Entertainment & Media Outlook 2012-2016, 2012Eduardo Larrain - Linkedin - Website 92
  • 93. • Has the internet decimated the entertainment industry, or are we living in a new gold age for both content creators and consumers? • Entertainment spending per households as a function of income is increasing from 4.9% in 2000 to 5.6% in 2008 (US) • The amount of content being produced in music, movies, books and video games is believe to be growing: • 1/4 M new books were available in 2002, 3 M in 2010 • 1.700 new movies p.a. in 1995, 7.000 in 2009 • 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote db) • The Entertainment industry is growing though the value chain is being totally redesignedFloor 64, The Sky Is Rising, 01/2012Eduardo Larrain - Linkedin - Website 93
  • 94. • How’s the video game industry going?Eduardo Larrain - Linkedin - Website
  • 95. 2 – Revenue streamLooking at the video game industryVideo games sales have grown with the digital revolution and cross the barrier of gender andage limitations• Globally, the amount that consumers spend on video games - for hardware, software and accessories - has grown from about $20 billion in 2000 to approximately $70 billion in 2011• The demographics of video game players has expanded greatly beyond the traditional core of boys and young men: – 53% of game players are male and 47% female – Average gamer player age is 30 – The amount of time kids are spending on video games has grown from 26 minutes per day in 1999 to 1 hour and 13 minutes in 2009 due to mobile device that has allow kids to squeeze more playing time into their busy days (Kaiser Family Foundation survey)• Worldwide, the population of gamers has exploded from 250 million in 2008 to 1.5 billion in 2011Floor 64, The Sky Is Rising, 01/2012Eduardo Larrain - Linkedin - Website 95
  • 96. 2 – Revenue streamLooking at the video game industryPurchases of digital content are growing the video games industry• The traditional console business model, based on the installed based per the attach rate (number of games per owner), led to an elitist approach to game design since price of each game was high (40-60 USD) and hardcore gamers wanted a return for their investment• New video games digital segments have emerged: – Downloads: Steam is to games as iTunes is to music – Massively Multiplayer Online (MMO) e.g. World Of Warcraft – Online / Casual – Mobile – Social• Digital sales (and rental delivery) now generate 40% of the industryESA, Essential Facts about the computer and the video game industry, 2012Eduardo Larrain - Linkedin - Website 96
  • 97. 2 – Revenue streamLooking at the video game industryLooking at the video game download business model• Piracy of video games has fewer benefits than music 2011 top-selling games at retail ranked by unit sales (VGChartz) and movie piracy: Piracy is an issue for single-player mode though the primary reason people buy games retail is for the multiplayer modes: – Most pirated games do not allow for multiplayer as the game often has to connect to an official server where its legitimacy can easily be verified by some sort of authentication service• Steam is to games as iTunes is to music: – Steam is a digital distribution, digital rights management, multiplayer and communications platform – Steam has an estimated 70% share of the digital distribution market for video games (competitor: EA’s Origin) – One PC game out of three is downloaded (average price not much lower than retail: -7%) – Steam is developed by Valve Corporation best known for a number of popular entertainment franchises such as Counter-Strike, Half-Life, Left 4 DeadEduardo Larrain - Linkedin - Website 97
  • 98. 2 – Revenue streamLooking at the video game industryLooking at MMO business models• Massively Multiplayer Online game are video games in which a large number of players engage simultaneously in a persistent world• Value of an MMO is in the size of the community per life time (retention)• The hardcore game MMO revenue stream was invented by World of Warcraft: – Average customer lifetime of 18 months – Client box or download (50 USD) – Subscription fees (15 USD/m) – Virtual goods – Average full cost to complete WoW for a gamer is 300 USD• Few MMO have been able to replicate WoW model so they switch to F2P to lower entry barrier and get a sizable community e.g. Habbo Hotel, Kart Rider, Warhammer, Everquest,… – Average customer lifetime of 6 months – Free trial or free game – Subscription optional – Virtual goods for actions items (competition) and personalisation (expression) • Theory of engagement: « the longer a user plays the more chances there are he buys virtual items » – Items payable through micro-payments mainly inside the game (60%) and on an external web siteLuc Bourcier, Game in progress new business models for the videogame industry, 04/2012Eduardo Larrain - Linkedin - Website 98
  • 99. 2 – Revenue streamLooking at the video game industryLooking at the online casual business model• Online casual games are games played online to “kill time, make a pause, relieves from stress”:• Free-to-Play (F2P) is the main business model (also for social games and some mobile games)• F2P is a freemium business model that can be based on: – Try-and-buy: limited access (time, levels,…), though games must be really addictive – Advertising with ads display on hosting sites or inside the game – Virtual goodsLuc Bourcier, Game in progress new business models for the videogame industry, 04/2012Eduardo Larrain - Linkedin - Website 99
  • 100. 2 – Revenue streamLooking at the video game industryLooking at the mobile video game business model• Ten of thousands of mobile games for smartphones and tablets can be download on platforms such as the Appel App Store, Android MarketPlaces (Google Play), Amazon, Facebook Mobile and Playstation Suite• Distribution is bypassing carriers: 30/70 meaning the game app developer get 70% of sales revenue (vs. 45/55 in cell phone business) – An opportunity for mobile banking?• Mobile video game revenue stream is based on: – Average customer lifetime of 2 months – Selling the app (e.g. at 0.99 cent or F2P model) – Selling virtual goods – A little of advertising (average of 15%): • Offer walls • SponsoringLuc Bourcier, Game in progress new business models for the videogame industry, 04/2012Eduardo Larrain - Linkedin - Website 100
  • 101. 2 – Revenue streamLooking at the video game industryLooking at social games• Social games are those games played primarily on social networking sites or games that can be played with a person’s real world social graph – E.g. CityVille, FarmVille (Zynga), EA (Sims)• Social video game revenue stream is based on: – F2P model with a logic of a massive audience – Virtual goods (50%) – Advertising (25%) – Lead-generation offers (25%): virtual currency incentives by marketers to social gamers in exchange of signing up for subscriptions, participating in surveys, or buying goods and services – Since virality is a key to success, notifications, invitations, sharing, gifting and other social network tools are used extensively to get new customers – Social games must work with a low retention rate (first day retention rate of 30% is a “huge success”)Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012Eduardo Larrain - Linkedin - Website 101
  • 102. 2 – Revenue streamLooking at the video game industryLooking at the e-sports business model• Twitch launched 18 months ago borne out of Justin.tv, the largest online community to live streaming service to enable streaming video service embedded into popular games• Twitch provide instant broadcasting of user gameplay: 23 million unique viewers per month, viewers watched 6 billion minutes viewed in December 2012, average session time of 1.5 hours• Twitch is getting embedded in games such as Call Of Duty: Black Ops 2• Twitch business model is based on sharing advertising revenue with broadcaster and in growing the e- sports market e.g. Twitch has announced a new scholarship of $50,000 to five student gamersEduardo Larrain - Linkedin - Website 102
  • 103. 2 – Revenue streamLooking at the video game industryWhat’s next for the game industry?• “Gamification” trend meaning that video games are no longer restricted to leisure: – Every part of our lives will eventually be turned into a game – Potentially encourage people to change their behavior to: • Benefit the environment • Perform their jobs better • Lose weight • Buy products • Perform almost any task imaginable• Games are even encroaching into vocational educationEduardo Larrain - Linkedin - Website 103
  • 104. 2 – Revenue streamShort focus at online video servicesPurely online video services are not yet collecting revenues at the same scale as thetraditional TV and films industries, but the size of this audience is unquestionnably large• Two business models: – Based on subscriptions such as Vimeo • 150.000 paying subscribers in 2010 – Based on advertising such as Youtube • 400 M USD of adversitiving revenues in 2010• Online videos are also a substantial traffic driver to social networking (e.g. Facebook)Eduardo Larrain - Linkedin - Website 104
  • 105. • How’s the book publishing industry going?Eduardo Larrain - Linkedin - Website
  • 106. 2 – Revenue streamLooking at the book publishing industrySales of e-books expected to compensate the decline of the physical books• Consumer and educational book publishing will increase by 0.6 percent compounded annually to 116 bn USD in 2016 from 112 bn in 2011 – E-books grow their share of global spending from 5% in 2011 up to 18% in 2016 – Print/audio consumer and educational books will continue to decline throughout the forecast period notably paperback books (“livres de poche” in French)• Publishers will need to provide eBooks in addition to paperbacks and the entire value process will be changing, from aggregation right to distribution• Piracy less likely to impact digital sales like in the music industry: demographic groups that are most often associated with digital piracy (generally men between 20 and 39 years old) and not the same than those associated with high-volume reading of mass market books (in general women age 40 and older)• New intermediaries are emerging to handle eBooks: – eBook platform (e.g. mass aggregators such as Amazon, Apple, and Google) – Handling of payments – Support for digital conversion – Establishment of a digital content systemPwC, Turning the Page - The Future of eBooks, 2010Eduardo Larrain - Linkedin - Website 106
  • 107. 2 – Revenue streamLooking at the book publishing industryNew revenues streams are emerging and changing current business models• Apps and special eBook editions enriched with music and video – Notably for educational and juveniles segment e.g. Byook start-up http://youtu.be/O_pBNPe3s-M• Sales of individual chapters and sections from books• Offer additional content such as a blog/forum dedicated to a chapter or sentence, immediate definition of a word, links to other content (news/other authors),…• Easier to sell updates• Books on demand• Easier to sell porn and erotic fiction• Establish basic contracts with university libraries to offer free eBooks for students or offer special editions exclusively to students for a discounted price• Providing online reviews (non-monetary action is posting a review at Amazon website)PwC, Turning the Page - The Future of eBooks, 2010Eduardo Larrain - Linkedin - Website 107
  • 108. 2 – Revenue streamLooking at the book publishing industryNon-traditional book publishing on the internet is 8X the output of traditional bookpublishing• In 2010, 4 million new titles were published with 92% of those being “non-traditional” i.e. self-publishing and books representing the reuse of content, most of it not covered by copyright• Non-traditional books are largely on demand titles produced by reprint houses specializing in public domain works and by presses catering to self-publishers and micro-niche publications• Non-traditional titles are marketed primarily on the WebBowker, ISBN Output 2002-2011, 2012Non-traditional numbers are undersestimated since books with no International Standard Book Numbers (ISBN) are not includedEduardo Larrain - Linkedin - Website 108
  • 109. 2 – Revenue streamWhat’s the business model of self-publishing?The traditional business model of book publishingAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 109
  • 110. 2 – Revenue streamWhat’s the business model of self-publishing?A new business model by lulu.comAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 110
  • 111. 2 – Revenue streamLooking at the book publishing industryThe best opportunity for the book publishing market is volume enabled by lowering costs ofdigital distribution• World population continues to grow• Literacy rates are increasing• Developing nations are taking advantage of the lower infrastructural costs of ebooks• Number of books per inhabitant is low in developing countries because books are much more expensive than in France and hardcover book piracy is highEduardo Larrain - Linkedin - Website 111
  • 112. 2 – Revenue streamShort look at the film industryFilm industry is growing but new digital-based business models are yet to be found• Filmed Entertainment has grown worldwide from 26 bn USD to 37 and is expected to reach 46 in 2015 (PwC)• Film piracy includes Internet piracy and Hard-good piracy – Though piracy apologists have long argued that online piracy was good for business (similar to freemium theory)• New business model are aimed at decreasing demand for illegal pirated downloads: – Worldwide releases – Day-and-date digital releases (releasing in theaters and VOD the same day) – Ultra release (releasing on VOD before a theatrical release) can also create a buzz and increase the number of people going to theaters• Current digital business models includes: – VOD (Video-On-Demand) – Over-the-top online movie providers such as Hulu and Google TV – Steaming such as Amazon and NetflixEduardo Larrain - Linkedin - Website 112
  • 113. Question raised at the end of class#2Is my start-up a good idea and what do you think of the business model?Entrepreneurship tips1. No one can tell you if your Internet-based company will be a success or not (remember Twitter)2. Go out and meet other entrepreneurs at conferences, start-up dating, La Cantine,… • Top Upcoming Paris Startup Events (Paris StartupDigest newsletter) • February 18 - [cours] Faire parler de sa boîte dans les médias (45€) • February 18 - Master Classe Entrepreneur avec Gilles Babinet (39€) • February 19 - Limportance de linnovation technologique dans lentrepreneuriat (gratuit) • February 20 - Cup of Ideas Voice - Session CFO (15€) • February 20 - Conférence Innover Entreprendre (gratuit) • February 26 - Atelier StartUP #11 : Les clés dun bon prévisionnel financier (49€) • February 26 - ApéroFounder : Trouver un co-fondateur (gratuit) • February 26 - Startup Calling (gratuit) • February 28 - Formation Business Angels – « De la Lettre d’Intention au Closing » (50€) • February 28 - Pitch My Game (gratuit) • …3. Learn to pitch your business model and do a great presentation • Like design, presentation performance does matterEduardo Larrain - Linkedin - Website 113
  • 114. Question raised at class#2Is my start-up a good idea and what do you think of the business model?Entrepreneurship tips4. Find a team since it is the most valuable assets of a start-up • Choose people to complement your skills • An idea has no value so you can talk to people about your projects (though don’t tell industrial secrets i.e. how you can do it)5. You can start a Internet company without money notably in France: • Though money save time • Though money “is the nerf de la guerre” • The earlier you ask for money, the more diluted you will be • Your company has no value until it has users, revenues, profits or a product / technologyEduardo Larrain - Linkedin - Website 114
  • 115. 3a – Customer segmentsDefinition and scope• Customer segments are the different groups of people or organizations an enterprise aims to reach and serve• In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors or other attributes.• An organization must take a conscious decision about which segments to serve and which to ignore (like facebook)Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 115
  • 116. 3a – Customer segmentsDifferent types of Customer Segments• Mass market: e.g. consumer electronic sector• Niche market: such business models are often found in supplier-buyer relationships, e.g. car part manufacturers (e.g. Faurecia in France)• Segmented: a company serve several different industries with the same needs or segment customers to provide a different proposition value: • e.g. in the banking industry individuals customers can be segmented in wealth Management (>1M€ financial assets), High Net Worth (>0,1M€) and large public• Diversified: a company serve unrelated customers segments with different needs e.g. Amazon sell “cloud computing” services • In fact, there are usually always two type of customers with different needs: B2B and B2C• Multi-sided markets: e.g. a credit card company need a large base of credit card holders and a large base of merchants who accept those credit cardsAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 116
  • 117. 3a – Customer segmentsNoncustomers differ in their relative distance from your market but they alloffer big blue ocean opportunitiesThe Three Tiers of Noncustomers• First-tier: buyers who minimally purchase an industry’s offering out of necessity and they are waiting to jump ship and leave the industry• Second-tier: people who refuse to buy your industry’s offerings• Third-tier: people who have never thought of your market’s offerings as an optionW. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 117
  • 118. 3a – Customer segmentsHow to attract each tiers of noncustomers• First-tier: Pret targeted UK workers who used not to go to a restaurant for healthy and time-consuming reasons with fast-food and fresh meal• Second-tier: JC Decaux targeted refusing municipalities and corporations by putting advertising in the street furniture instead on city outskirts• Third-tier: defense department has usually sold military technology to the private sector• Companies should go for the biggest catchment at the time although there could be overlapping commonalities across all three tiers of noncustomersW. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 118
  • 119. 3b – ChannelsDefinition and scope• Channels are the way how a company communicates with and reaches its customer segments to deliver a value Proposition• Communication, distribution and sales Channels comprise a company’s interface with customersAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 119
  • 120. 3b – ChannelsType of channels• Distribution channels can be owned (sales force, web sales, own stores) or done with partners (partners stores and wholesaler)• Partners channels lead to lower margins but they allow an organization to expand its reach and benefit from partner strengths McDonald’s 2008 Restaurants Income Income growth bn USD Owned 6,502 16.5 0% Franchise 25,465 6.9 13%Eduardo Larrain - Linkedin - Website 120
  • 121. 3c – Customer RelationshipDefinition and scope• Customer Relationships are the type of relationships a company establishes with specific customers segments• A company should clarify the type of relationship it wants to establish with each customer segment (customer acquisition, customer retention, boosting sales/upselling)W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 121
  • 122. 3c – Customer RelationshipCategories of Customer Relationships• Personal assistance: relationship based on human interaction. E.g. point of sales (pos), call-centers.• Dedicated personal assistance: dedicating a customer representative specifically to an individual client. It represents the deepest and most intimate type of relationship and normally develops over a long-period of time. E.g. key account managers, HWN individuals consultant• Self-service: no direct relationship with customers• Automated services: more sophisticated form of customer self-service with automated process. E.g. offering a book or movie recommendations• Communities: deploy user communities to become more involved with customers/prospects and facilitate connections between community members• Co-creation: go beyond the traditional customer-vendor relationship and co-create value with customers. E.g. Youtube, Amazon invites customers to write reviews and thus create value for other book loversAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 122
  • 123. 3c – Customer RelationshipGreat blocks to utility can be identify looking at the buyer experience in orderto be removed and unlock exceptional utilityThe buyer experience cycle• A each stage of the buyer experience, managers can ask a set of questions to gauge the quality of buyers’ experience and thus unlock utility for buyers• The following questions can help you identify the most compelling hot spots to unlock exceptional utility:W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005Eduardo Larrain - Linkedin - Website 123
  • 124. 4a – Key ressourcesDefinition and scope• Key resources are the most important assets required to make a business model work• Key resources can be: • Human • Physical assets: manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems and distribution networks • Financial resources / guarantees: cash, lines of credit, or a stock option pool for hiring key employees. • E.g. distributors (B2C) have usually a low or negative working capital as for producers (B2B), they usually have positive working capital • Intellectual: brands, proprietary knowledge, patents and copyrights, partnerships and customer databasesAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 124
  • 125. 4b – Key activitiesDefinition and scope• Key activities are the most important things a company must do to make its business model work• There is several types of key activities: • Production: designing, making and delivering a product. E.g. Manufacturing • Problem solving: coming up with new solutions to individual customer problems. E.g. hospitals, consltancies and services organizations • Platform/Network: networks, platforms, software and brands. E.g. eBay, VisaAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 125
  • 126. 4c – Key partnershipsDefinition and scope• Key partnerships are the network of suppliers and partners that make the business model work• There is four types of partnerships: • Buyer-supplier relationships to assure reliable supplies • Strategic alliances between non-competitors • Coopetition: strategic partnerships between competitors • Joint ventures to develop new businessesAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 126
  • 127. 4c – Key partnershipsMotivations for creating partnerships• Optimization and economy of scale: optimize the allocation of resources and activities since it would be illogical for a company to own all resources or perform every activities by itself • E.g. 100,000 people will have contributed to build your iphone 5.0, limitation for 3D printers• Reduction of risk and uncertainty: it is not unusual for competitors to form a strategic alliance in one area while competing in another. E.g. Blu-ray• Acquisition of particular resources and activities: such partnerships can be motivated to acquire knowledge, licenses or access to customersAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 127
  • 128. 4c – Key partnershipsTracking partnerships with the code bar and code packerExhibit - Code bar Exhibit - Code packerExhibit – Tracking a partnership for a bean can with Open Food FactsOpenFoodFactsEduardo Larrain - Linkedin - Website 128
  • 129. 5 – Cost structureDefinition and scope• Cost structure is all costs incurred to operate a business model• Naturally enough, costs should be minimized in every business model but we have already see that some business models are more cost-driven than others (design to cost, pyramid base): • Cost-driven: focus on minimizing costs wherever possible maintaining the leanest possible cost structure • Value driven: focus on value creation rather than the cost implicationsAlexander Osterwalder and Yves Pigneur, Business Model Generation, 2010Eduardo Larrain - Linkedin - Website 129
  • 130. Who are the Internet heavyweightsEduardo Larrain - Linkedin - Website 130
  • 131. Looking at Internet heavyweights…10 biggest Internet IPOs of the last 10 YearsTop 10 Internet IPOs Internet companies IPO Area Stock price since IPO year IPO-February 2013 Facebook 2012 Social media -30% Google 2004 Search and advertising +620% Alibaba 2007 B2B ecommerce Since then delisted from Hong Kong Stock Exchange Yandex 2011 Russian search engine -70% Shanda Games 2009 Online games -70% Zynga 2012 Social games -60% Giant 2007 Online games -70% Renren 2011 Chinese social media -80% Groupon 2011 Discounted gift certificates -80% Linkedin 2011 Professional social media +70%Eduardo Larrain - Linkedin - Website 131
  • 132. • What is Facebook business model?Eduardo Larrain - Linkedin - Website
  • 133. What is Facebook’s business model?Facebook value propositionFacebook value proposition • Facebook helps Internet users stay connected with their friends, families, and colleagues • Facebook provides a number of products, free of charge, to its users: • Timeline, News Feed, Photos and Videos, Messages (Email, Chat, Text Messaging), Groups, Lists, Events, Places, Subscribe, Ticker, Notifications, and Facebook Pages • Facebook have a “long tail” of customers (not dependent upon any single customer for their revenues)Business Model Innovation Matters, Understanding Business Models, 2012Eduardo Larrain - Linkedin - Website 133
  • 134. What is Facebook’s business model?Its revenue stream is mainly advertising-basedFacebook key operational figures • Fourth Quarter 2012 Operational Highlights: • Monthly active users (MAUs) were 1.06 billion as of December 31, 2012, an increase of 25% year-over-year • Daily active users (DAUs) were 618 million on average for December 2012, an increase of 28% year-over-year • Mobile MAUs were 680 million as of December 31, 2012, an increase of 57% year-over-year • Mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012 • Recent Business Highlights • Mobile revenue represented approximately 23% of advertising revenue for the fourth quarter of 2012, up from approximately 14% of advertising revenue in the third quarter of 2012 • Facebook launched Graph Search Beta, a structured search tool that enables users for the first time to find people, places, photos and other content that has been shared on Facebook • Launched Facebook for Android 2.0, completely rebuilt to deliver improved stability and faster performance and opened Facebook Messenger to anyone with a telephone numberFacebook, Facebook Reports Fourth Quarter and Full Year 2012 Results, 30/1/2013Eduardo Larrain - Linkedin - Website 134
  • 135. What is Facebook’s business model?Its revenue stream is mainly advertising-basedFacebook key financial figures Exhibit – Key figures 2011 • 5.1 bn in 2012 (up from 3.7 bn USD in 2011) • 83% of revenues coming from advertising • Profit down to 0,05 bn in 2012 (down from 1 bn USD in 2011) mainly due to shares given to the top managementFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 135
  • 136. What is Facebook’s business model?Facebook replicated Google’s formula... with relatively less successFacebook advertising modelFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 136
  • 137. What is Facebook’s business model?Facebook’s main asset is the connections and interactions between usersFacebook’s Social Graph • 100 billion friendships, 250 million photos uploaded every day and 2.7 billion Likes and Comments per day • « User engagement » is key for Facebook successFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 137
  • 138. What is Facebook’s business model?Looking at the CanvasFacebook business model using the CanvasBusiness Model Innovation Matters, Understanding Business Models, 2012Eduardo Larrain - Linkedin - Website 138
  • 139. What is Facebook’s business model?Facebook vs. MySpaceAutomated news feed launched in 2006 gave the illusion of a continuous user andpersonalized activity that MySpace didn’t haveFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 139
  • 140. What is Facebook’s business model?Similar to Google’s Page Rank, Facebook’s created its Edge Rank based onan algorithmFacebook’s Edge RankFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 140
  • 141. What is Facebook’s business model?Its new Open Graph is expected to leverage its current business model (keypartners)Facebook’s new OpenGraphFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 141
  • 142. What is Facebook’s business model?Facebook is a social media (not only network) based on advertisingFacebook’s like button developed the social graph even furtherFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 142
  • 143. What is Facebook’s business model?Facebook could be squeezed out in the next years by new competing appsOn Mobile Facebook lost the central position n the ecosystem which made its success on thewebFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 143
  • 144. What is Facebook’s business model?If successful, Facebook can become the apps merchandising expertIn May 2012, Facebook launched its mobile weapon: the Facebook App CenterFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 144
  • 145. What is Facebook’s business model?Facebook’s stock quote highly volatile since the company is still growing fast and it is in theadvertising businessEduardo Larrain - Linkedin - Website 145
  • 146. • What is Google business model?Eduardo Larrain - Linkedin - Website 146
  • 147. What is Google’s business model?Google value propositionGoogle value propositionOrganize the world’s information and make it universally accessible and useful…… for better quality leadsEduardo Larrain - Linkedin - Website 147
  • 148. What is Google’s business model?Google has changed the ad industry by giving products away to end users for free(in return for advertising), as well as reducing the advertising costs for brandGoogle revolution on advertising• Google opened up the market to SMEs and extended the reach of larger corporations• A great search algorithm is important though real advantage comes from the massive investments in Google platform which means tiny marginal costs, so Google give Free products to end usersIllustration – Advertising market by company sizeEduardo Larrain - Linkedin - Website 148
  • 149. What is Google’s business model?Google revenue stream comes from Google AdWords and Google AdSenseGoogle revenue streamTraffic acquisition costs (TAC) comprises of money paid to the Google Network websites under the Adsense program and to the distribution partners who distribute GoogleToolbar and other products or drive traffic to the Google websites.Eduardo Larrain - Linkedin - Website 149
  • 150. What is Google’s business model?Two-thirds of Google revenues come from AdWords and remaining from AdSenseGoogle quarterly revenuesGoogle, Q3 2012Quarterly EarningsSummary, 2012Eduardo Larrain - Linkedin - Website 150
  • 151. What is Google’s business model?Newspaper ad revenue after GoogleEduardo Larrain - Linkedin - Website 151
  • 152. What is Google’s business model?Google give products away in return for advertising (two-sided market) andGoogle reduce the advertising costs for brandGoogle business model using the CanvasBusiness Model Innovation Matters, Understanding Business Models, 2012Eduardo Larrain - Linkedin - Website 152
  • 153. What is Google’s business model?Google is trying to remain central in the Mobile experienceGoogle strategy on mobile• Mobile advertising is still in relative infancy, though the mobile device is quickly becoming the world’s newest gateway to information • Google dominate the mobile ad market which is mainly based on search• Google is trying to remain central in the Mobile experience controlling the hardware, as well as the software: • On the software side, • Android was created to be a free, fully open source mobile software platform that any developer could use to create applications for mobile devices and any handset manufacturer can install on a device • Android include the Google Mobile App • On the hardware, Google acquired Motorola Mobility in 2012 (12,5 bn USD) in order to acquire Motorola’s patent portfolio and remain central in the mobile experience like Apple has demonstrated with its popular iPhoneEduardo Larrain - Linkedin - Website 153
  • 154. What is Google’s business model?Google’s stock quote highly volatile since it is in the advertising businessEduardo Larrain - Linkedin - Website 154
  • 155. • What is Zynga business model?Eduardo Larrain - Linkedin - Website 155
  • 156. What is Zynga’s business model?Zynga business model key elementsFabernovel, Facebook, The Perfect Startup, 05/2012Eduardo Larrain - Linkedin - Website 156
  • 157. What is Zynga’s business model?Zynga business model key elements• Value proposition: free-to-play social gaming• Revenue stream: freemium model • F2P for hundred of millions of players • Limited by “Energy”: after a mission, players have to wait for energy to be replenish (can take several hours) • Sell virtual goods like “Energy” (95% of revenues, remaining is advertising) • Players can also take surveys, buy services from Zyngas partners, watch advertising videos in order to obtain game credits• Key partner: Facebook contributed to 94% of Zynga revenue though Zynga contributed “only” to 15% of Facebook’s Revenue• Customer acquisition is key: • Zyngas customer acquisition was largely built on Facebook initially and most of its new users came in through incentivized viral loops • But Facebook prevented applications in 2010 from sending messages to news feeds of friends because of spam concerns: • Many of Zyngas games involve players posting messages to non-players, often for in-game benefits. • Many non-players have notably complained about such communications created by those games that appear to them as "spammy"• Key activities: even if Zynga has plenty of games, revenues come mainly from three games: Farmville, CityVille and MafiaWarsEduardo Larrain - Linkedin - Website 157
  • 158. What is Zynga’s business model?Zynga relies on "hit" games and so its business will always have an elementof cyclicalityZynga users growthEduardo Larrain - Linkedin - Website 158
  • 159. What is Zynga’s business model?Zynga business model using the CanvasCitrix Startup Accelerator, Zynga Business Model Canvas, 06/2011Eduardo Larrain - Linkedin - Website 159
  • 160. • Facebook and Zynga revised their partnership: • Facebook can make its own games, if it chooses • Facebook will no longer be the exclusive social platform for Zynga, allowing it to launch games first on mobile or its own Zynga.com platformEduardo Larrain - Linkedin - Website 160
  • 161. What is Zynga’s business model?Growth will have to come from other platforms, particularly Google+ andmobile gamesZynga stock quote dropping since the IPO because of stable “bookings” and partnershiprevision with main partner, FacebookEduardo Larrain - Linkedin - Website 161
  • 162. • What is Linkedin business model?Eduardo Larrain - Linkedin - Website 162
  • 163. What is Linkedin’s business model?Linkedin business model key elements• Value proposition: help professionals stay connected with each other by creating and managing a professional identity and building a professional network • Helps getting new businesses, helps changing jobs, helps networking• Revenue stream: freemium model • Free for its network members: Profile and Profile Stats; LinkedIn Connections, Invitations, and Introductions; knowledge and insights using tools such as LinkedIn Groups, Network Updates, News, Answers etc. • Premium offering (50% of revenues): LinkedIn InMails and Profile Stats Pro • 1,5% of user are premium (90,000) • Hiring Solutions and advertising (50% of revenues): recruiters post and manage job opportunities • Competitors: Monster, Cadreemploi,…Eduardo Larrain - Linkedin - Website 163
  • 164. What is Linkedin’s business model?Linkedin business model using the CanvasBusiness Model Innovation Matters, Understanding Business Models, 2012Eduardo Larrain - Linkedin - Website 164
  • 165. • Linkedin acquired Slideshare in 2012 to add presentations to your Linkedin profile (individuals and company) to differentiate from other Hiring solutions showing just a resume with cold data (education, experience and skills) leading to: • A better recruitment search • Higher switching costs for membersEduardo Larrain - Linkedin - Website 165
  • 166. What is Linkedin’s business model?Recruiting presents the best growth catalyst for LinkedinLinkedin stock quote went up since IPOEduardo Larrain - Linkedin - Website 166
  • 167. • What is Groupon business model?Eduardo Larrain - Linkedin - Website 167
  • 168. What is Groupon’s business model?Groupon business model key elements• Value proposition: • Deep discount deals for customers who discover new services and merchandise • Guaranteed revenues and large number of customers for merchants and incremental revenues (Gap Groupon value of 50 USD likely to convert into 75-100 USD spending in the store) • Best suited businesses: those with high fixed costs, high customer acquisition costs and repeat purchases• Revenue stream: • Groupon share of 50% on deals • Negative working capital since payments spread out in 3 installments over lifecycle of a deal• Customer relationships: • Horrible publicity surrounding Groupon • Lack of quality control• Cost structure: • High cost of customer and merchant acquisition (sales people on the ground) • Lack of network effect: each city has to be won separately • Low switching costs for merchants and customers • Competitors: Living Social (Amazon) and DealMap/Dailydeal (Google) • Past competitors: Yelp and FacebookEduardo Larrain - Linkedin - Website 168
  • 169. What is Groupon’s business model?Groupon business model using the CanvasSami Dob, Is Groupon Business Model profitable for Merchants? for Consumers? 2011Eduardo Larrain - Linkedin - Website 169
  • 170. What is Groupon’s business model?Groupon stock quote went down since IPOEduardo Larrain - Linkedin - Website 170
  • 171. What is Groupon’s business model?Groupon growth future remains in its huge customer database of 200 MillionGroupon key growth levers• Increase purchasing frequency and repeat buys• Activate dormant customers who have not purchased• Reduce cost structure notably customer costs acquisition• Improve execution and quality controlEduardo Larrain - Linkedin - Website 171
  • 172. Quizz1. Which company has network effects?2. Which company has locked the customer (high switching costs)?3. Which type of employees work in each company (sales and/or R&D/engineers)?4. For which company, revenue is not a Key Performance Indicator? Top 5 Internet 1. Network 2. Switching 3. Sales and/or 4. Revenue not IPOs effect? costs? R&D engineers? the right KPI? Facebook Google Zynga Groupon LinkedinEduardo Larrain - Linkedin - Website 172
  • 173. Looking at the most promising Internet companies…Worlds most valuable private digital tech companiesDigital 100 (not publicly traded) 1. Alibaba 26. Survey Monkey 51. Etsy 76. Return Path 2. Bloomberg 27. Mu Sigma 52. One Kings Lane 77. Quora 3. Twitter 28. ZocDoc 53. Nasty Gal 78. Snapdeal 4. 360Buy 29. Just Eat 54. Klout 79. Tremor Video 5. Palantir 30. Gilt Groupe 55. Automattic 80. RightScale 6. Dropbox 31. Everyday Health 56. Xiu 81. Whaleshark/RetailM. 7. Square 32. Evernote 57. Manta 82. Break Media 8. MLB.com 33. LivingSocial 58. Eventbrite 83. Tagged 9. Softlayer 34. Criteo 59. Sugar, Inc 84. Yext 10. Vente-Privee 35. Zulily 60. Kickstarter 85. Stripe 11. VANCL 36. Zoosk 61. Apptio 86. Rocket Fuel 12. Airbnb 37. Coupang 62. Fresh Direct 87. Mind Candy 13. Pinterest 38. Redfin 63. eHarmony 88. AddThis 14. Datapipe 39. Qualtrics 64. Veracode 89. SoundCloud 15. Spotify 40. Seamless 65. Wix 90. Xirrus 16. Craigslist 41. Media Ocean 66. Turn 91. Federated Media 17. Flipkart 42. JustDial 67. Quantcast 92. Say Media 18. Ozon Group 43. 10gen 68. Nest 93. Yodle 19. Wonga 44. AppNexus 69. Fab 94. Coupons.com 20. Hulu 45. GitHub 70. Foursquare 95. Path 21. Klarna 46. Tumblr 71. Storm8 96. Shazam 22. Kaspersky Lab 47. Box.net 72. Flipboard 97. Plenty of Fish 23. Rovio 48. Glam Media 73. Vibrant Media 98. Warby Parker 24. Conduit 49. Stella & Dot 74. Rubicon Project 99. Thrillist 25. Aricent Group 50. Marketo 75. OpenX 100. Vox MediaBusiness Insider, Digital 100, 10/2012Eduardo Larrain - Linkedin - Website 173
  • 174. Executive summaryPopular revenue streams among top Internet companies• Freemium: Zynga, Rovio, Linkedin, Spotify, Dropbox, SurveyMonkey, Eventbrite, Tumblr, Evernote, Skype• Advertising: Google, Facebook, Twitter, Craiglist, Criteo, Path• Marketplace: Amazon, Alibaba, Venteprivee, ZocDoc, TaskRabbit, Airbnb• Ecommerce: Groupon, LivingSocial, Foursquare, Hulu• Others: • Premium: The New York Times, Les Echos • Crowdsourcing/Crowdfunding: Kickstarter, Kaggle • Digital money: Starbuck, Paypal … Datamining and big data at the heart of the Data revolution: Shazam, Meilleuragents, Trulia, Zillow, Kel QuartierEduardo Larrain - Linkedin - Website 174
  • 175. Short focus on dataThe data revolution and data buzzwords• Open Data: data from public and private sectors free for anyone to reuse or redistribute for any purpose e.g. data.gouv.fr• Open Governments and companies: • Boost innovation and create jobs • Leverage on local Knowledge e.g. file a report on pothole and monitor the claim (Chicago 311) • Leverage on professionals amateurs and specialized skills e.g. thousands of people can browse data and flag issues• Data visualization: simplify data analytics for end users (visualization = data + design) • Data journalism: a journalist who knows how to use Excel • Finding new stories from dataset, bigger picture by linking datasets, more pairs of eyes to spot patterns, analyzing data beyond the stories, putting stories into context• Analytics and datamining • Data driven pricing and recommendations “today’s recommendation for you”, “campaign recommendations” • Operational intelligence e.g. crime hotspot prediction• Bigdata: collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications • What data to store, with which data to combine, data has value far beyond what you originally anticipate • Infrastructure to handle data growth: Google processes 24 PB data per day using 1 million servers, 90 trillion mails sent per year, Walmart handles 1 M transactions per hourEduardo Larrain - Linkedin - Website 175
  • 176. What is the business model of Alibaba.com?…B2B marketplaceEduardo Larrain - Linkedin - Website 176
  • 177. Focus on ecommerceMajor traffic sources of a regular e-commerce website Costs Search Engines Search Engine • Optimization of website in order to improve rank of website in search engine results: optimization (SEO) – Content production Free (internal) – Net linking – Technical optimization (togo, link, url rewriting) Search Engine • Purchasing of paying links on search engine result pages Cost per client Marketing • Optimization levers: (CPC) (SEM paid search) – Increase / decrease cost per click – Increase # of keywords to bid on Partners White Label • Website hosting other website technologies, product CPC / Cost per catalogue, search engine acquisition (CPA) Comparators • Website aggregating merchants catalogue and displaying links to their websites CPC / CPA Advertising Display • Advertising through banners on large websites CPM / CPC Affiliation • Platforms aggregating free space of thousands of small sites & blogs CPC / CPA Emailing • Newsletters sent to inhouse database CPM / CPC / • Newsletters sent to external databases CPANicolas Martin, 2012Eduardo Larrain - Linkedin - Website 177
  • 178. • What is Twitter business model?Eduardo Larrain - Linkedin - Website 178
  • 179. What is Twitter’s business model?… AdvertisingTwitter business model key elements• Value proposition: blogging service • Share text messages with a length constraint (social Networking Site / SNS and Micro-blogging platform) • For advertisers, marketers, and media, • Traffic generator (ecommerce, fund-raising,…) • Communication tool (customer service channel, brand awareness, PR,…) • Cheap monitoring on niche subject and tracking the spreading of news • Datamining and data visualization of worldwide data • Competitors: Reuters, survey companies, consulting companies• Revenue stream: advertising (self-serve ad platform) • Companies spending money on Twitter to ensure their messages are seen: promoting Accounts (Cost-Per-Follow / CPF) , Tweets (Cost-Per-Engagement / CPE) and Trends appearing in search results, within the ‘Who to Follow’ and next to a user’s timeline • No ‘Display Ads’ • Twitter’s mobile ad revenue surpassed that of its desktop adsEduardo Larrain - Linkedin - Website 179
  • 180. What is Twitter’s business model?Twitter business model key elements• Key partnerships are key since Twitter is a multi-sided platform (like Facebook) • Developers and companies: • APIs for third party apps • Tweet and Follow buttons • Search API and Streaming API provides real-time access to Twitter firehose helping developers with data-intensive needs • Search Vendors: Twitter licenses full feed of public tweets to search engine vendors such as Microsoft (Bing Social), Google (Google Realtime), and Yahoo. This helps in enabling real-time search and discovery. • Device Vendors: Twitter partnered with Apple to enable deep integration of Twitter in iOS5 mobile operating system for iPad, iPhone, and iPod touch. This means users can tweet directly from Apple apps such as Camera, Photos, and Safari, along with third-party apps such as Flipboard, Livingsocial, and Instagram. • Media:Twitter has entered into partnerships with media companies and brands to deliver compelling Twitter integration to their users more easily. This can help media companies capture real-time reactions to the important news • Mobile operators/ Twitter has partnered with Telecom operators across the globe to enable users to send and receive tweets from mobile phones using SMSEduardo Larrain - Linkedin - Website 180
  • 181. What is Twitter’s business model?Twitter business model key elementsBusiness Model Innovation Matters, Understanding Business Models, 2012Eduardo Larrain - Linkedin - Website 181
  • 182. What is the business model of Venteprivee?… Members only ecommerceEduardo Larrain - Linkedin - Website 182
  • 183. What is the business model of Craiglist?… ClassifiedsEduardo Larrain - Linkedin - Website 183
  • 184. Conclusion and farewell• Productivity in the service sector is expected to exponentially with the Digital revolution… • … as productivity in the industry sector grew during the Industrial revolution• 6 revolutions that could change the world in the next 5-10 years: 1. Education • New ways to learn e.g. Khan Academy (200 million views) 2. State • 400,000 French elected representatives 3. Crowd • 500 million unique visitors per month (Wikipedia) 4. Health • 1/3 medical treatment are useless (OCDE). 1 out 2 people lie to his doctor • So 80 bn € of the inefficiency cost in France (out of 285 bn €) • Solution: personalized medical file 5. Knowledge • Intelligent object / Quantified-self 6. Robots • 3D Printing• Have fun working in a web-based company or creating your company! • Remember average age within a start-up is 32 (in France) • Failed portfolio of investment funds is huge!Eduardo Larrain - Linkedin - Website 184
  • 185. This class will be evaluate using an individual test and a group projectNotes and evaluation• Short individual test at the beginning of class #3 based on classes (30%)• Group project (70%) • Each group of students will present the business model of an Internet-based company of their own design • 5 minutes presentation: explain and challenge the business model of a company (thus just a few slides) • 5 minutes Q&A • Evaluate by three judges: • Presentation performance (2/3) • Facts and Figures (1/3) • Send me an email to submit the company for your Group project (before 10 February 2013) • Strong advices: • Choose a company which is a leader in what it does (even though it doesn’t necessarily make money on it), not glamorous but with market potential (e.g. B2B) • Don’t choose a really glamorous one (e.g. Google, Facebook, Linkedin) or really small ones • Need help? Look for a company at http://techcrunch.com/• Attendance is mandatoryEduardo Larrain - Linkedin - Website 185
  • 186. Individual test (1/2) Internet = Web + mail + data transfer HTML5 technology for fast and cheap mobile apps and Native for more complex apps like those using the phone features BM is a simple expression of the strategy of the company on how to make money without going into too much details. BP is a document which includes BM and other documents (team, financial analysis, roadmap,…) Key activities, resources, partners, customer relationships, customer segments and channels, cost structure Because of better assets rotation Because they “lock the customer for a long period” giving time to sell more profitable products X X X XEduardo Larrain - Linkedin - Website 186
  • 187. Individual test (2/2) Non-monetary markets e.g. Wikipedia Industry is expected to be stable in few months bceause it’sfinding new business models such as streaming Music, newspaper and consumer magazine publishing Growing thanks to the Digital revolution “Gamification”: eery part of our lives could eventually be turned into a game Free-to-Play is the freemium name model for games in which you charge for virtual goodsEduardo Larrain - Linkedin - Website 187